Edited version of your written advice

Authorisation Number: 1012724716330

Ruling

Subject: Employee Share Scheme - Trustee of the Employee Share Trust

Question

Will the Trust be an employee share plan trust within the meaning of subsection 130-85(4) of the Income Tax Assessment Act 1997 (ITAA 1997) if its activities are limited to obtaining shares in the Company to satisfy obligations to deliver shares on the vesting of rights or exercise of options under the terms of a long term incentive plan?

Answer

Yes.

This ruling applies for the following periods:

1 July 20xx - 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The Company is an Australian public company. It has one class of shares on issue, namely ordinary shares.

The Company and members of the group are not involved predominantly in the business for the acquisition, sale or holding shares, securities and other investments.

The Company established a Plan for eligible individuals (the Participants) who permanently live and work in Australia. The Plan is part of the Company's remuneration framework which is designed to attract, retain, motivate and reward high performance individuals with the key skills and to align the interests of participants with the interests of the Company and shareholders.

The Plan provides long term incentive awards to the Participants in the form of rights or options over the Company ordinary shares (Shares). According to the definitions in the Plan Rules, "Right" means the right to be allocated a Share, and "Option" means the right to be allocated a Share on payment of the "Exercise Price". The grant of rights or options does not confer a right to vote or an entitlement to dividends until the right or option has vested.

The vesting of awards is subject to performance hurdles and a performance period. Where the vesting conditions are satisfied, the awards will vest. In the case of Rights, upon vesting the Participant will be entitled to one Share for each Right.

The Company has established a Trust. It will fund the Trust by way of a cash amount, and arrange for the Trustee to subscribe for or purchase Shares to be held on trust on behalf of the Participants in accordance with the Plan. The Trustee is not related to the Company and operates the Trust independently.

The Company has implementation and ongoing administration costs.

The Trust will be partially funded by employees (i.e. to the extent of any exercise price for options, rights and subscription price of the Company shares) and the Company (i.e. the balance, by way of irretrievable cash contributions) into the Trust.

Shares will be delivered in accordance with the terms of the Plan.

The Company's stated reasons for implementing and administering the Plan via a trust include:

• employee share trusts are common commercial vehicles, which have been used by taxpayers for many years to provide remuneration benefits to employees. Their usage is wide spread among public and private companies in Australia and overseas, and they provide significant commercial benefits to taxpayers;

• from a commercial and governance perspective, an employee share trust provides the board of directors of the Company with flexibility to satisfy its obligations under the Plan by purchasing shares on market or alternatively, through the fresh issue of shares;

• using a single vehicle assists with consolidation of administration and reduces administration costs as the employee share trust structure can be employed for all of the employee long-term incentive arrangements;

• using an employee share trust with an independent trustee acquiring shares in accordance with a settled trust deed allows a company to meet its obligations under the Corporations Act 2001 (Cth) ("Corporations Act") regarding not dealing in own shares, manage any insider trading issues involved in delivering own company shares and manage obligations in respect of Australian financial services and licensing;

• an employee share trust provides a useful means of enforcing time-related vesting and performance conditions or disposal restrictions which may be attached to the securities granted under the Plan;

• provides an efficient structure for giving effect to disposal restrictions, forfeiture conditions and other conditions on shares. As a trustee is the legal owner, employees as beneficial owners have no ability to deal in the shares unless complying with those restrictions or conditions;

• an employee share trust enables a trustee to recycle shares without increasing the percentage of ownership of other shareholders. When shares are forfeited (i.e. on termination of employment or on expiry of a plan), the shares can be re-used for future offers to employees

• an employee share trust provides the Company with capital management flexibility, that is by allowing the Company to decide whether the trustee should purchase shares from another shareholder or subscribe for shares to hold on behalf of employees or buying shares ahead of delivery date. This flexibility may allow the Company to manage its cash flows and earnings per share, for example.

The Trust will be principally governed by the key documents:

• the trust deed for the Trust;

• the Company's Plan Rules. Under the Plan, grants may be made of both rights and options to employees of the Company

The Trust Deed

The Company has established the Trust for the purpose of operating in connection with share, option and rights plans which are made available by the Company to employees from time to time. The Trustee has agreed to act as trustee of the Trust and to receive funds from the Company or its subsidiaries and apply the funds as set out in the Trust Deed. The Trustee is to deal with any Shares held in the Trust as set out in the Trust Deed.

The Object of the Trust as defined in the Trust Deed means the purpose of the Trust is to operate in conjunction with Employee Share Schemes with the object of acquiring Shares for the benefit of employees or otherwise facilitating the operation and implementation of Employee Share Scheme.

The Trust Assets are to be held by the Trustee on trust for the benefit of any one or more of the Discretionary Beneficiaries from time to time in accordance with the terms of the Trust Deed.

Subject to the Trust Deed and terms of the relevant Employee Share Scheme, the Trustee in its discretion has the full power to do all things a trustee is permitted to do by law in respect of the Trust and the Trust Assets.

The powers of the Trustee are outlined in the Trust Deed.

The limitations on Trustee are outlined in the Trust Deed.

The Trust Deed outlines how the Trust will work, including:

• to satisfy, or enable the satisfaction of, an award, entitlement or right under an Employee Share Scheme, the Trustee may purchase the Company shares on ASX or subscribe for shares (in which case, the Company will issue those shares to or at the direction of the Trustee) or a combination of both purchase and issue;

• Those shares are to be held on the Trust on behalf of the Participants (who will be the beneficial owners of the Company shares) in accordance with the Plan.

The Trust Deed contains a clause about Remuneration of Trustees.

The Trust Deed contains a clause about Costs of Trustee.

The Plan Rules

Options and Rights are defined in the Plan Rules as:

Option ….

Rights

The Plan Rules also defines that:

Expiry Date ..

Participant means: …

The Plan Rules provides guidance on the allocation of Shares or Payment of Cash Equivalent

The Company's default position is to settle its obligations with Shares. Where Participants are current employees, the board of directors considers that the objective of aligning the Participants' interests with the interests of the Company so as to enhance the Participants' commitment to the Company's long term goals is best met by allocating Shares to Participants.

However, the board will cash settle in some circumstances.

If, in the unlikely case that rights were settled in cash, the cash payment will be made through the Trust.

Relevant legislative provisions

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

Subsection 130-85(4) of the ITAA 1997

Section 995-1 of the ITAA 1997

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Summary

The Trust is an employee share trust within the meaning of subsection 130-85(4) of the Income Tax Assessment Act 1997 (ITAA 1997) as its activities are limited to obtaining shares in the Company to satisfy obligations to deliver shares on the vesting of rights or the exercise of options under the terms of the Long Term Incentive Plan (Plan).

Detailed reasoning

An 'employee share trust' is defined in subsection 995-1(1) of the ITAA 1997 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 employee share trust 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).

Employee share scheme

An ESS interest is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company (83A-10(1)(a)) or a beneficial interest in a right to acquire a beneficial interest in a share in the company (83A-10(1)(b)).

An employee share scheme is defined as a scheme under which the ESS interests in a company (or subsidiaries of the company) are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2) of ITAA 1997).

In the current case the Plan allows the Company to allocate a Performance Right or an Option to a Participant. A Performance Right represents a right to acquire a beneficial interest in a Company Share, and an Option represents a beneficial interest in a right to acquire a beneficial interest in a Company Share. Therefore, the conditions of section 83A-10 of the ITAA 1997 are satisfied and the Performance Rights and Options granted to the Participants will be ESS interests.

These ESS interests will be granted under an employee share scheme for the purposes of subsection 83A-10(2) as they are granted in relation to the employee's employment with the company or a subsidiary of the company.

Employee share trust

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 Company has established the Trust. Under the Trust Deed, the Trust's sole purpose is to obtain shares for the benefit of Participants, including subscribing for or acquiring, allocating, holding, and delivering Shares under the Plan (130-85(4)(a)). The granting of ESS interests, the provision of the money to the Trustee under the arrangement, the acquisition and holding of the shares by the Trustee and the allocation of shares to the participating employees (130-85(4)(b)) are all interrelated components of the employee share scheme. All the components of the scheme must be carried out so that the scheme can operate as intended.

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

The other activities of the Trust to operate the employee share scheme are incidental activities (130-85(4)(c)).

Conclusion

Therefore, the Trust is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the Trust 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 are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).