Edited version of your written advice

Authorisation Number: 1013046993774

Date of advice: 18 July 2016

Ruling

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

Question

Will a capital gain or capital loss arise under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the Trustee of the EST in relation to Shares transferred from the EST to Employees to satisfy rights to shares under the Company's Employee Performance Rights Plan (PRP)?

Answer

No.

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 following documents form part of the relevant facts:

• Application for Private ruling

• Performance Rights Plan Rules (PRP)

• Employee Performance Rights Plan Trust Deed (Trust Deed).

Remuneration and Incentive Programmes

• The Company prides itself on its ongoing efforts to maintain a productive and motivated work environment. A clear factor in its successes to date can be linked to the opportunities and rewards which it provides to staff and senior employees.

• The design of effective remuneration packages is a key aspect of the Company's strategy to retain and attract high-quality staff. As the Company has grown, it has faced increased competition in attracting and retaining staff, particularly from larger or listed competitors.

• The Company is focused on rewarding staff performance by enabling the staff to participate in its future growth and profitability in order to facilitate an increase in shareholder value.

• As part of this growth strategy The Company has a long term incentive plan in place, providing grants of performance rights (Rights).

• Under the Company's existing long term incentive structure, eligible directors and employees (Participants) receive Rights under the Company's Performance Rights Plan Rules (PRP).

Operation of the Plan

The Company, at the sole discretion of the board of the Company (Board), may issue invitations to an eligible Participant to participate in the Plan.

On acceptance of the invitation by the eligible Participant, the Board, at its sole discretion, may issue Rights to eligible Participants.

The Rights will vest to the extent that "Performance Hurdles" are met during the "Measurement Period" at which point all or a portion of the Rights will be convertible into Company shares (Shares).

Rights are granted to eligible Participants for nil consideration.

Operation of the Trust

An employee share trust (EST) has been established as a separate vehicle for the sole purpose of acquiring ordinary shares in the Company for the benefit of eligible Participants under the Company's employee equity plans.

The Company's Employee Performance Rights Plan Trust (Trust) was established during the financial year ended 30 June 20XX.

The Trust has been established with the sole purpose to acquire and hold Plan Shares pursuant to the Plan Rules for the benefit of Beneficiaries (Participants) of the Trust.

Contributions made to the Trust by the Company

Shares are acquired by the Trustee through contributions made by the Company to the Trustee. Shares acquired are held by the Trustee absolutely on behalf of the Participants. This arrangement is referred to as the Company Employee Performance Rights Plan (PRP).

It is the Company's intention to continue making contributions to the Trust on an annual basis.

The cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition of Shares by the Trust are irretrievable and non-refundable under the Trust Deed.

The Company will also incur costs associated with the services provided by the Trustee of the EST and various implementation costs.

Use of a Share Trust to facilitate the Plan

It is increasingly common for Australian companies to use a share trust to facilitate the provision of shares to employees as part of equity based employee incentive and retention strategies.

The applicant has provided the following commercial benefits of using a trust:

• the trust will facilitate the acquisition of shares by the trustee either on market or by a new issue of shares by the company;

• it is an arm's length vehicle for acquiring and holding shares in the company, either by way of new issue or acquiring on market;

• it better aligns the company's tax effect accounting policy with its cash flows;

• the trust will be an efficient structure for giving effect to disposal restrictions / vesting conditions;

• as the trustee is the legal owner, employees have no ability to deal in shares;

• contributing to the trust can enable the company to hedge against share price growth;

• the trust provides the flexibility to acquire and hold shares that will be allocated to employees under its employee rights plans and facilitates the forfeiture of rights when performance hurdles are not met. The trust is more able to hold shares for reallocation. This enables easy recycling of shares;

• the trust will provide one single vehicle for the administration of the group's employee rights plan;

• the trust establishes independent records and accounts for participating employees; and

• a trust is the most appropriate vehicle to be used to acquire shares and manage dividend income during the vesting period.

The Company has set up the EST to allow employees to participate in the equity of the company as follows:

1. The EST has been established for the sole purpose of subscribing for or acquiring, delivering, allocating and holding shares in the Company under the Company's PRP, including outstanding awards and future awards.

2. The sole activities of the Trustee will be acquiring shares for the purpose of providing them to eligible directors and employees (Participants) at a discount and the administration of the trust.

3. The Trustee will acquire shares at market value and will have the discretion to acquire them on- or off-market or by subscribing for new shares.

4. Under the terms of the Trust Deed, eligible Participants are the 'Beneficiaries' of the EST.

5. Prior to the time of vesting, Participants are not entitled to any voting rights, dividends or Rights issues based on their participation in the PRP.

6. Under the terms of the Trust Deed, the Company will instruct the Trustee to subscribe (or purchase a number of shares specified in the notice, to be held by the Trustee as trust shares in respect of the Participant.

7. The Trustee will, in accordance with instructions received pursuant to the plan rules, acquire, deliver and allocate Shares for the benefit of a Participant provided that the Trustee receives sufficient payment to subscribe for or purchase Shares and/or has sufficient unallocated Trust Shares available.

8. Shares will not be allocated to employees under the EST and no interest in the Shares will arise until the relevant performance/vesting hurdles are met and the equity interest has been exercised.

9. Such contributions made to the Trust are irretrievable contributions in the form of the initial contribution and additional similar contribution as required to fund the PRP.

10. The amount of the contributions made by the company will depend on:

• the number of performance rights granted to employees under the relevant plans;

• the number of shares held at the time by the trustee;

• the type of rights plan being administered at the time;

• the likelihood of rights vesting; and

• the employee contributions expected on vesting, if any.

11. Participants are absolutely entitled to the Shares as against the Trustee from when vesting occurs and the Shares are allocated to them. While such Shares are held in trust, the Participant may be entitled to dividend and voting rights.

12. All funds received by the Trustee from the company will constitute accretions to the corpus of the Trust and no Participant will be entitled to receive such funds.

13. The funds will not be repaid to the company (i.e. the contributions will be irretrievable). However the Trustee may apply part of the funds received to subscribe for shares in the company, which would require a payment to the company.

14. Where an amount paid by the company to the Trustee in respect of the acquisition of Shares for the benefit of a Participant is in excess of the amount required by the Trustee to acquire those Shares, the company may require the Trustee to apply such amount to acquire, deliver or allocate Shares in accordance with the Trust Deed, the relevant plan rules or the relevant terms of participation, or deposit the funds into any account opened and operated by the Trustee.

15. To the extent that vesting or performance conditions are not met, or the equity interests are otherwise forfeited in accordance with the PRP, the Shares are forfeited to the Trustee who acquires the Shares.

16. The trustee will not be permitted to offer, issue, or acquire any Share or any Rights to any Share if to do so would contravene any applicable law. It will not be permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the trust. It will not be permitted to carry out activities which result in the participants being provided with additional benefits other than the benefits that arise from the relevant plan rules.

17. It is the intention that the EST be used to administer all of the Company's employee equity awards for existing and future awards under the PRP.

18. The company will have no interest in the Shares held by the Trust.

Relevant legislative provisions

Section 100-20 of the Income Tax Assessment Act 1997

Section 104-75 of the Income Tax Assessment Act 1997

Section 130-90 of the Income Tax Assessment Act 1997

Reasons for decision

Section 100-20 of the ITAA 1997 provides that you make a capital gain or capital loss if a capital gains tax (CGT) event happens.

Relevant CGT event

Under section 104-75 of the ITAA 1997, CGT event E5 happens where a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) sets out the Australian Taxation Office (ATO) view on absolute entitlement.

TR 2004/D25 explains at paragraph 10 that the core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

TR 2004/D25 explains at paragraph 74 that a vested interest is one that is bound to take effect in possession at some time in the future and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest is vested in possession if they have the right to immediate possession or enjoyment of it.

Thus, the two core principles expressed in this draft ruling are that a beneficiary of a trust will be absolutely entitled as against the trustee where they have:

• a vested, indefeasible and non-contingent interest in a trust asset; and

• the ability to call for that asset to be transferred to them or at their direction.

In broad terms, under the PRP, on the satisfaction of the relevant vesting conditions, Participants will acquire a beneficial interest in the Shares once the Participant has lodged the relevant 'notice of exercise' with the Company. The conditions for the exercise of the Performance Rights are contained in the PRP.

The Shares will then be held in the EST on behalf of the Participant until such time as the Participant submits a 'Notice of Withdrawal' with the Company. The conditions for the withdrawal notice are contained in the PRP. Once approved, the Company will notify the Trustee that the Trustee may deal with the Shares that are the subject of that withdrawal notice. At this point in time the Trustee (in accordance with the Trust Deed) will deliver the Shares to the relevant Participant by either transferring legal title in the Shares to the Participant or by selling the Shares, and the proceeds (net of brokerage and other expenses) being forwarded to the Participant.

It is noted that though the 'Notice of Withdrawal' provides for the legal title to the Shares to be transferred to the Participant, the Shares cannot be sold if the ASX holding lock is still in place. In this way, the Notice of Withdrawal is simply an administrative process within the EST in relation to the withdrawal of Shares.

Shares held in the EST, under the terms of the PRP, are subject to various restrictions and vesting conditions, for example, relating to the sale of the Shares and/or not committing an act of gross misconduct. These conditions are enforced via the PRP by the Company, outside of the confines of the EST.

Under the terms of the Trust Deed the Trustee is required to deal with the Shares in accordance with the PRP. The PRP has various conditions that the Participant has to meet in order to become absolutely entitled to the Shares as against the Trustee. Once the Participant meets the conditions under the terms of the PRP to be absolutely entitled, CGT Event E5 happens.

On the Participants becoming absolutely entitled to the Shares, CGT Event E5 applies such that there is a disposal of the Shares by the Trustee.

If a capital gain or capital loss does arise for the Trustee under CGT Event E5, any capital gain or capital loss may be disregarded if the conditions under section 130-90 of the ITAA 1997 are met.

Operation of section 130-90 of the ITAA 1997

Subsection 130-90(1) provides that a capital gain or loss that is made by an employee share trust, to the extent that it results from a CGT event, is disregarded if certain conditions are satisfied. These conditions are:

(a) the CGT event is a 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 employee share scheme (ESS) interest to which Subdivision 83A-B or 83A-C (about employee share schemes) applied.

These factors are considered below to determine whether the Trustee will meet the conditions such that there is a disposal of the Shares by the Trustee.

(a) the CGT event is a CGT event E5 or E7

CGT event E5 happens in relation to the EST when a beneficiary (Participant) becomes absolutely entitled to a trust asset (Shares) as against the Trustee. Under the terms of the Trust Deed the Trustee is required to deal with the Shares in accordance with the PRP. The PRP has various conditions that the Participant has to meet in order to become absolutely entitled to the Shares as against the Trustee. Once the Participant meets the conditions under the terms of the PRP to be absolutely entitled, CGT Event E5 happens. The requirements of subparagraph 130-90(1)(a) are satisfied.

(b) the CGT event happens in relation to a share

It is accepted that the CGT event happens in relation to a Share that is held by the EST. The requirements of subparagraph 130-90(1)(b) are satisfied.

(c) the beneficiary had acquired a beneficial interest in the share by exercising a right

Under the terms of the PRP, the Participant will acquire a beneficial interest under its employee share scheme in a Share by exercising a Right that the Participant has been granted by the Company. The requirements of subparagraph 130-90(1)(c) are satisfied.

(d) the beneficiary's beneficial interest in the right was an employee share scheme (ESS) interest to which Subdivision 83A-C applied.

Subdivision 83A-C applies to employee share scheme (ESS) interests:

• that are acquired at a discount under an ESS ;

• in relation to the employees' employment;

• that relate to ordinary shares and/or rights; and

• are subject to a real risk of forfeiture.

Subdivision 83A-C is considered to apply based on the following:

• The Company operates a scheme under which Rights to acquire a beneficial interest in Shares of the Company are provided at a discount to employees (Participants) of the company. It is accepted that the interest that the Participant acquires meets the definition of an ESS interest under section 83A-10 of the ITAA 1997;

• the employee share scheme provides ESS interests in relation to the Participants' employment as an employee of the Company;

• the Rights are provided to Participants at a discount (nil consideration); and

• the Rights are at real risk of forfeiture as there is a requirement that the Participant meets the "Performance Criteria" over the "Performance Period" in order to exercise the Right into a Share.

The requirements of subparagraph 130-90(1)(d) are satisfied.

For the reasons detailed above, the conditions under section 130-90 of the ITAA 1997 will be satisfied. Accordingly, any capital gain or loss made by the Trustee under section 104-75 of the ITAA 1997 will be disregarded under section 130-90 of the ITAA 1997.

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