Disclaimer
You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1052036347869

Date of advice: 14 April 2023

Ruling

Subject: Employee share scheme trust

Question 1

Will the irretrievable cash contributions by XXXX to the Trustee to fund the acquisition of, or subscription for, XXXX shares by the Trust for the purposes of providing Australian employees Awards under the ESOP or the KEEP 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 CGT Event E5 happens in relation to XXXX shares held by the Trustee under the ESOP or KEEP for Australian employees be disregarded under section 130-90 of the ITAA 1997, if the employees acquire the 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 periods:

Income tax year ended 30 June 2022

Income tax year ended 30 June 2023

Income tax year ended 30 June 2024

Income tax year ended 30 June 2025

Income tax year ended 30 June 2026

Relevant facts and circumstances

The Company A Employee Share Trust Deed (Trust Deed).

The Plan Rules consisting of:

•         Company A Employee Share Option Plan Rules (ESOP Rules)

•         Employee Equity Plan Rules (EEP Rules).

The template invitation letters provided to the Commissioner on 25 October 20XX for grants of:

•         Deferred tax options under the Company A Employee Share Option Plan (ESOP)

•         Start up options under the ESOP

•         Rights under the Company A Employee Equity Plan (EEP)

If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background

Company A was listed on the ASX in 20XX. Company A and its subsidiaries is one of Australia's fastest growing online service provider. It offers these services in Australia and US markets.

It has lodged a notification to the ATO forming a tax consolidated group with its wholly owned Australian subsidiaries in 20XX. As such, all references to TCG are to the tax consolidated group.

The performance of TCG is strongly correlated with the quality of its employees. Accordingly, TCG is committed to maintaining a remuneration policy that ensures employee reward is aligned with the achievement of TCG's overall strategic objectives, outcomes and creation of value for shareholders. TCG rewards key employees with a mix of remuneration commensurate with their position and responsibilities. Remuneration structures are reviewed regularly to ensure that:

The remuneration of key employees at TCG is comprised of the following elements:

(a) Fixed remuneration, which includes base pay and other benefits; and

(b) Performance linked remuneration, which consists of performance rights or options.

TCG implemented the Employee Share Option Plan (ESOP) to reward, retain and motivate employees and to encourage participation by employees of TCG through share ownership. Under the ESOP TCG has granted options.

In 20XX, TCG implemented a new Employee Equity Plan (EEP) as an omnibus plan under which various types of incentive awards can be offered to employees, including rights, options and restricted shares. Performance Rights have been offered to employees under the EEP and it is anticipated that additional awards will be offered in future under the EEP.

TCG maintains a strong focus on the attraction, retention and motivation of staff to facilitate continued growth of TCG over the short to medium term. The retention of outstanding people is an ongoing challenge faced by many companies operating in the listed environment. Accordingly, TCG is continually evaluating ways to improve the scope and implementation of incentive programs to its employees. Fundamental to this growth strategy is the establishment of The Trust to administer the ESOP, the EEP and any future equity plans. The Trust Deed was executed in 2021.

The ESOP and EEP (collectively known as the Plans) provide TCG the flexibility to offer rights, options or restricted shares (collectively known as Awards) to executive directors and non-executive directors, employees and contractors of TCG or its subsidiaries.

Although the Plans allow flexibility for the Awards to be provided with or without a grant price and with or without an exercise price, the Awards provided under the Plans that are the subject of this ruling are those offered to employees at a discount to market value.

The Plans are administered in accordance with the terms summarised below.

Company A Employee Share Option Plan

The ESOP was designed to assist in the reward, retention and motivation of eligible participants (Participants) and align the interests of Participants with shareholders of the group. Under the ESOP, TCG can grant options which represent rights to acquire shares in Company A (Shares) subject to payment of an exercise price. The ESOP allows options to be settled in cash at the discretion of the Board, where such ability has been provided for in the invitation letter to the relevant employee.

The purpose of the ESOP, as outlined in the plan rules, is to "assist in the reward, retention and motivation of Participants" and "align the interests of Participants with shareholders of the Company".

The ESOP broadly operates as follows:

1.Participants may receive a grant of options under the ESOP.

2.      Participants are full-time, part-time employees, executive or non-executive directors of the TCG or subsidiaries (see Eligible Participants in the ESOP rules)

3.      Invitations sent to the Participants outline:

  1. the number of options for which that Participant may apply;
  2. the grant date;
  3. the grant fee (if any) for each option or how such fee is to be calculated;
  4. any vesting conditions;
  5. any exercise conditions;
  6. the exercise price;
  7. any restrictions on the manner of delivery of the Shares following exercise of the options;
  8. whether the options must be Equity Settled or may, at the discretion of the Board, be Equity Settled or Cash Settled (see the ESOP rules); and
  9. any other supplementary terms and conditions considered relevant by the Board.

4.      Participants may not dispose of their options, unless the relevant dealing is effected by force of law on death or legal incapacity to the Participant's legal personal representative or the Board determines otherwise. (see the ESOP rules)

5.      Participants will not be entitled to voting rights or rights to receive dividends until the options are exercised and the Participant holds Shares. (see the ESOP rules)

6.      Options may be exercised when all applicable vesting conditions and any applicable exercise conditions have been satisfied, by delivery of an exercise notice and the payment of any exercise price applicable. (see the ESOP rules)

7.      As soon as practicable after the valid exercise of an option, TCG must issue, allocate or cause to be transferred to that Participant the number of Shares to which the Participant is entitled (Equity Settled). Where permitted in the relevant Invitation and subject to Board approval, TCG may pay a cash amount to the Participant equal to the value of the Shares which would have otherwise been granted to the participant if the options had been Equity Settled (Cash Settled). (see the ESOP rules)

8.      Where a Participant ceases employment then (see the ESOP rules):

  1. The Participant may retain any vested and unexercised options, unless the Board exercises its absolute discretion to require that the Participant sell some or all of the vested and unexercised options to a person or entity nominated by the Board for an amount equal to the fair market value of the options; and
  2. All unvested options will be forfeited on a date determined by the Board, unless the Board provides express written consent that some or all of the Participant's unvested options may be retained. Where the Board determines that the Participant may retain unvested options, those options will be held subject to the same terms and conditions that the Participant held those options prior to ceasing employment.

9.      Options which have not yet been exercised must be forfeited immediately on the date the Board determines that any applicable vesting condition or exercise condition has not been, or cannot be, met by the relevant date. (see the ESOP rules)

10.   Where a Participant acts fraudulently or dishonestly, or wilfully breaches his or her obligations; the Board may deal with or take any actions, in relation to options, Shares resulting from the exercise of options or cash settlement proceeds so as to ensure no unfair benefit is obtained by the Participant. (see of the ESOP rules)

11.   Shares acquired by Participants as a result of exercising their options may be subject to a disposal restriction, where the Participant must not dispose of their Shares unless the disposal is in accordance with the ESOP, the relevant Invitation, the shareholders deed and any securities trading policy.

12.   The ESOP allows TCG to use an employee share trust to facilitate the allocation of Shares to a Participant (i.e. the Trustee to subscribe for and / or acquire shares to be held on behalf of the Participants under the ESOP and to hold any Shares under the plan rules on such terms and conditions as by the Board in its absolute discretion). (see the ESOP rules)

13.   All Shares issued under the ESOP will rank pari passu in all respects with the shares of the same class from the date of issue. (see the ESOP rules)

Company A Employee Equity Plan

The EEP allows the Board to make offers to eligible participants (Participants) to acquire ordinary shares in Company A or rights to Shares.

The incentives that may be granted under the EEP are as follows:

The purpose of the EEP, as outlined in the Introduction of the plan rules, is to allow the Board to make Offers to Eligible Employees to acquire securities in Company A and to otherwise incentivise employees.

The Plan broadly operates as follows:

1.Participants may receive a grant of Rights, Options or Restricted Shares under the EEP.

2.      Certain performance, service or other conditions may need to be satisfied before an award may vest (Vesting Conditionsor Performance Hurdles). Additional conditions may need to be satisfied before a Participant may exercise a vested award (Exercise Conditions). The Board has the discretion to waive any Vesting Conditions and Exercise Conditions. (the EEP Rules)

3.      Awards are granted pursuant to an invitation letter (Invitation) made under the EEP. The number of awards to which a Participant may be eligible to receive will be set out in the Invitation made to a Participant.

4.      Invitations sent to the Participants will outline the following as per the EEP Rules:

  1. the type and number of awards being offered, or the method by which the number will be calculated;
  2. the amount (if any) that will be payable for the grant of awards;
  3. any Vesting Conditions or other conditions that apply, including any vesting period;
  4. 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;
  5. where the Board has made a determination that the vesting of Rights and/or exercise of Options (as applicable) will only be satisfied through an allocation of Shares;
  6. the circumstances in which Rights and/or Options will lapse, Shares (including Restricted Shares) allocated under the EEP may be forfeited or a Participant's entitlement to awards may be reduced;
  7. how awards may be treated in the event that the Participant ceases employment, and any discretions retained by the Board in this regard; and
  8. any restrictions (including the period of restriction) on dealing in relation to a Restricted Share or Share allocated to the Participant under the EEP.

5.      Participants must not sell, transfer, assign, encumber, swap, hedge or otherwise deal (Deal) with their awards unless the Board determines otherwise.

6.      The Participant will not be entitled to voting rights, rights to receive dividends, bonus issues and to participate in rights issues until their Rights and Options vest and are exercised and the Participant holds Shares, or unless the Participant holds Restricted Shares.

7.      Rights will vest when all Vesting Conditions and all other relevant conditions have been satisfied. Options may be exercised when all Vesting Conditions and all other relevant conditions have been satisfied, and following the payment of any exercise price applicable. (the EEP Rules)

8.      Restricted Shares will vest and become Shares where the Vesting Period and other relevant conditions, including Vesting Conditions, have been satisfied. (the EEP rules)

9.      The Board may determine that the vesting of Rights or the exercise of Options will be satisfied by a cash payment to the Participant in lieu of an allocation of Shares (Cash Settled). Where Rights are Cash Settled, the cash payment will be the market value of the Shares in respect of which Rights have vested. Where Options are Cash Settled, the cash payment will be the market value of the Shares in respect of which Options have been exercised, less any exercise price that would otherwise have been payable. (the EEP rules)

10.   In some circumstances, the Board may determine at the time an offer is made that a dividend equivalent payment will be paid to a Participant who becomes entitled to an allocation of Shares following the vesting or exercise of Rights or Options. The payment will be approximately equal to the amount of dividends that would have been payable to the Participant had they been the owner of the Shares during the Vesting Period (Dividend Equivalent Payment). The Dividend Equivalent Payment amount may be satisfied through the allocation of Shares or the payment of cash. A cash-settled Dividend Equivalent Payment would not be paid through the Trust. (the EEP rules)

11.   Where a Participant ceases employment then the Board, in its discretion, may determine that some or all of a Participant's unvested awards, as applicable:

  1. Lapse;

b.   are forfeited;

c.   vest (immediately or subject to conditions);

d.   are only exercisable for a prescribed period and will otherwise lapse; and/or

e.   are no longer subject to some of the restrictions (including any Vesting Condition) that previously applied,

as a result of the Participant ceasing to be employee of the group. (the EEP rules)

12.   Where a Participant prior to vesting of the awards has acted fraudulently or dishonestly or otherwise inappropriately, the Board may determine that any unvested Rights or Options, vested but unexercised Options, or Restricted Shares and/or Shares allocated under the EEP will lapse or be deemed to be forfeited. (the EEP rules)

13.   The EEP allows TCG to use an employee share trust to facilitate the allocation of Shares to a Participant (i.e. allows the Trustee to subscribe for and / or acquire Shares to be held on behalf of the Participants under the EEP and to hold any Shares under the EEP on such terms and conditions as determined by the Board in its absolute discretion). (the EEP rules)

14.   All Shares issued under the EEP on the vesting or exercise of awards will rank pari passu in all respects with the shares of the same class from the date of issue (the EEP rules).

Rights, Options and Restricted Shares offered under the EEP, and options offered under the ESOP, are collectively referred to as "Awards".

Company A Employee Share Trust

The Company A Employee Trust was established in 2021 as a sole purpose trust for the purpose of holding Shares for the satisfaction of Awards under the rules of the Plans (refer the Trust Deed). The Board may do all things necessary for the establishment, administration, operation, and funding of an employee share trust and may, in its absolute discretion, require that a Participant's Shares are held in the employee share trust.

For completeness, the Trust will not be involved in the process of satisfying any Cash Settled Awards under the Plans or any future equity plans. The EST will only be used to acquire Shares for the purpose of satisfying Equity Settled Awards. Any Cash Settled Awards will be settled outside the Trust directly by TCG.

The Trust provides TCG with greater flexibility to accommodate the incentive arrangements of TCG both now and into the future as the group continues to expand its operations. The Trust provides capital management flexibility for TCG, in that the Trust can use the contributions made by TCG either to acquire shares in Company A on market, or alternatively to subscribe for new shares in Company A.

Similarly, it provides an arm's length vehicle through which Shares in Company A can be acquired and held on behalf of employees. In effect, this aspect allows Company A to satisfy Corporations Law requirements relating to companies dealing in their own shares.

Company B, an independent third party, is the Trustee of the Trust, and will operate the Trust in accordance with Company A Employee Share Trust Deed (Trust Deed).

Broadly, the Trust will broadly operate as follows:

Contributions to the Trust

TCG does not and will not pay cash contributions to the Trust prior to the issue of Awards under the Plans to Participants.

TCG, where possible, will wait until the Awards vest (and to receive the exercise notice from Participants where relevant) before providing the Trust with the cash necessary to acquire shares to satisfy the acquisition or subscription of shares related to those Awards. In the event that Restricted Shares are granted, the Company will also typically wait until grant of Restricted Shares to make related contributions to the Trust.

However, where it makes commercial sense to do so, TCG may make cash contributions to the Trust prior to the Awards vesting, and where relevant, Awards being exercised by the Participants or in the event that Restricted Shares are granted to Participants, prior to grant. In this case, TCG will contribute to the Trust enough funding to enable purchase of shares in advance of when Awards are likely to be exercised or in the case of Restricted Shares, prior to the grant. This allows the Trustee to have enough shares in the Trust ahead of when they need to be allocated to Participants, and avoids delays in times such as blackout trading periods.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for The Trustee for Company A Employee Share Trust.

This is to explain how we reached our decision. This is not part of the private ruling.

Question 1

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 (list of provisions about assessable income that is not ordinary income) are relevant in the present circumstances. The irretrievable cash contributions made by the TCG to the Trustee of the Trust will therefore not be included in the assessable income of the Trustee under section 6-10.

The contributions made by TCG are irretrievable and non-refundable to it in accordance with the Trust Deed (see the Trust Deed). The funds provided to the Trustee are used in accordance with the Trust Deed and the Plan Rules for the sole purpose of the employee share schemes (see the Trust Deed). Therefore, 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).

Question 2

Subsection 130-90

Broadly, section 130-90 applies to disregard any capital gain or capital loss made by an employee share trust when providing shares or rights to shares in the trust to a beneficiary as a part of the operation of an employee share scheme subject to certain conditions. Relevantly,

Employee Share Trust

To determine whether the Trust is an 'employee share trust' for the purposes of subsection 130-85(4) an analysis of what the Trustee actually does and its powers and duties that are prescribed in the Trust Deed is required. However, as indicated in the facts the Trustee will exercise its powers and obligations as set out in the Trust Deed. Therefore, it meets the definition of 130-85(4) as:

•         the Trust acquires shares in a company, namely Company A

•         the sole purpose being the acquisition, holding, and ongoing administration of holding Company A shares under the Plans for the benefit of the Participants (see the Trust Deed).

•         the Trustee is not permitted to carry out activities that are not connected to or for the purpose of the Plans established by TCG (see the Trust Deed)

•         the Commissioner accepts that the other activities undertaken by the Trustee will be merely incidental to this purpose 130-85(4)(c)

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

•         the Trust Deed indicates that Company A and the Trustee agree the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purpose of subsection 130-85(4) (the Trust Deed).

ESS interest to which Subdivision 83A-B or 83A-C applied/applies

Under the Plans, Participants acquire an ESS interest as defined in subsection 83A-10(1) as they acquire either a beneficial interest in a share in Company A or a beneficial interest in a right to acquire a beneficial interest in the share in Company A. All of the ESS interests provided through the Trust are provided at a discount and therefore the Commissioner accepts that 83A-B or 83A-C applies.

The CGT event must be E5 or E7

Subsection 104-75(1) provides that CGT event E5 happens when a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee.

On satisfying any vesting conditions, an interest-holder will have an unconditional right to receive a Company A share. At this point, they will be absolutely entitled to that share (being a CGT asset of the Trust) as against the Trustee and CGT event E5 will happen (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).

Conclusion

Therefore, as shown above the conditions of 130-90 have been met such that where the beneficiary does not acquire 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, the capital gain or loss made by the Trustee will be disregarded.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).