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Edited version of private advice

Authorisation Number: 1052258009428

Date of advice: 31 July 2024

Ruling

Subject: Employee share trust

Question

Will the irretrievable contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group) and Company B, (collectively, Group Companies), to the trustee (Trustee) for the Company A Employee Share Trust (EST) to fund the subscription for, or acquisition on-market of, ordinary Company A shares (Company A Shares) by the EST in accordance with the EST Trust Deed (Trust Deed) be assessable income of the EST?

Answer

No.

Question

Will a capital gain or capital loss incurred by the Trustee, at the time shares held by the EST are delivered to employees, be disregarded under section 130-90 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997)?

Answer

Yes, unless the capital gain is due to the exercise of Options where the Trustee's cost base in the relevant Shares is less than the exercise price of the relevant Options.

This ruling applies for the following periods:

Relevant facts and circumstances

Company A

Company B

The Plans

Key terms of Performance Rights Plan

Key terms of Employee Option Plan

The EST

Powers of the Trustee

Allocating Shares to the EST

Contributions to the EST

Reasons for decision

All legislative references below are to the Income Tax Assessment Act (1997) unless otherwise indicated.

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 ITAA 1936). The assessable income of a taxpayer includes income under ordinary concepts (section 6-5) or statutory income (section 6-10).

Section 10-5 contains a summary list of the provisions for statutory income. None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, the irretrievable cash contributions made by the Group Companies to the Trustee will not be assessable income of the Trustee under section 6-10.

The cash contributions made by the Group Companies constitute accretions to the corpus of the EST and are irretrievable and non-refundable in accordance with the Trust Deed (other than as consideration for shares under the terms of the Trust Deed).

Therefore, the contributions constitute capital receipts to the Trustee, and are not assessable under section 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

Detailed reasoning

Under section 130-90, capital gains or capital losses made by an employee share trust can be disregarded where shares were held for future acquisition under employee share schemes (subsection 130-90(1A)) or to satisfy the future exercise of rights acquired under employee share schemes (subsection 130-90(1)).

Under the terms of the Trust Deed, the Trustee will acquire Shares following the receipt of cash contributions from Group Companies, and, on vesting or exercise of Rights, the Shares will be transferred to Participants, therefore subsection 130-90(1) is applicable.

The conditions required to satisfy section 130-90(1) are as follows:

(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.

In addition, subsection 130-90(2) states that subsection 130-90(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.

An Employee Share Trust' as defined in subsection 130-85(4) is a trust whose sole activities are:

(a) obtaining share 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 ESS 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).

The Commissioner's view of what constitutes activities that are 'merely incidental' is contained in Taxation Determination 2019/13 Income tax: what is an 'employee share trust' (TD 2019/13).

The Commissioner is of the opinion that the EST, as determined by the terms of the Trust Deed, is an employee share trust within the definition in subsection 130-85(4).

CGT event E5 or E7

When the Rights granted to a Participant under the Plans vest and are exercised, the Participant becomes absolutely entitled to a number of Shares held (or to be acquired by the EST). This will cause event E5 for the Trustee to occur, satisfying condtion (a) of subsection 130-90(1).

Once the Participant is absolutlely entitled to Shares held on their behalf by the EST, section 106-50 deems the Shares to be the asset of the Participant rather than the EST.

In relation to a share

Upon the Rights vesting and being exercised, a Participant acquires fully-paid ordinary shares in Company A. Therefore condition (b) of 130-90(1) is satisfied.

Beneficial interest

Under the Plan, Participants are granted Rights. When the Rights vest, are exercised and Participants acquire Company A shares, the Rights are treated as rights to acquire shares from the date of grant under subsection 83A-15(2). Participants acquire a beneficial interest in the shares on vesting and exercise of their Rights, and paragraph 130-90(1)(c) is satisfied.

Subdivisions 83A-B or 83A-C

Where Rights granted under the Plans vest, are exercised and Participants acquire Company A shares, the Commissioner accepts the Rights are interests provided under an ESS to which Subdivision 83A-B or 83A-C applies.

Not acquired for more than cost base of EST

The Participants in the Plans will acquire Shares when the Rights are exercised, for a nil exercise price. Therefore the requirement in 130-90(2) will be satisfied.

In relation to Options with an exercise price, this condition will be satisfied where the Trustee's cost base in the relevant Share is not less than the respective exercise price of the Option being exercised.

Conclusion

Any capital gain or loss arising to the Trustee of the EST will be disregarded for CGT purposes in respect of Shares transferred to Participants under the Plans for any Rights that are exercised, and for Options that are exercised where the Trustee's cost base in the relevant Shares is not less than the exercise price of the relevant Options.


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