Edited version of your written advice

Authorisation Number: 1012783821123

Ruling

Subject: Company A Equity Plans

Question 1

Will the irretrievable contributions made pursuant to the Company A Equity Plans to Company B as Trustee (the Trustee) for the Company A Executive Share Trust (the EST), to fund the acquisition of Company A shares by the Trustee in accordance with the Trust Deed, be assessable income of the EST under sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will a capital gain or capital loss that arises for the Trustee of the EST at the time the Participants become absolutely entitled to the Company A shares under the Company A Equity Plans be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Company A shares for the same or less than the cost base of the shares in the hands of the Trustee?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2014 - year ending 30 June 2018

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company A is listed on the Australian Stock Exchange.

The shareholders of Company A have implemented a simple Executive Share Option Plan (ESOP) to help attract, motivate and retain executives and to encourage participation by executives of Company A through share ownership.

The ESOP was later amended to accommodate the establishment of an Executive Share Trust (EST). In particular, Company A established the Company A EST pursuant to a Trust Deed (Trust Deed) entered into between Company A and Company B (Trustee) to facilitate the provision of ordinary shares in Company A to executives under the Company A ESOP and future executive and employee equity plans. The purpose of the EST was to, amongst other things, result in better performance measurement for the Company A group entities, allow Company A to better manage its capital structure, provide greater flexibility in incentive arrangements and allow for a streamlined approach to the administration of the ESOP.

The Company A Board (Board) has adopted the following plans:

• a Short Term Incentive Plan (STIP))

• a Long Term Incentive Plan (LTIP A) and

• Executive Engagement Award (EEA)

• Long Term Incentive Plan (LTIP B); and

• Deferred Equity Plan (DEP)

These plans are collectively referred to as the Company A Equity Plans.

(Note: the LTIP A replaced the former Company A ESOP. As at the date of this ruling, all options issued under the Company A ESOP either lapsed or were cancelled.)

Company A maintains a strong focus on attraction, motivation and retention of staff to facilitate the continued growth of the company over the short to medium term. Fundamental to this growth strategy is the continued maintenance of the EST to administer the existing Company A Equity Plans and future executive and employee equity plans. The EST Deed has not been amended since its establishment.

The Company A Equity Plans

STIP - overview

The STIP was adopted by a resolution of the Board and was established pursuant to the STIP Rules.

The purpose of the STIP is to

• provide incentives to certain eligible executives and senior managers and

• align Eligible Participant reward outcomes with the accomplishment of annual business plans and targets that drive divisional and group performance

• Administration of the STIP is vested in the Board and it is as the Board's discretion to offer Annual Incentives to certain employees.

It is at the Board's absolute discretion to offer the STIP to certain employees. The eligibility conditions for the grant of these rights are determined by the Board.

Eligible Participants are entitled to a benefit consisting of the payment of a cash component and the issue of Performance Rights. The mix of cash and Performance Rights will depend on the seniority of the Eligible Participant and will be determined at the discretion of the Board.

LTIP A - overview

LTIP A was adopted by resolution of the Board and was established pursuant to the LTIP A Rules).

The purpose of the LTIP A Rules is to:

• provide incentives to certain eligible executives and senior managers

• foster a responsible balance between shot term and long term corporate goals

• build and maintain a strong spirit of performance and entrepreneurship and

• bring Company As incentive arrangements into line with some best practice guidelines consistent with market practice alternatives

• Administration of the LTIP A is vested in the Board and it is at the Board's absolute discretion to offer Performance Rights to certain employees. The eligibility conditions for the grant of these rights are determined by the Board.

EEA - overview

The EEA was adopted by resolution of the Board and was established pursuant to the EEA Plan Rules.

The purpose of this plan is to:

• provide 'one-off' incentives to retain certain eligible executives and senior managers and encourage equity holding in Company A by those people and

• foster a responsible balance between short term and long term corporate results and alignment with longer term shareholder value creation and build and maintain a strong spirit of performance and entrepreneurship

Administration of the EEA is vested in the Board and it is at the Board's absolute discretion to offer Performance Rights to certain employees. The eligibility conditions for the grant of these rights are determined by the Board.

LTIP B - overview

LTIP B was adopted by resolution of the Board and was established pursuant to the LTIP B Rules.

The purpose of the LTIP B is to provide the Board with the ability to offer a long-term incentive to an employee in the form of the grant of Performance Rights under this plan. Pursuant to this plan Eligible Participants may be entitled to exercise Performance Rights subject to the achievements of certain terms and conditions and/or any restrictions (including performance hurdles and disposal restrictions) that the Board may determine from time to time.

Administration of the LTIP B is vested in the Board and it is at the Boards absolute discretion to offer Performance Rights to certain employees. The eligibility conditions for the grant of these rights are determined by the Board.

DEP - overview

The DEP was adopted by resolution of the Board and was established pursuant to the DEP Rules.

The purpose of the DEP is to provide the Board with the ability to allocate a portion of the appropriate bonus or incentive payment to which an employee may become entitled in the form of the grant of Performance Rights pursuant to the DEP. Under the DEP, Eligible Participants may be entitled to exercise Performance Rights subject to the achievement of certain terms and conditions and/or any restrictions (including performance hurdles and disposal restrictions) that the Board may determine from time to time.

Administration of the DEP is vested in the Board and it is at the Board's absolute discretion to offer Performance Rights to certain employees. The eligibility conditions for the grant of these rights are determined by the Board.

Common terms

The following terms are common to the operation of all the Equity Plans:

• A Performance Right is defined in the rules of the respective plans as an option granted to an Eligible Employee to subscribe for one ordinary share in Company A (Company A share). The Performance Rights issued are not listed securities

• Eligible Participants are not entitled to any voting rights or dividends by virtue of ownership of Performance Rights, prior to the Performance Right being exercised

• A Performance Right is issued under the Company A Equity Plans for no consideration

• The Exercise Conditions which are applicable in respect of each Performance Right issued are determined by the Company A Board and will be set out in the Offer Document

• Subject to certain circumstances, an Eligible Participant will be entitled to exercise the Performance Rights granted under the respective Company A Equity Plan in respect of which all Exercise Conditions have been satisfied and are capable of exercise. At this point, each Performance Right can be converted into one ordinary share in Company A. Exercise of the Performance Rights can only occur where the shares have been quoted throughout a 12 month period immediately preceding the exercise date, without suspension for more than a total of 5 trading days during that period

• The Performance Rights will immediately lapse and all rights are lost where:

• the Eligible Participant ceased to be an employee or director of Company A for any reason and the Exercise Conditions have not been met

• the Exercise Conditions are unable to be met

• the Lapsing Date has passed

• the Eligible Participant ceased to be an employee or director of Company A for any reason and the Exercise Conditions have been met, but the Eligible Participant does not exercise the Performance Rights granted within 60 days of ceasing employment

• If employment ceases prior to Performance Rights becoming exercisable, the Board can exercise its discretion such that the Performance Rights held by the relevant participant do not lapse, provided they are exercised within the additional exercise period provided

• Where an Eligible Participant dies, becomes Permanently Disabled, retires from the workforce or is made redundant by Company A during the life of a Performance Right granted to such a participant:

• the participant (or their legal representative) may exercise the Performance Rights at that date provided they are exercisable, have not already been exercised and have not lapsed

• if the Performance Rights have not become exercisable or have lapsed, the Board has absolute discretion to resolve that the participant may exercise these Performance Rights. Where such discretion is exercised by the Board, the Performance rights will not immediately lapse, provided the participant exercises the Performance Rights within the timeframes required by the Plan Rules

• Cessation of employment for any other reason will cause any Performance Rights on issue to immediately lapse, unless the Board determines otherwise

• Upon exercise of the Performance Right the Eligible Participant must deliver the relevant notices to the Company A company secretary and a payment must be made, payable to Trustee, of an amount equal to the Performance Right's Exercise Price (set by the Company A Board) multiplied by the number of Performance Rights being exercised (unless the Exercise Price is nil)

• Company A then instructs the Trustee, in writing, to subscribe for, acquire or allocate the relevant number of shares to the Eligible Participant, in respect of the exercise of the Performance Rights after which, the Trustee must act on the instructions, such that the Trustee will hold those shares as trustee for and on behalf of the participant as beneficial owner

• From and including the date of acquisition by the Trustee, the participant is the beneficial owner of the shares and entitled to deal with those shares as beneficial owner

• As soon as practicable following the acquisition of the shares by the Trustee, the Trustee should transfer to the participant the relevant shares allocated to it

• In the event of a new issue of shares or rights, an Eligible Participant in respect of a Performance Right may only participate in the new issue of shares or rights to shareholders if the Performance Right has been exercised

• In the event that Company A makes a bonus issue of Company A shares hares to ordinary shareholders during the life of a Performance Right, upon later exercise of that Performance Right, the Eligible Participant will receive so many additional shares to ensure they remain entitled to the same proportion of shares in Company A to which they were entitled, prior to the bonus issue

• Eligible Participants to whom Performance Rights have been granted under any of the Company A Equity Plans is referred to as a Participant in the singular, or as Participants in the plural

Operation of the EST

The EST was established solely for the purpose of subscribing for or acquiring, delivering, allocating and holding Company A shares under the Company A Equity Plans or any future plans set up and operated for the benefit of Participants.

Pursuant to the broad powers enumerated in the Trust Deed the Trustee has full power to do all things that a trustee is permitted to do at law in respect of the EST, the trust shares and the trust assets.

Contributions made by Company A to the EST

Company A will make irrevocable and non-refundable contributions to the Trustee, on an ongoing basis for the sole purpose of enabling the Trustee to subscribe for new shares or acquire Company A shares on -market for the benefit of Eligible Participants.

The amount of each cash contribution to be made by Company A to the EST will broadly equal the fair market value of shares to be acquired by the EST as at the date of exercise of Performance Rights, less the Performance Right's exercise price (if any) payable to the EST by the Eligible Participant.

The Trustee of the EST holds all Company A shares issued under of the Company A Equity Plans on capital account for income tax purposes.

Company A is a tax consolidated group with each of its 100% owned Australian subsidiary companies. As such, contributions made to the EST will be treated as contributions made by Company A itself for Australian income tax purposes, rather than a subsidiary of Company A.

Use of an EST to facilitate the Company A Equity Plans

The use of the EST provides Company A greater flexibility to accommodate the long term incentive arrangements of the company. Similarly, it allows for a streamlined approach to the administration aspect of the Company A Equity Plans. The Company A EST can also be used to provide a range of incentives involving shares in Company A as circumstances change in the labour market that require different incentives to be provided in order to attract, reward and retain key executives and employees.

The Commercial benefits of Company A using an EST include:

• assisting the company with its management, as Company A can direct the EST to use the contributions received to either acquire shares on-market, which will prevent the dilution of interests held by existing shareholders, or alternatively to subscribe for new shares in Company A

• providing an arm's length vehicle through which shares in Company A can be acquired and held in the company on behalf of the relevant employee. This assists Company A to satisfy corporate law requirements relating to a company dealing in their own shares

• allows for greater flexibility for Company A to accommodate its long term incentive arrangements both now and into the future, as the company continues to grow and expand its operations and as a result, its employee numbers

On-going costs incurred by Company A to administer the EST

Company A will incur costs associated with services provided by the Trustee of the EST in respect of the on-going administration and management of the EST, including but not limited to:

• costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to Participants)

• employee plan record keeping

• production and dispatch of holding statements to employees

• provision of annual income tax return information for employees

• management of employee termination and

• other Trustee expenses including the annual audit of the financial statements and annual income tax return of the EST

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95

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 Section 83A-10

Income Tax Assessment Act 1997 Section 83A-20

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 Section 130-85

Income Tax Assessment Act 1997 Section 130-90

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

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 were a resident, less all allowable deductions …

Subsection 6-5(1) states that your assessable income includes:

income according to ordinary concepts, which is called ordinary income

Further, 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 list of these provisions, see section 10-5.

None of the provisions listed in section 10-5 are relevant in this situation. Therefore irretrievable contributions made by Company A to the Trustee will not be assessable income under section 6-10. They will only be included in the calculation of the net income of the EST under section 95 of the ITAA 1936 if they are assessable as income according to ordinary concepts under section 6-5.

The Recitals of the Trust Deed confirm that Company A established the EST for the purpose of holding Company A shares for the benefit of Participants who are, or will become, the beneficial owners of such shares pursuant to the Company A Equity Plans and any other employee equity plans established in the future. The Trust Deed confirms that all contributions by Company A to the Trustee for the purpose of acquiring Company A shares, constitute accretions to the corpus of the EST. Further, pursuant to the Trust Deed the Trustee must, when directed by the Board, acquire shares for the purpose of enabling Company A to satisfy its obligations to allocate Company A shares to Participants. All the documentation provided demonstrates that the contributions received from Company A must only be used to acquire Company A shares in accordance with the terms of the Trust Deed and the Company A Equity Plans.

Accordingly, the irretrievable contributions made by Company A to the Trustee to acquire Company A shares will not be assessable income under section 6-5, but will constitute capital receipts of the Trustee, and not be assessable income of the EST pursuant to sections 6-5 or 6-10. This accords with the view expressed in ATO ID 2002/965.

Note that 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 as Trustee, Company A must pay to the Trustee such fees and reimburse such expenses incurred by the Trustee as Company A and the Trustee agree. Such receipts will be assessable income of the Trustee in contrast to the irretrievable contributions made to facilitate the acquisition of Company A shares.

Note also that income derived by the employment of the property that is the fund or corpus of the EST, and which the Trustee holds on trust will be income according to ordinary concepts (See Federal Commissioner of v. Everett (1980) 143 CLR 440; (1980) 10 ATR 608; 80 ATC 4076 for a discussion of the distinction between the trust income and corpus).

Question 2

Subsection 104-75(1) provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies), as against the trustee. Subsection 104-75(3) provides that the trustee will make a capital gain if the market value of the asset (at the time of the event) is more than its cost base, but will make a capital loss if that market value is less than the asset's reduced cost base.

Accordingly, where a Participant becomes absolutely entitled to Company A shares as against the Trustee, CGT event E5 will occur, and pursuant to subsection 104-75(3), the Trustee will make a capital gain or loss. However, section 130-90 operates to disregard that gain or loss where specified conditions are satisfied. It states:

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.

Executive (employee) share trust

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

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

An employee share scheme is defined in subsection 83A-10(2) 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.

Each of the Company A Equity Plans is an employee share scheme within the meaning of subsection 83A-10(2) because each is a scheme under which rights to acquire shares in Company A (Performance Rights) are provided to employees in relation to their employment (see further discussion of the term 'employee share scheme' under the heading 'Paragraph 130-90(1)(d)' below).

Company A established the EST to facilitate the Company A Equity Plans by acquiring Company A shares and allocating those shares to Participants, in order to satisfy the Performance Rights acquired under the employee share scheme. The beneficial interest in the Company A share is itself provided under an employee share scheme because it is provided under the same scheme under which the Performance Rights to acquire the Company A shares are provided to the Participant in relation to the Participant's employment, being an employee share scheme as defined in subsection 83A-10(2).

Therefore, paragraphs 130-85(4)(a) and (b) are satisfied because:

• the Trustee acquires Company A shares, and

• the Trustee 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 Participants in accordance with the governing documents of the scheme.

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

For the purposes of paragraph 130-85(4)(c), activities which are merely incidental, as set out in ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities, 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.

the Trust Deed is titled 'Sole activities test' and provides that Company A and the Trustee:

Without limiting the generality of Clause [x] the Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the sole activities test for the purposes of subsection 139(C)5 of the ITAA 1936 and be an 'employee share trust' as defined in subsection 995-1(1) of the ITAA 1997, as interpreted in ATO ID 2007/179

(Note the applicant comments that 'This clause includes references to legislation and an ATO ID that have since been repealed/withdrawn, following the introduction of the new Division 83-A Employee Share Scheme regime in 2009. This does not affect the Clause, for the purposes of this Application' - the Commissioner agrees as the current legislative provisions have the same effect as subsection 139(C)5 of the ITAA 1936.)

For the avoidance of doubt, this statement is supported by the Recitals of the Trust Deed which provide that the Trust was established by Company A to facilitate the Company A Equity Plans and for the purposes of holding Company A shares for the benefit of Participants who are, or will become, the beneficial owners of Company A shares pursuant to the Company A Equity Plans.

The Trust Deed makes it clear that the Trustee can only use the contributions received from Company A for the acquisition of Company A shares for Participants in accordance with the Company A Equity Plans. To this end, all other duties/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 Company A shares to be acquired for Participants of the Company A Equity Plans.

Accordingly, paragraph 130-85(4)(c) is also satisfied because the EST satisfies the definition of an employee share trust in subsection 130-85(4), as the Trust Deed does not provide for the Trustee to participate in any activities which are not considered merely incidental to a function of managing the employee share scheme and administering the trust.

Therefore, the EST is an employee share trust, as defined in subsection 995-1(1), 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) and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c).

Paragraph 130-90(1)(a)

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

Paragraph 130-90(1)(b)

Subsection 995-1(1) defines a share in a company to mean a share in the capital of a company. An ordinary share in Company A held by the Trustee and to which a Participant is entitled upon exercise of a Performance Right is a share in the capital of a company i.e. Company A. 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)

Paragraph130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a share (in Company A) by exercising a right (Performance Right) granted under the Company A Equity Plans.

Paragraph 130-90(1)(d)

Subsection 83A-20(1) of Subdivision 83A-B 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). Subsection 83A-10(2) states:

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), subsection 995-1(1) 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.

Each Company A Equity Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement/plan (scheme) under which an ESS interest i.e. a beneficial interest in a right to acquire a beneficial interest in a Company A share, is provided to a Participant in relation to their employment by Company A as an Eligible Employee pursuant to the Company A Equity Plan rules. The Performance Rights are acquired at no cost, however to exercise the Performance Right a Participant may be required to pay an exercise price which, if paid will be less than the market value of a Company A share.¹

Accordingly, prima facie Subdivision 83A-B will apply to Performance Rights acquired under the Company A Equity Plans as pursuant to subsection 83A-20(1) the ESS interest (i.e. Performance Rights issued under the Company A Equity Plans) will be acquired under an employee share scheme (for the reasons stated immediately in the preceding paragraph) 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) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C), 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) will be satisfied.

Accordingly, all the conditions in subsection 130-90(1) have been satisfied.

Provided then, that the Participant does not acquire the beneficial interest in the Company A share for more than its cost base in the hands of the EST at the time that CGT event E5 happens, subsection 130-90(1) will apply.

Under these circumstances, section 130-90 operates to disregard any capital gain or loss made by the Trustee on any Company A share when a Participant becomes absolutely entitled to that share.

CGT Event E7

Subsection 104-85(1) provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) 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 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 Company A shares by the Trustee, becomes absolutely entitled to those shares. In accordance with clause 3.1(b)(i) of the Trust Deed each Participant is absolutely entitled to any Company A shares held by the Trustee on their behalf, and is entitled to the same rights in respect of those shares as if he or she was the legal owner of the shares (subject to the Company A Equity Plans and terms of participation).

Once the Participants are absolutely entitled to the Company A shares held on their behalf by the EST, section 106-50 will deem the disposal of them by the Trustee to be done by the Participants.

Therefore, section 106-50 will apply, such that if the Trustee disposes of the Company A shares under the Company A Equity Plans (by way of transfer to Participants), the Trustee will not make a capital gain or capital loss under CGT Event E7.

¹ The applicant has stated at page 35 of its application "In any event this question has been framed on the assumption that the exercise price (if any) will not exceed the cost base of the shares in the hands of the Trustee."

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