Edited version of private advice

Authorisation Number: 1051806834023

Date of advice: 19 February 2021

Ruling

Subject: Trustee in employee share scheme

Question 1

Will the irretrievable cash contributions by Company A or any subsidiary member of the Company A tax consolidated group ('Company A Group') to the trustee ('Trustee') of the Trust B Employee Share Trust ('Share Trust' or 'Trust') to fund the acquisition of Company A shares by the Trustee for the purposes of the Performance Rights Plans ('PRPs'), the Former Performance Rights Plans ('FPRPs') and the Employee Salary Sacrifice Share Plan ('ESSSP') be assessable income of the Trust under section 6-5 or 6-10 of Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

No.

Question 2

Will a capital gain or capital loss that arises for the Trustee at the time when the employees become absolutely entitled to Company A shares (capital gains tax ('CGT') event E5), be disregarded under section 130-90 of ITAA 1997 if the employees 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 periods:

Income Tax year ended 30 June 20xx

Income Tax year ended 30 June 20xx

Income Tax year ended 30 June 20xx

Income Tax year ended 30 June 20xx

Income Tax year ended 30 June 20xx

Relevant facts and circumstances

Background

Company A is an Australian listed company.

Company A forms the head company of an income tax consolidated group ('TCG'). (Company A and its subsidiaries forming the TCG are the 'Company A Group' or the 'Group').

As part of its overall remuneration strategy, in addition to fixed remuneration, Company A offers certain employees and directors payments of both cash and shares upon satisfaction of certain performance conditions. This is implemented through the Performance Rights Plans (the 'PRPs'). Company A also allows eligible employees to participate in a salary sacrifice arrangement to obtain shares in Company A through the Employee Salary Sacrifice Share Plan (the 'ESSSP').

Incentive Plans

Trustee B is the trustee of the Trust C Employee Share Trust (the 'Share Trust' or 'Trust') which will be used to acquire shares to satisfy awards of Performance Rights ('Performance Rights' or 'Rights') and Salary Sacrificed Shares issued under the various share plans noted below. Company A (and a number of its subsidiaries) are the employers of individuals that participate in the following PRPs:

.   the Company A Incentive Plan A (the 'Plan A');

.   the Company A Incentive Plan B (the 'Plan B'); and

.   the Company A Incentive Plan C (the 'Plan C')

The Performance Rights issued under the PRPs are governed by the Performance Rights Plan Rules (the 'PRPR').

In addition to the above, a number of Performance Rights were previously issued. These are collectively referred to as the 'Former Performance Rights Plans' or 'FPRPs'.

The Performance Rights issued under the FPRPs are governed by the PRPR.

Company A (and a number of its subsidiaries) are also the employers of individuals that participate in the ESSSP.

The Rights issued under the ESSSP are governed by the Employee Salary Sacrifice Share Plan Rules (the 'ESSSP Rules').

The key provisions of the PRPR are outlined below.

1. The Company A Performance Rights Plans under the PRPR

The PRPR provides the terms and conditions under which the PRPs and FPRPs are governed.

Broadly, the PRPR operate as follows:

.    Eligible participants are issued invitations by the Board, to apply for a grant of Performance Rights which vest according to performance criteria. The invitation will outline the number of Performance Rights offered and the performance conditions.

.    Once the eligible participant has received the invitation, they may accept the invitation in accordance with the instructions accompanying the invitation, unless the Board determines otherwise. The Board may also treat the conduct of an eligible employee in respect of an invitation as valid acceptance of that invitation.

.    The Performance Rights will be issued to Participants for nil consideration.

.    The satisfaction of the performance conditions shall determine the proportion of performance rights which vest to the participant. Satisfaction of the performance conditions will be determined by the Board at the end of the performance period.

.    The Performance Rights will vest at the end of the performance period, subject to the satisfaction of the performance conditions. If there is a Change of Control Event, or upon retirement, retrenchment or death of the participant, the Board has discretion as to how to deal with the Participant's Performance Rights, regardless of whether vesting and performance conditions have been met.

.    Performance Rights can lapse in a number of ways:

-     expiry of the right in accordance with its terms

-     the receipt of a notice from the Participant to the effect that they have elected to surrender the Performance Right

-     if the Board determines that the Participant has acted fraudulently, dishonestly or wilfully breached the Participant's duties

-     vesting conditions are not satisfied or waived within vesting period, or

-     according to another provision of the PRPR or in accordance with the terms of an invitation.

.    All shares issued on the exercise of a Performance Right will rank equally with other shares then on issue.

.    Once the Performance Rights vest and are exercised or following the exercise of a Vested Right, the participant will be entitled to shares in the company (one ordinary share for every right). The shares will be held in the Trust on behalf of the Participant subject to conditions as specified in the PRPR. At the time these conditions are satisfied, the Participant will become eligible to withdraw the shares from the Trust.

.    Participants are subject to transfer restrictions under the PRPR. A Participant may not deal with a Company A share acquired under the PRPR until the end of any period specified by the Board in the invitation or the end of any other period determined by the Board in accordance with applicable law.

.    Company A operates a "clawback policy" under the PRPR. Clawback will be initiated where in the opinion of the Board, a Participant:

-     has acted fraudulently or dishonestly

-     has engaged in gross misconduct;

-    has done an act which has brought Company A, or any member of the Company A Group into disrepute

-    has breached his or her duties or obligations to Company A or a member of the Company A Group, or

-    is convicted of an offence or has a judgment entered against them in connection with the affairs of the Company A Group.

.    Clawback will also be initiated where in the opinion of the Board, there is a financial misstatement event.

.    In the event of clawback, the Board may determine that any Performance Rights held by the Participant will lapse or be deemed to be forfeited.

.    Company A may provide funds to the Trustee to allow the Trustee to subscribe for and/or acquire Company A shares to be held on behalf of the Participants under the PRP.

.    Subdivision 83A-C applies to the PRP.

2. Company A Employee Salary Sacrifice Share Plan ('the ESSSP')

The ESSSP aims to enable employees to build a vested interest in Company A's longer term performance by providing an opportunity to acquire shares in the company.

The key objectives of the ESSSP are to:

.    align the interests of employees and shareholders;

.    provide competitive remuneration for the retention of key employees;

.    support a culture of share ownership by employees;

.    provide Company A with the ability to attract employees of a high calibre; and

.    assist with remuneration planning for employees.

Under the plan, employees are able to nominate between $1,000 and $5,000 per annum of their pre-tax salary to be salary sacrificed to acquire shares ('Salary Sacrifice Share') in Company A.

As part of the acceptance process, a Participant must elect for a tax deferral and non-disposal period ("Holding Condition") of between 3 and 15 years to apply to any shares issued, transferred or allocated to them, or their nominated personal representative. If no Holding Condition is nominated, it will automatically default to 3 years.

Within 7 workings days of a Participant's monthly salary deduction, shares in Company A will be acquired on the Participant's behalf by the Trustee.

Eligible participants in the ESSSP are all permanent full-time and part-time employees of the Employer Entities, as well as fixed term employees whose term of employment is greater than 12 months, who were employed at the commencement of the invitation period.

The ESSSP is governed by the ESSSP Rules. These are broadly as follows:

.    Eligible Participants are issued invitations by the Board to participate in the ESSSP as specified in the invitation. The invitation allows the employee to acquire shares in Company A on the terms and conditions imposed by the Board.

.    Once an Eligible Participant has received an invitation, they may accept in accordance with the instructions accompanying the Invitation, unless otherwise determined by the Board.

.    Where an Invitation is made, the number of shares to be issued, transferred or allocated to the Trustee to be held on behalf of a Participant will be the dollar amount of the salary sacrifice divided by the issue price per share outlined in the Invitation. Such an invitation will be conditional on Company A and the Participant entering into an agreement setting out the terms and conditions of the salary sacrifice arrangement.

.    Each Participant must elect to make their salary sacrifice contributions by way of regular deductions from the Participant's remuneration during the relevant year or a lump sum deduction from the Participant's remuneration in the first payroll period during the relevant year.

.    The Trustee will then hold those Company A shares on behalf of that Participant in accordance with the terms of the Trust Deed.

.    Subject to the Trustee receiving from Company A and its Employer Entities sufficient funds to subscribe for or acquire the Shares, the Board may, in its absolute discretion instruct the Trustee to either subscribe for new shares or acquire shares on market to be held on a Participant's behalf, or instruct the Trustee to use a combination of both alternatives.

.    All shares issued will rank equally with other shares of the same class on issue at the time, except for any rights attaching to the shares by reference to a record date prior to the date of their allotment, transfer or allocation.

.    A separate account or record will be opened and maintained by the Trustee in respect of each Participant containing details of the ESSSP contributions, shares issued, shares transferred and any dividends, bonus shares, interest or other earnings.

.    The ESSP is a scheme to which Subdivision 83A-C of the ITAA 1997 applies.

3. Share Trust

The Trust was set up for the sole purpose of obtaining shares for the benefit of employees of Company A Group. The key operating terms of the Trust are outlined as follows:

.    The Trust was established for the sole purpose of obtaining Shares for the benefit of Participants under employee equity plans including the PRPs, the FPRPs and the ESSSP that are described in this ruling request.

.    The Trust will be funded by contributions from Company A and Employer Entities (i.e. for the purchase of shares in accordance with the PRPs, the FPRPs and the ESSSP). All funds received by the Trustee from the Company A Group will constitute Accretions to the corpus of the Trust and will not be repaid to Company A and no Participant will be entitled to receive such funds.

.    Company A and the Employer Entities are likely to contribute funds to the Trust when the Performance Rights vest to the Participant and are subsequently exercised by the Participant or when Performance Rights vest and are converted into Vested Rights. In accordance with the intended operation of the ESSSP, contributions are likely to be regular deductions from the Participant's remuneration during the relevant year.

.    These funds will be used by the Trustee of the Trust to acquire the shares in Company A either on-market or via a subscription for new shares in Company A, based on written instructions from Company A.

.    Shares acquired by the Trustee must be allocated to the relevant employees and held on their behalf as soon as reasonably practicable where required to do so, or permitted, by the relevant Plan Rules.

.•   The structure of the Trust and the PRPs, the FPRPs and the ESSSP are such that shares may be dealt with at any time after the Restrictive Period lapses, in the following manner:

-   Shares allocated to each Participant will generally be transferred into the name of the Participant (i.e. legal title) upon a Withdrawal Notice being lodged with and approved by the Board; or

-   The Trustee can sell shares on behalf of the Participant, where permitted to do so by the Participant, resulting in a cashless exercise for them. That is, the Participant receives proceeds on sale of shares by the Trust less the exercise price (if any) and any brokerage costs.

.    Each Participant is the beneficial owner of the Trust Shares (as part of a Rights Issue) held by the Trustee on their behalf and is absolutely entitled to all other benefits and privileges attached to, or resulting from holding, those trust shares.

.    Company A does not have any charge, lien or other proprietary right or interest in the Company A shares acquired by the Trustee.

.    At no time will any member of the Company A Group have any beneficial interest in the Trust Assets.

.    Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the 'employee share trust' definition in subsection 130-85(4) of the ITAA 1997.

.    The Trustee is not permitted to carry out activities which result in the Participants being provided with additional benefits.

.    The Trustee can recover costs, expenses or other liabilities of the Trust from Company A.

.    The Trustee may pay any fees, costs and expenses incurred in establishment, maintenance or administration of the Trust. Company A must provide to the Trustee, or cause provision to the Trustee of, all necessary funds required by the Trustee for the Trustee to be able to pay such liability, fees, costs and expenses.

.    The Trustee must not pay any distribution from the Trust Assets to any member of the Company A Group when the Trust is terminated.

.    No member of the Company A Group is a beneficiary of the Trust.

.    The Trustee is an external trustee acting in an independent capacity on behalf of the beneficiaries of the Trust.

.    Company A incurs on-ongoing administration costs for operating the employee share scheme, such as

-     Employee plan record keeping;

-    Production and dispatch of holding statements to employees;

-    Provision of annual income tax return information for employees;

-    Costs incurred in the acquisition of shares on market (e.g. brokerage costs and the allocation of such Company A shares to Participants);

-    Management of employee termination; and

-    Other trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust.

Reasons for decision

Question 1

Detailed Reasoning

The total assessable income of a trust estate is calculated as if the trustee were a resident taxpayer in respect of that income (subsection 95(1) of the Income Tax Assessment Act 1936 ('ITAA 1936')).

The assessable income of a taxpayer includes income under ordinary concepts (section 6-5) or statutory income (section 6-10).

None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, non-refundable contributions made by Company A or the Company A Group to the Trustee will not be assessable income under section 6-10.

The cash contributions made by Company A or the Company A Group to the Trustee are irretrievable and non-refundable to Company A in accordance with the Trust Deed as Company A and members of the Company A Group do not have any beneficial interest in the Trust Assets. All funds received by the Trustee from the Company A Group will constitute Accretions to the corpus of the Trust and will not be repaid to Company A. The Trust Deed prevents distribution to any Group member in the event the Trust is terminated.

The funds provided to the Trustee are used in accordance with the Trust Deed and the PRPs, FPRPs and ESSSP for the sole purpose of and under the employee share scheme ('ESS'). The contributions constitute capital receipts to the Trustee, and are not assessable under sections 6-5 or 6-10 (ATO Interpretative Decision ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme), and hence will not be assessed to the Trustee pursuant to section 95 of the ITAA 1936.

Question 2

Detailed reasoning

Pursuant to section 102-20, an entity can make a capital gain or loss if, and only if, a CGT event happens.

Under subsection 104-75(1), 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.

The time of the event is when the beneficiary becomes absolutely entitled to the asset according to subsection 104-75(2).

If CGT event E5 happens, the trustee may make a capital gain or capital loss if the market value of the asset, at the time of the event, is more than its cost base or less than the asset's reduced cost base respectively. The trustee makes a capital loss under subsection 104-75(3) if that market value is less than the asset's reduced cost base.

In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 applies.

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') explains the principles set out in the leading English trust law case of Saunders v. Vautier (1841) 49 ER 282 in relation to 'absolutely entitled' as follows:

... if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustees to transfer the trust property to them or at their direction, even though the trust deed contains a contrary intention. The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway.

A Participant will become absolutely entitled to the Performance Rights in accordance with the PRPs and FPRPs when the Performance Rights have vested or when the disposal restriction ends in ESSSP and the Company will allot Company A Shares to the Participant. At this point, the Participant will become absolutely entitled to the Company A Shares as against the Trustee, and CGT event E5 happens pursuant to subsection 104-75(1).

However, any capital gain or loss that the Trustee makes from CGT event E5 is disregarded if section 130-90 applies.

Section 130-90 states:

130-90(1A) [...]

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.

(2)  Subsection (1A) or (1) does not apply if the beneficiary acquired the beneficial interest in the *shares for more than its *cost base in the hands of the *employee share trust at the time the *CGT event happens.

Therefore, to qualify for the exemption in section 130-90, there must be an 'employee share trust' and an 'ESS interest'.

The Share Trust satisfies the definition of 'employee share trust' in subsection 130-85(4) and the granting of Performance Rights to acquire Company A shares in the Company under the PRPs, FPRPs and ESSSP to the Participants falls within the definition of 'ESS interest' in subsection 83A-10(1).

The Performance Rights granted under the PRPs, FPRPs and ESSSP are ESS interests to which Subdivision 83A-B or 83A-C applies because the Participants acquire the ESS interests under an ESS for nil consideration, which are at discount.

As such, any capital gain or loss that arises for the Trustee when the Participants become absolutely entitled to Company A shares under the PRPs, FPRPs and ESSSP is disregarded by virtue of subsection 130-90(1).

Note that subsection 130-90(1) does not apply if the Participant acquired the beneficial interest in the Company A share for more than its cost base in the hands of the Share Trust at the time CGT event E5 happens (subsection 130-90(2)).

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