Edited version of your private ruling

Authorisation Number: 1012553423088

Ruling

Subject: Employee share schemes

Question 1

Will the irretrievable cash contributions to the Trustee of the employee share trust (EST), be assessable income of the EST, pursuant to either sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

In respect of Shares acquired by the Trustee of the EST under the terms of the Employee Share Plans (the Plans), will any capital gain or capital loss made by the Trustee under CGT Event E5 (section 104-75 of the ITAA 1997) or E7 (section 104-85 of the ITAA 1997) be disregarded?

Answer

Yes

Relevant facts and circumstances

The Company submitted an application for a private binding ruling on aspects of its employee equity plans (the Plans).

The Company develops, manufactures and markets products.

The application for a private binding ruling (application) stated that:

· the Company has two equity based compensation plans which are currently in use

· the Company established a single employee trust (the EST) to facilitate the provision of shares in the Company for Australian employees and executives

A summary of each of the Plans is as follows:

General Plan (GP)

GP allows all employees to share in the Company's financial success by enabling them to invest in it on attractive terms. It provides all employees with the opportunity to subscribe for shares at a discount to the applicable market price, as follows:

· Employees receive dividend distributions and capital returns and are able to vote at the Company's general meetings.

· If an employee's employment is terminated, the employee will automatically be withdrawn from the GP. The entire balance of the employee's contribution account at the time will be refunded at this time.

· The Board may apply a Holding Lock to some or all Shares acquired by an employee under the GP for the duration of the relevant Holding Lock Period.

· The GP uses the EST as outlined below for contributions by employees to acquire Shares.

Performance Plan (PR)

The PR has been established to provide the Company with a mechanism to attract key prospective employees, to retain them and to strengthen the link between employee performance and increases in shareholder value.

The PR broadly operates as follows:

· The Board may issue an invitation to eligible employees to acquire "Performance Rights" and "Performance Options" (together "Options") with the absolute discretion to develop and amend any policies in relation to these Options.

· The invitation will specify various aspects of the Options such as performance hurdles and period, test dates, expiry date, exercise price, etc.

· Performance Rights granted by the Company under the Plan will be granted for no consideration payable by employees, unless otherwise determined by the Board. Performance Options will be granted with an exercise price based on market value of a Share at the time of the original invitation.

· Employees must achieve a minimum "good" rating under the Company's performance appraisal system for each year from the grant date to the test date.

· Vesting of the component measured against the EPS performance hurdle will occur where the Company earns a specified compound annual growth rate of EPS at which point 50% of the instruments will vest, rising on a straight line basis to 100% vesting if the compound annual growth rate of EPS reaches or exceeds the target.

· If all eligible Options have not vested by the end of the performance period, performance may be reassessed at one-yearly intervals for up to a further five years (depending on the tranche).

· Each Option can be converted into one ordinary Share in the Company on satisfaction of the vesting period and the performance hurdles.

· An Option does not confer on an employee the right to participate in new issues of Shares by the Company, including by way of bonus issue, rights issue or otherwise.

· Shares issued as a consequence of the exercise of Options will, from the date of allotment, rank equally with all other issued Shares, and will be entitled in full to those dividends which have a record date for determining entitlements after the date of issue.

· The PR uses the EST as outlined below (refer "Operation of the EST" section below).

· Employees are absolutely entitled to the shares as against the Trustee of the EST from when the Shares are allocated to them.

Operation of the EST

The EST broadly operates as follows:

· it was established as a sole purpose trust to acquire shares for Australian employees of the Company.

· it is funded by contributions from the Company and where applicable from employees.

· such funds will be used by the Trustee of the EST to acquire the shares in the Company either on-market or via a subscription for new shares.

· such Shares acquired by the Trustee will be immediately allocated to the relevant employees who will become absolutely entitled to those Shares at that point in time.

· the Trustee will be permitted to sell shares on behalf of an employee where directed by the Company or the employee to do so.

· the Trustee of the EST is an independent party.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 Division 13A (repealed)

Income Tax Assessment Act 1936 section 139E (repealed)

Income Tax Assessment Act 1936 Part IVA

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 (Transitional Provisions) Act 1997 section 83A-5

Income Tax (Transitional Provisions) Act 1997 subsection 83A-5(1)

Income Tax (Transitional Provisions) Act 1997 subsection 83A-5(2)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-10(1)

Income Tax Assessment Act 1997 section 83A-10(2)

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 section 83A-20

Income Tax Assessment Act 1997 subsection 83A-20(1)

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 106-50

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 (repealed)

Income Tax Assessment Act 1997 section 130-90(1) (repealed)

Income Tax Assessment Act 1997 section 130-90(2) (repealed)

Income Tax Assessment Act 1997 section 130-90(3) (repealed)

Income Tax Assessment Act 1997 section 130-90(4) (repealed)

Income Tax Assessment Act 1997 section 130-90(5) (repealed)

Income Tax Assessment Act 1997 section 130-90

Income Tax Assessment Act 1997 section 130-90(d)

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

Income Tax Assessment Act 1997 paragraph 130-90(1)(a)

Income Tax Assessment Act 1997 paragraph 130-90(1)(b)

Income Tax Assessment Act 1997 paragraph 130-90(1)(c)

Income Tax Assessment Act 1997 paragraph 130-90(1)(d)

Income Tax Assessment Act 1997 subsection 130-90(2)

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Issue 1

Question 1

Will the irretrievable cash contributions to the Trustee of the employee share trust (EST), be assessable income of the EST, pursuant to either sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Section 95 of the 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) 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.

Note: These are included by provisions about assessable income. For a summary of these provisions, see section 10-5.

None of the provisions listed in section 10-5 of the ITAA 1997 is relevant to the facts and circumstances of this ruling and therefore irretrievable contributions made by the Company to the EST will not be assessable income under section 6-10 of the ITAA 1997. 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 of the ITAA 1997, which is considered in the following section of the reasons for decision.

Pursuant to the Trust Deed, all contributions by the Company to the EST for the purpose of acquiring the Company's Shares constitute accretions to the corpus of the EST. Furthermore, pursuant to clauses of the Trust Deed the Trustee must, when directed by the Company, acquire Shares on behalf of participating employees and use the contributions made by the Company and the employees to do so.

The general powers granted to the Trustee pursuant to the Trust Deed must be exercised only for the purposes of the EST and only to give effect to the plans which the EST supports. To this end, the contributions received from the Company and participating employees must, therefore, only be used to acquire Shares in accordance with the terms of the Trust Deed and the Plans.

Accordingly, the irretrievable contributions made by the Company to the Trustee to acquire Shares will not be assessable income under section 6-5 of the ITAA 1997, but will constitute capital receipts of the Trustee. Therefore, the irretrievable cash contributions made by the Company to the Trustee of the EST to fund the acquisition of Shares by the EST in accordance with the Trust Deed will not be assessable income of the EST pursuant to sections 6-5 or 6-10 of the ITAA 1997. This accords with the view expressed in ATO ID 2002/965.

The Trust Deed provides that whilst the Trustee is not entitled to receive any fees, commissions or remuneration in respect of the performance of its obligations, the Company may pay to the Trustee from its own resources any fees, commission or remuneration as the Company and the Trustee may agree, from time to time. Such receipts will be assessable income of the Trustee in contrast to the irretrievable contributions made to facilitate the acquisition of the Company's Shares.

Question 2

In respect of Shares acquired by the Trustee of the EST under the terms of the Employee Share Plans (the Plans), will any capital gain or capital loss made by the Trustee under CGT Event E5 (section 104-75 of the ITAA 1997) or E7 (section 104-85 of the ITAA 1997) be disregarded?

Detailed reasoning

Application of Division 83A of the ITAA 1997

Division 83A of the ITAA 1997 will apply to ESS Interests issued on or after 1July 2009 and also, in certain circumstances, to ESS Interests that were provided under an ESS established prior to 1 July 2009.

"Division 83-A Options"

Division 83-A of the ITAA 1997 will apply to options issued under the Plans 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).

The applicant has advised that some Options issued before 1 July 2009 will satisfy subsection 83A-5(2) of the IT(TP)A 1997. As subsection 83A-5(2) will be satisfied, Division 83A of the ITAA 1997 will apply to those Options. These Options and those acquired on or after 1 July 2009 are referred to as "Division 83-A Options".

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. CGT Event E7 will happen at the time the Trustee disposes of Shares according to the Trust Deed and in satisfaction of a beneficiary's interest. However, section 130-90 of the ITAA 1997 operates to disregard that gain or loss where the specified conditions are satisfied.

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 (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.

EST

The term 'employee share trust' referred to in subsection 130-90(1) of the ITAA 1997 is defined in section 995-1 of the ITAA 997 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides that an EST for an employee share scheme (having the meaning given by subsection 83A-10(2) of the ITAA 1997) 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).

The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997.

An ESS 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) in relation to the employees' employment.

The Plans comprise an ESS within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which Options to acquire Shares are provided to employees in relation to the employee's employment (see further discussion of term 'employee share scheme' under the heading 'Paragraph 130-90(1)(d) of the ITAA 1997' below).

Under the Plans the Company has established the EST to acquire Shares in the company and to allocate those shares to employees to satisfy the Options acquired under the scheme. The beneficial interest in the Share is itself enabled under an ESS because it is provided under the same scheme as the Options to acquire the Shares are provided to the employee in relation to the employee's employment, being an ESS as defined in subsection 83A-10(2) of the ITAA 1997.

Therefore, paragraph 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

·the EST acquires shares in the company,

·the EST ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the governing documents of the scheme.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require a trustee to undertake incidental activities that are a function of managing the ESS and administering the trust.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental include:

· 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

· 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 merely incidental.

For the purposes of the EST the general powers of the Trustee are set out in the Trust Deed. Other clauses effectively read down the general powers given to the Trustee so as to ensure that the general powers are exercised for the purposes of the Plans, thereby making it clear that the Trustee can only use the contributions received exclusively for the acquisition of shares for eligible employees in accordance with the Plans. To this end, all other duties and general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the shares to be acquired for eligible employees for the purposes of the Plans.

Therefore, the EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Paragraph 130-90(1)(a) of the ITAA 1997

CGT event E5 is the CGT event that will apply under the terms of the Plans at the time the participant becomes absolutely entitled to the Shares in the Company as against the Trustee. Therefore paragraph 130-90(1)(a) will be satisfied.

Paragraph 130-90(1)(b) of the ITAA 1997

Section 995 of the ITAA 1997 defines a share to mean a share in the capital of a company. An ordinary Share in the Company held by the Trustee and to which a participant is entitled upon exercise of an Option is a share in the capital of a company i.e. the Company. 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) of the ITAA 1997

Paragraph 130-90(1)(c) is satisfied as a participant will have acquired a beneficial interest in a share (in the Company) by exercising an Option granted under the Plans.

Paragraph 130-90(1)(d) of the ITAA 1997

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 follows:

An employee share scheme is 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.

The Plans are an employee share scheme for the purposes of Division 83A of the ITAA 1997 as they are an arrangement (scheme) under which an ESS interest i.e. a beneficial interest in an option to acquire a beneficial interest in a share of the Company, is provided to eligible employees in relation to their employment by the Company or its subsidiaries.

Accordingly, prima facie, Subdivision 83A-B of the ITAA 1997 - Immediate inclusion of discount in assessable income, will apply to Options acquired under the Plans as pursuant to subsection 83A-20(1) of the ITAA 1997 the ESS interest (i.e. Options issued under the Plans) will be acquired under an employee scheme 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 of the ITAA 1997) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C of the ITAA 1997 - Deferred inclusion of gain in assessable income), 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) of the ITAA 1997 will be satisfied. Accordingly, 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 that CGT event E5 happens, subsection 130-90(2) of the ITAA 1997 will also have been satisfied.

Under 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.

"Division 13-A Options"

Options issued to participants before 1 July 2009 where a former section 139E of the ITAA 1936 election is made will fall within former Division 13A of the ITAA 1936 and former section 130-90 of the ITAA 1997 will apply to disregard any capital gain or loss made by the Trustee.

In the context of the Plans, former section 130-90 provided that any capital gain or loss could be disregarded if the following conditions were satisfied (subsection 130-90(1)):

The participants are individuals who receive withholding payments from their employer at the time of allocation (subsection 130-90(5))

The terms of the trust authorise the trustee to transfer the share to the participant (subsection 130-90(2))

The individual acquires a share by the exercise of a right acquired under an employee share scheme (subsection 130-90(3))

The share or right is acquired under the employee share scheme in respect of employment (subsection 130-90(3))

The share would be acquired for less than the cost base of it in the hands of the trustee (subsection 130-90(4)).

As stated above, where a participant becomes absolutely entitled to the Shares as against the Trustee, CGT Event E5 will happen and CGT Event E7 will happen at the time the Trustee disposes of Shares according to the Trust Deed and in satisfaction of a beneficiary's interest.

In the facts and circumstances of this ruling, in regard to CGT Event E5, all conditions of former section 130-90 are satisfied and any capital gain or loss made by the Trustee will be disregarded.

In regard to CGT Event E7 where a beneficiary is absolutely entitled to a CGT asset, section 106-50 of the ITAA 1997 regards the asset as if any 'act done by the trustee in relation to the asset as if you had done it'. Thereby, any capital gain or loss is that of the participant (beneficiary) taxpayer, not the trustee.

In sum, in the Plans, any capital gain or capital loss made by the Trustee under CGT Event E5 or E7 should be disregarded.

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