Edited version of your written advice

Authorisation Number: 1012997796057

Date of advice: 22 April 2016

Ruling

Subject: Employee Share Plan

Question 1

Will the irretrievable cash contributions made pursuant to the Company A Executive Incentive Plan (EIP) to Company B (Trustee), as trustee for the Company A Employee Share Trust (Company A EST), to fund the subscription for, or acquisition on-market or off-market of, Company A shares by the Trustee in accordance with the Employee Share Trust Deed between Company A and Company B (Trust Deed), be assessable income of the Company A 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 Company A EST at the time the Participants become absolutely entitled to Company A shares under the EIP 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 Company A shares in the hands of the Trustee?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20YY

Relevant facts and circumstances

Company A has established an employee share plan, the Company A Equity Incentive Plan (EIP), under which senior executives may be provided with performance rights (Rights and Options), with each Right and Option representing a right to acquire a fully paid ordinary share in Company A (Company A share) in the future at no cost, subject to vesting conditions. Senior executives were granted Rights and/or Options under the EIP on listing and subsequent grants of Rights and/or Options are made to them on an annual basis as part of their remuneration.

In addition, Company A established the Company A Limited Recourse Loan Plan (LRLP) under which one senior executive has been provided with a loan to acquire shares in Company A for market value. The shares are subject to vesting conditions and are forfeited where performance conditions and/or service conditions are not met. The LRLP is not the subject of this private ruling and is mentioned only by virtue of the fact that shares acquired by an executive under the LRLP which have been forfeited due to the executive not meeting vesting conditions may be purchased by Company A off-market.

The implementation of the EIP and LRLP form part of Company A's long-term strategy of creating shareholder wealth by:

• rewarding the hard work of senior executives in Company A in a way that is competitive, market related and cost-effective for the business;

• motivating and promoting the long-term retention of senior executives in Company A;

• reflecting the importance of senior executives to the future success of Company A;

• enabling the executives to benefit in the long term growth and ownership of Company A by participating in these plans; and

• attracting new executive talent to achieve Company A's strategy.

EIP Overview

The EIP is governed by the Company A Equity Incentive Plan Rules (Plan Rules).

Pursuant to the Plan Rules the Board of Directors of Company A (Board) or any committee of the Board or a duly authorised person or body to which the Board has delegated its powers under the EIP may, from time to time, in its absolute discretion, invite Eligible Employees (as defined in the Plan Rules) to participate in a grant of Rights or Options. An offer to participate in the EIP (Offer) will be made on the terms set out in the Plan Rules and/or on any additional or alternative terms as the Board may determine from time to time.

An Eligible Employee to whom Rights or Options have been granted becomes a Participant under the EIP.

Pursuant to the Plan Rules, the Board will, amongst other things, set out in the Offer:

• the number of Rights or Options being offered, or the method by which the number will be calculated;

• the amount (if any) that will be payable for the grant of Rights or Options;

• any vesting conditions or other conditions that apply, including any vesting period;

• when Rights or Options may vest;

• the procedure for exercising an Option (including any exercise price that will be payable) following vesting and the period(s) during which it may be exercised; and

• whether the vesting of Rights and/or vesting and exercise of Options will be satisfied through an allocation of Company A shares or by making a cash payment.

Pursuant to the Plan Rules, acceptance of an Offer must be made by the Eligible Employee in accordance with the instructions that accompany the Offer, or in any other way the Board determines.

The Board may, at its discretion, refuse to allow the participation of an Eligible Employee where that Eligible Employee ceases to be an Eligible Employee, or ceases to satisfy any other conditions imposed by the Board, before the grant of Rights or Options is made.

Rights

A Right is defined in the Plan Rules as an automatic entitlement to a Company A share (or, in certain circumstances, to a cash payment in lieu of a Company A share) once applicable conditions (including any vesting conditions) are satisfied.

Pursuant to the Plan Rules, where an Eligible Employee has accepted an Offer to participate in a grant of Rights in accordance with the Plan Rules, the Board will, subject to its discretion, grant Rights to the Eligible Employee. Unless the Board determines otherwise:

• no payment is required for the grant of a Right

• Rights may not be registered in any name other than that of the Eligible Employee

The Plan Rules detail how Rights will vest:

• subject to any express rule to the contrary, a Right will only vest where each vesting condition, and all other relevant conditions advised to the Participant by the Board have been satisfied

• subject to the Plan Rules, the vesting of a Right will be satisfied by Company A allocating Company A shares to the Participant pursuant to the Plan Rules

• the Board may determine that the vesting of a Right will be satisfied by Company A making a cash payment in lieu of an allocation of Company A shares pursuant to the Plan Rules

• the Board may determine, prior to making a grant of Rights, that the vesting of those Rights will only be satisfied through an allocation of Company A shares to the Participant in accordance with the Plan Rules, and not by making a cash payment under the Plan Rules

• vesting occurs upon notification from Company A to the Participant that Rights have vested pursuant to the Plan Rules

Subject to the Plan Rules as soon as practicable following vesting of a Right, the Board must issue to, procure the transfer to, or procure the setting aside for the Participant of the number of Company A shares in respect of which Rights have vested. No further action is required on the part of the Participant.

Pursuant to the Plan Rules, where the Board exercises its discretion under the Plan Rules to make a cash payment to a Participant in lieu of an allocation of Company A shares, it will do so on the following terms:

• Company A must pay to the Participant an amount in Australian dollars (or any other currency determined by the Board in its absolute discretion) equivalent to the value of Rights that have vested

• the amount of the cash payment referred to in the Plan Rules will be calculated by multiplying the number of Company A shares in respect of which Rights have vested by the Current Market Price (as defined in the Plan Rules)

• where the Board determines that the payment under the Plan Rules is to be made in a currency other than Australian dollars, unless the Board determines otherwise, the foreign exchange rate applied will be the average closing exchange rate of the relevant currency for the 5 days prior to the date of vesting

A Right will lapse upon the earliest to occur of:

• the Right lapsing in accordance with a provision of the Plan Rules (including in accordance with a term of an Offer);

• failure to meet a vesting condition or any other condition applicable to the Right within the vesting period; or

• the receipt by Company A of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Right.

Options

An Option is defined in the Plan Rules as an entitlement to receive a Company A share (or, in certain circumstances, to a cash payment in lieu of a Company A share) that may only be exercised on satisfaction of applicable conditions (including any vesting condition) and compliance with the applicable exercise procedure (including payment of any applicable Exercise Price (as defined in the Plan Rules)).

Pursuant to the Plan Rules, where an Eligible Employee has accepted an Offer to participate in a grant of Options in accordance with the Plan Rules, the Board will grant Options to the Eligible Employee. Unless the Board determines otherwise:

• no payment is required for the grant of an Option

• Options may not be registered in any name other than that of the Eligible Employee

The Plan Rules detail how Options vest:

• subject to any express rule to the contrary, an Option granted under the EIP will only vest and become exercisable where each vesting condition, and all other relevant conditions advised to the Participant by the Board pursuant to the Plan Rules, have been satisfied

• the exercise of any Option granted under the EIP will be effected in the form and manner determined by the Board and, subject to the Plan Rules, must be accompanied by payment of the relevant Exercise Price (if any)

• subject to the Plan Rules, the exercise of an Option will be satisfied by Company A allocating Company A shares to the Participant pursuant to the Plan Rules

• the Board may determine that the exercise of those Options will be satisfied by Company A making a cash payment in lieu of an allocation of Company A shares pursuant to the Plan Rules

• the Board may determine, prior to making a grant of Options, that the exercise of those Options will only be satisfied through an allocation of Company A shares to the Participant in accordance with the Plan Rules and not by making a cash payment under the Plan Rules

• vesting occurs upon notification from Company A to the Participant that Options have vested pursuant to the Plan Rules

Subject to the Plan Rules, as soon as practicable following the exercise of an Option, the Board must issue to, procure the transfer to, or procure the setting aside for the Participant of the number of Company A shares in respect of which Options have been exercised. No further action is required on the part of the Participant.

Pursuant to the Plan Rules, where the Board exercises its discretion under the Plan Rules to make a cash payment to a Participant in lieu of an allocation of Company A shares, Company A must:

• notify the Participant that no Exercise Price is payable in respect of the Options exercised and/or refund any amount paid by the Participant in respect of those Options

• as soon as reasonably practicable, pay to the Participant an amount in Australian dollars (or any other currency determined by the Board in its absolute discretion) equivalent to the value of Options that have been exercised by the Participant

• the amount of the cash payment referred to in the Plan Rules will be calculated by multiplying the number of Company A shares in respect of which Options have been exercised by the Current Market Price, less any Exercise Price that would otherwise have been payable in respect of the Options exercised

• where the Board determines that the payment under the Plan Rules is to be made in a currency other than Australian dollars, unless the Board determines otherwise, the foreign exchange rate applied will be the average closing exchange rate of the relevant currency for the 5 days prior to the date of exercise

An Option will lapse upon the earliest to occur of:

• 5 years after vesting or any other date nominated as the expiry date in the Offer;

• the Option lapsing in accordance with a provision of the Plan Rules (including in accordance with a term of an Offer);

• failure to meet a vesting condition or any other condition applicable to the Option within the vesting period; or

• the receipt by Company A of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Option.

The Company A EST

Company A has established the Company A EST pursuant to the Employee Share Trust Deed (Trust Deed) between Company A and Company B (Trustee) for the purpose of obtaining Company A shares for the benefit of participating senior executives of the EIP. This includes subscribing for Company A shares at market value or otherwise acquiring Company A shares on-market or by way of off-market transfers, and allocating, holding and delivering shares in Company A pursuant to the Plan Rules of the EIP.

It is also intended that the Company A EST will be available for the following:

• to facilitate the off-market purchase of Company A shares acquired by an executive under the LRLP which have been forfeited due to the executive not meeting vesting conditions. These shares will be used to settle existing Rights and Options granted under the EIP when they vest

• to facilitate the requirements of any future equity plans Company A may implement pursuant to the Trust Deed which includes, within the purpose of the Company A EST, '…administering the current and future employee incentive plans adopted by the Company or the Group".

Operation of the Company A EST

The Trust Deed sets out the manner in which contributions can be made to the Company A EST and Company A shares acquired. Pursuant to the Trust Deed, contributions to the Company A EST are made on the following basis:

• the Company A EST may acquire Company A shares determined appropriate and necessary by Company A;

funds must be transferred to the Company A EST by Company A to enable the Trustee to acquire Company A shares;

• where the Trustee receives a request or direction from the Board specifying how the Trustee should acquire the Company A shares (whether by way of purchase on-market or pursuant to an off-market transfer or subscription (refer to the Plan Rules and the Trust Deed)), the Trustee must, so far as is reasonable within the terms of the Trust Deed and subject to the Plan Rules and the Trust Deed, comply with any such request or direction. (The Plan Rules and the Trust Deed provides that a request or direction from the Board to the Trustee to acquire shares is only effective if the Trustee has been provided with sufficient funds to acquire the relevant Company A shares); and

• the Trustee will then consider the Board's instructions and having regard to its broader obligations under the Trust Deed and under trust law will then act accordingly to acquire and allocate the Company A shares to a Participant, with such actions, however, being subject at all times to the requirement under the Plan Rules and the Trust Deed that the Trustee manage and administer the Company A EST so that the Company A EST satisfies the definition of an 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997.

The Trustee's action to acquire shares on-market, by way of an off-market transfer, or to subscribe for new shares in Company A will take into consideration any Corporations Act 2001 (Corporations Act) requirements.

The purpose and sole activities of the Company A EST are limited to obtaining shares for the benefit of Participants in the EIP and other incidental activities (such as distributing dividends to employees in accordance with the Trust Deed and Plan Rules and meeting the administrative costs of the EST).

At all times, the decision by the Trustee will be made in accordance with the Trust Deed and in fulfilment of the Trustee's fiduciary duty to beneficiaries. Company A is not a beneficiary under the Trust Deed, and any funds, both the initial contributions and any additional contributions required to fund the Company A EST, cannot be refunded, repaid or returned to Company A (other than by way of the Trustee paying the issue price where it subscribes for shares in Company A). Further, Company A will have no interest in the shares held by the Company A EST.

To the extent that the Company A EST derives interest or dividend income from the holding of Company A shares that is in excess of the costs of the Company A EST, such income may be used to acquire more Company A shares to deliver to employees or may be distributed to employees who have become beneficially entitled to the income (because, for example, their rights have vested but the shares not yet delivered). To the extent that there is no one presently entitled to the income of the Company A EST, the Trustee will pay tax on this income.

The Company A shares acquired by the Trustee at any time will be registered in the name of the Trustee as legal owner of the Company A shares. No employee will have beneficial entitlement to the Company A shares in the Company A EST or the income of the Company A EST at any time, unless the Trustee exercises its discretion otherwise. This discretion will be exercised under the terms of the Trust Deed, in fulfilment of the Trustee's fiduciary duty to beneficiaries and in accordance with Plan Rules. All of the Company A shares acquired by the Company AEST will be ordinary shares in Company A.

The EIP, operated by Company A with the participation of the Trustee, will at all times be operated in accordance with the requirements of Division 83A of ITAA 1997.

Reason for establishing and using the Company A EST

Company A's reasons for administering the EIP via the Company A EST are that:

• the Company A EST provides employees with the knowledge that the Company A shares and any incidental dividend income or associated rights, are held independently of Company A and the Trustee has a fiduciary obligation to act in the interests of its beneficiaries, i.e. Company A employees

• the Company AEST can enable the Company A shares to be acquired progressively over time either on-market or by subscription

• Company A can manage its costs and share capital position by having the Company AEST acquire Company A shares to hold on executives' behalf for a period of time, before the executives meet the vesting criteria and become entitled to the Company A shares under the Plan Rules of the EIP. If the executives do not meet the vesting criteria, the Company A EST can reallocate the Company A shares to fulfil future grants

• the Company A EST provides the opportunity to improve cash flow planning as Company A can make contributions to the Company A EST periodically throughout the vesting period, thus giving Company A the flexibility to determine the most appropriate time to make contributions

• the Company A EST is the most appropriate vehicle to be used to acquire shares and accumulate dividend income during the vesting period for the purpose of acquiring further Company A shares, meeting the costs of the EIP or distributing dividends to employees

• the Company A EST enables easier administration of the EIP

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

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 Assessment Act 1997 Division 83A

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

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

Income Tax Assessment Act 1997 section 104-75

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

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

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

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

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

Reasons for decision

All references are to the Income Tax Assessment Act 1997 unless otherwise stated.

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:

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 the present circumstances. Therefore, non-refundable 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 Company A EST under section 95 of the ITAA 1936 if they are assessable as income according to ordinary concepts under section 6-5.

Section 6-5 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 gave the classic definition of "income" in Australian law. Chief Justice Jordan considered that:

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts.

The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). The decision states that:

The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description.

In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

The contributions provided by Company A to the Trustee of the Company A EST are used in accordance with the terms of the Trust Deed and the Plan Rules of the EIP. The Trust Deed states that the Trustee holds the Trust Fund (as defined in the Trust Deed and includes Company A shares and money) for all Beneficiaries in the manner required by the Plan Rules. The Trustee cannot repay funds received by the Trustee from Company A. The Trustee must apply the funds received in the acquisition or subscription of Company A shares under the Trust Deed and the EIP. No Participant is entitled to receive such funds from the Trustee. The contributions will not be assessable as ordinary income under section 6-5 as they constitute receipts of a capital nature to the Trustee.

Question 2

When a Participant in the EIP becomes absolutely entitled to the Company A shares as against the Trustee, CGT Event E5 will occur and under section 104-75 the Trustee will make a capital gain or loss. However, section 130-90 may operate to disregard that gain or loss where specified conditions are satisfied.

Section 130-90

Section 130-90 relevantly states:

Shares held to satisfy the future exercise of rights acquired under employee share schemes

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 (1A) or (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.

Employee share trust

Subsection 130-85(4) states:

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 interest 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

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

Paragraphs 130-85(4)(a) and (b)

The beneficial interest in a Company A share received by a Participant when an ordinary share in Company A is granted to them under the terms of the Trust Deed is an ESS interest within the meaning of subsection 83A-10(1).

Subsection 83A-10(2) defines an employee share scheme as being 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 EIP is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme that provides rights (Rights and Options) to acquire beneficial interests in ordinary shares in Company A to employees in relation to the employee's employment.

Company A has established the Company A EST to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests (Rights and Options) acquired by those employees under the EIP. A beneficial interest in a Company A share is itself provided under an employee share scheme because it is provided under the same scheme under which the Rights and Options are provided to Participants in relation to their employment, being an employee share scheme as defined in subsection 83A-10(2).

Paragraphs 130-85(4)(a) and (b) are therefore satisfied because:

• the Company A EST acquires shares in a company, namely Company A; and

• the Company A EST ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those Company A shares to the employees in accordance with the Trust Deed and the EIP.

Paragraph 130-85(4)(c)

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the EIP.

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 sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c):

• 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; and

• 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 to be merely incidental.

The Trust Deed states that the Trustee holds the Trust Fund (which includes Company A shares and money) for all beneficiaries in the manner required by the Plan Rules.

The Trust Deed states that Company A and the Trustee agree that the Trust will be managed and administered in a way that satisfies section 130-85(4).

The Trust Deed states that the Trustee must comply with any direction of the Board to acquire Company A shares on behalf of a Participant in accordance with the Plan Rules.

Paragraph 130-85(4)(c) is satisfied as any activities undertaken by the Trustee other than the acquisition of Company A shares and the allocation of those shares to the employees in accordance with the Trust Deed and Plan Rules of the EIP are merely incidental to operation of the EIP.

The Trust satisfies the definition of an employee share trust in subsection 130-85(4) as:

• the Company A EST acquires shares in a company (being Company A);

• the Company A EST ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those Company A shares to the employees in accordance with the Trust Deed and Plan Rules of the EIP; and

• the Trust Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to the function of administering the Company A EST.

Paragraph 130-90(1)(a)

CGT event E5 is the CGT event that will apply under the terms of the EIP 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 vesting of a Right, and vesting and exercise of an Option, 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)

Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a share (in Company A) by vesting (and automatic exercising) of a Right and/or vesting and exercising of an Option provided under the EIP.

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.

Subsection 83A-10(2) defines an employee share scheme as being 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 EIP is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme that provides rights (Rights and Options) to acquire beneficial interests in ordinary shares in Company A to employees in relation to the employee's employment. Each Right or Option is acquired for no cost.

Subdivision 83A-B will apply to the Rights or Options provided under the EIP as pursuant to subsection 83A-20(1) the ESS interests (i.e. Rights or Options issued under the EIP) will be acquired under an employee share scheme (for the reasons stated in the immediately 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 a Participant does not acquire the beneficial interest in the Company A share for more than its cost base in the hands of the Trustee 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 that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), Part 3-1 and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

A Participant, on allocation of the Company A shares by the Trustee, becomes absolutely entitled to those shares. In accordance with the Trust Deed each Participant is absolutely entitled to any Company A shares held by the Trustee on their behalf once allocated, 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 EIP).

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

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

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