Edited version of private advice

Authorisation Number: 1051571085767

Date of advice: 16 December 2019

Ruling

Subject: Employee Share Scheme

Question 1

Will the irretrievable cash contributions from the Company or any subsidiary of the consolidated group (the Group) to the Trustee of the Employee Share Trust (the Trustee), to fund the acquisition of the Company's shares (Shares), be assessable income of the trust, under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) or Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Will any capital gain or capital loss made by the Trustee at the time when either CGT Event E5 or E7 happens, in relation to Shares, be disregarded under section 130-90 of the ITAA 1997, if the employees acquire Shares for the same or less than the cost base of the Shares in the hands of the Trustee?

Answer

Yes.

Relevant facts and circumstances

The Company is an Australian resident public company listed on the Australian Securities Exchange and is the head company of a consolidated group (the Group).

The Company's employee share plans (the Plans) are a component of the Group's compensation and benefits packages and are a retention and alignment tool (aligning employee behaviour with shareholders' interests) available to eligible employees of the Group.

The Plans are comprised of a number of governance documents and include:

·        A general plan for Australian resident employees; a tax deferred plan award; a tax deferred salary sacrifice plan; a tax exempt salary sacrifice plan; a tax exempt plan award; an annual incentive plan award of Share Rights to senior executives as part of their annual incentive remuneration; and an award of fully-paid ordinary Shares of a value specified to the executive, partly comprised of Performance Shares and the balance of Restricted Shares.

·        Fully-paid ordinary shares in the Company are allocated to eligible employees

·        Shares are subject to various trading restrictions

·        Shares are held by the Trustee, and

·        Participants are entitled to receive dividends in relation to their allocated Shares.

Acquisition of Shares by the Trustee

The following applies to Share allocations:

·        The Company makes irretrievable contributions to the Trustee (Contributions) in order to allow the Trustee to either subscribe for Shares or acquire Shares on-market.

·        The Company makes Contributions on behalf of its wholly owned subsidiaries and the subsidiaries it controls (as defined in the Corporations Act 2001) and recovers from those other entities (via a recharge) the costs of Shares issued to or acquired for its employees.

·        The Company can pay the Contribution to the Trustee before or after the acquisition of the Shares.

The Trustee is neither a subsidiary nor a related body corporate of the Company for the purposes of the Corporations Act 2001.

The Company will indemnify the Trustee in respect of all liabilities, costs and expenses incurred by it in executing the employee share trust.

Reasons for decision

Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.

Question 1

The irretrievable contributions made to the Trustee to fund the acquisition of Shares under the Plans are neither ordinary income nor statutory income and will not be assessable income of the Trust under sections 6-5, 6-10 or Division 6 of Part III.

Detailed reasoning

Section 6-5

Under subsection 6-5(1), assessable income includes income according to ordinary concepts, which is called ordinary income.

The irretrievable contributions made by the Company to the Trustee under the terms of the Plans and the Trust are to be used for the sole purpose of obtaining shares in the Company for the benefit of Participants, they will constitute accretions to the corpus of the Trust. Accordingly, the irretrievable contributions constitute capital receipts to the Trustee of the Trust.

The irretrievable cash contributions made by the Company to the Trustee will not be included in the Trustee's assessable income under section 6-5 as ordinary income because the contributions are of a capital nature. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

Section 6-10

Under subsection 6-10(1), assessable income includes some amounts that are not ordinary income. These are included by provisions about assessable income listed under section 10-5. None of the provisions listed in section 10-5 is relevant in the present circumstances.

In ATO Interpretative Decision ATO ID 2002/965, Income Tax - Trustee not assessable on employer contributions made to it under the employee share scheme, the Commissioner has expressed the view that the funds provided to the trustee of an employee share scheme trust constitute capital receipts to the trustee, and are not assessable under sections 6-5 or 6-10.

Division 6 of Part III

Under Division 6, it is generally the beneficiaries of a trust, who are presently entitled to a share of the income of the trust, who include that share of the 'net income' of the trust in their assessable income. The trustee is generally taxed on the balance of the net income which is not included in the assessable income of a beneficiary.

Section 95 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 ....

Given that the irretrievable cash contributions made by the Company to the Trustee are neither ordinary income nor statutory income, they will not be included in the assessable income of the Trust, and hence will not form part of the 'net income' of the Trust (under Division 6 of Part III).

Question 2

Any capital gain or loss that arises to the Trustee at the time when either CGT Event E5 or E7 happens in relation to the Company's shares held by the Trustee will be disregarded under section 130-90 where the Participant acquires the shares for the same or less than the cost base of the shares in the hands of the Trustee.

Detailed reasoning

Section 130-90 operates to disregard any capital gain or loss made by an EST under section 104-75 or 104-85 where specified conditions are satisfied.

Shares held for future acquisition under employee share schemes

130-90(1A)

Disregard any capital gain or capital loss made by an employee share trust to the extent that it results from a CGT event, if:

(a)             immediately before the event happens, an ESS interest is a CGT asset of the trust; and

(b)            either of the following subparagraphs applies:

                                       (i)                the event is CGT event E5, and the event happens because a beneficiary of the trust becomes absolutely entitled to the ESS interest as against the trustee;

                                     (ii)                the event is CGT event E7, and the event happens because the trustee disposes of the ESS interest to a beneficiary of the trust; and

(c)   Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest.

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 the 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.

Subsection 130-90(1A) applies to shares held for future acquisition under employee share schemes while section 130-90(1) applies in respect of shares held to satisfy the future exercise of rights acquired under employee share schemes.

The elements of each of these provisions need to be satisfied in order for them to apply to the schemes described in this ruling. The following explains why each of these elements has been satisfied.

Firstly, as both provisions apply to capital gains or capital losses made by an employee share trust, the Commissioner needs to be satisfied that the Trust is an employee share trust for the purposes of the provisions.

Employee Share Trust

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

Under subsection 130-85(4):

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 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).

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 employee's employment.

The Plans comprise an employee share scheme within the meaning of subsection 83A-10(2) because the ESS is a scheme under which either shares in the Company, or rights to acquire beneficial interests (Rights) in ordinary shares in the Company, are provided to Participants in relation to their employment with the Company.

The Company has established the Trust for the sole purpose of acquiring and holding ordinary shares in the Company, for the benefit of Participants, and to allocate those to Participants in order to satisfy ESS interests (the Shares and Rights) acquired under the Plans.

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

A Right granted to an employee will be an 'ESS interest' as it is a beneficial interest in a right to acquire a beneficial interest in a Share.

All Participants are employees of the Company. Accordingly, paragraphs 130-85(4)(a) and (b) are satisfied. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) will require the Trustee to partake in incidental activities that are a function of managing the Plans and administering the Trust.

Taxation Determination TD 2019/13 Income Tax: what is an 'employee share trust'? (TD 2019/13), sets out a number of activities that are merely incidental for the purposes of paragraph 130-85(4)(c).

For the purposes of the Trust, the powers of the Trustee are set out in the Trust Deed. Specific clauses limit the powers given to the Trustee so as to ensure that the powers of the Trustee under the Trust Deed are exercised in accordance with the purpose of the Trust Deed, that is, for 'acquiring and holding certain property on trust for the benefit of employees of the Company.... in accordance with the rules of the Plans and the terms and conditions set out in the Deed.'

Accordingly, the Trustee can only use the contributions received exclusively for the acquisition of Shares in accordance with the Plan Rules. To this end, all other duties and general powers listed in the Trust are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the Shares for the sole benefit of Participants in accordance with the Plan Rules.

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

Disregarding of capital gain or capital loss

Each paragraph of subsection 130-90(1) is considered in turn as follows.

Paragraph 130-90(1)(a)

The question assumes that CGT event E5 or CGT event E7 will happen in relation to the Company shares held by the Trustee.

Paragraph 130-90(1)(b)

Relevantly, subsection 995-1(1) defines a 'share' in a company to mean a share in the capital of a company. An ordinary share in the Company held by the Trustee and to which a Participant is entitled upon vesting or exercise of a Right, or the opportunity to receive and acquire shares in the Company under one of the Plans is a share in the capital of a company. Accordingly, paragraph 130-90(1)(b) is satisfied as the CGT event happens in relation to a share for the purposes of that paragraph.

Paragraph 130-90(1)(c)

Paragraph 130-90(1)(c) will be satisfied as the Participant will have acquired a beneficial interest in a share in the Company by the exercise of a Right granted under the relevant 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.

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 Plans are employee share schemes within the meaning of subsection 83A-10(2) because they are schemes that provide rights to acquire beneficial interests (the Rights) and/or the opportunity to acquire ordinary shares in the company, for employees, in relation to the employees' employment.

The Plans are therefore an employee share scheme as defined, and as such either subdivision 83A-B or 83A-C will apply to the Rights over shares or allocation of Shares issued.

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

Provided a Participant does not acquire the beneficial interest in the Company 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 Share when a Participant becomes absolutely entitled to that Share.

Subsection 130-90(1A)

Under the Plans, Participants are invited to acquire shares in the Company. The Company fulfils the acquisition and provision of Shares through the Trust.

Subsection 130-90(1A) provides that any capital gain or loss made by an employee share trust is disregarded where it results from a CGT event if immediately before the event happens an ESS interest is a CGT asset of the trust and a beneficiary of the trust becomes absolutely entitled to the ESS interest (CGT event E5), or the trustee disposes of the ESS interest to a beneficiary of the trust (CGT event E7).

For the reasons discussed above, the Trust satisfies the definition of an employee share trust in subsection 130-85(4).

Paragraph 130-90(1A)(a) is satisfied as the shares held by the Trustee are ESS interests which are CGT assets of the company Plans.

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

The Plans comprise an employee share scheme for the purposes of Division 83A as they are an arrangement under which an ESS interest is provided to a Participant in relation to their employment in the Company in accordance with the Trust.

Subdivision 83A-C will apply to the Shares acquired under the Plan Rules (refer section 83A-105). Accordingly, paragraph 130-90(1A)(c) will be satisfied.

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

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

Conclusion

Under either circumstance of subsection 130-90(1) or 130-90(1A), section 130-90 operates to disregard any capital gain or loss made by the Trustee on any Share when either CGT Event E5 or E7 happens.

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