Edited version of private advice

Authorisation Number: 1052262064317

Date of advice: 21 June 2024

Ruling

Subject: Employee share trust

Question 1

Is the Company A Employee Share Plan Trust (the Trust) an employee share trust as defined in subsection 130-85(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will CGT event E5 section (section 104-75 of the ITAA 1997) happen at the time employees become absolutely entitled to fully paid ordinary shares in Company A (Plan Shares) held by the trustee for Company A Employee Share Plan Trust (the Trustee) under the Plan?

Answer

Yes.

Question 3

Will a capital gain or capital loss made by the Trustee when CGT event E5 (section 104-75 of the ITAA 1997) happens be disregarded under section 130-90 of the ITAA 1997 if the employees acquire the Plan 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 period:

Income tax year ended 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

•         Company A Employee Benefits Plan Rules (Plan Rules), and

•         Company A Employee Share Plan Trust Deed (Trust Deed).

Company A Ltd (Company A) is listed on the Australian Securities Exchange (ASX). Ordinary shares are the sole class of shares on issue.

Company A is the head company of the income tax consolidated group. The Company A group has foreign subsidiaries.

Company A Employee Benefits Plan

The Plan was established on XX month 20XX to assist Company A to recruit, reward, retain and motivate its employees.

The Plan Rules are used to stipulate the terms under which the various awards are made to employees.

Under the Plan, eligible Australian employees can be offered an award which may consist of any number or type of security. A security includes the following:

• a fully paid ordinary share in the capital of Company A (Plan Share)
• an option (an option to receive a share by transfer or allotment granted to an employee under the Plan, subject to satisfaction of applicable conditions, including any vesting conditions, and compliance with any applicable exercise procedures) (Option)
• a performance right (a conditional right to acquire one or more shares by transfer or allotment as set out in the relevant invitation to employees under the Plan) (Performance Right).

A security exercisable for Plan Shares in accordance with the Plan Rules, is defined as a convertible security in both the Plan Rules and Trust Deed (Convertible Security).

No awards will be offered to employees of foreign subsidiaries under the Plan, nor will the Company A Employee Share Plan Trust (the Trust) be used to satisfy awards to any foreign employees or for the provision of shares associated with the foreign subsidiaries.

The Plan broadly operates as follows:

• the Company A Board (the Board) may from time to time determine that an employee may participate in the Plan. Participation in the Plan is voluntary, and no employee is required to participate in the Plan
• an application to participate in the Plan must be made by the employee in accordance with the instructions that accompany the invitation, or in any other way the Board determines. By accepting the invitation, employees become participants in the Plan and are bound by the terms and conditions of the invitation, including the Plan Rules, and Company A's Constitution
• Options and Performance Rights will be governed by the Plan until they lapse in accordance with the Plan Rules; or have vested and are exercised and allocated because of the exercise. Unless the Board determines otherwise, no payment is required for the grant of an Option or Performance Right. Options and Performance Rights are personal and may not be transferred or exercised by any other person except to the extent necessary to enable a participant's legal personal representative to exercise in accordance with the Plan Rules
• The Board may determine in its full discretion that, in respect of some or all of a participant's vested Options or Performance Rights, instead of issuing Plan Shares or purchasing shares on market and transferring them, Company A will pay a cash amount to the participant equivalent to the market value of the shares (as determined by the Board) that would otherwise have been allocated to the participant
• If the invitation provides that any Plan Shares are subject to any restrictions as to the disposal or other dealing by a participant for a period, the Board may implement any procedure it deems appropriate to ensure the compliance by the participant with this restriction, including but not limited to imposing an ASX Holding Lock (where applicable) on the Plan Shares or using an employee share trust to hold the Plan Shares during the relevant restriction period
• For the avoidance of doubt, notwithstanding any other Plan Rule, a share allocated to a participant under the Plan may not be disposed of or otherwise dealt with by that participant at any time when the participant would be precluded from dealing in shares pursuant to Company A's internal regulations for dealings in its securities (including pursuant to the Company A's Securities Trading Policy, or otherwise as determined by the Board)
• Unless otherwise stated in the invitation or determined by the Board, a Convertible Security which has not yet vested will be forfeited immediately on the date that the Board determines (acting reasonably and in good faith) that any applicable vesting conditions have not been met or cannot be met by the relevant date
• Where a participant who holds Convertible Securities becomes a Leaver, all unvested Convertible Securities will automatically be forfeited by the participant, unless the Board otherwise determines in its discretion to permit some or all of the Convertible Securities to vest, subject to the Listing Rules
• Subject to the terms of any Trust Deed (if applicable) or invitation, the participant is entitled to receive all dividends and other distributions or benefits payable to the Participant or to the Trustee in respect of the Plan Shares
• Unless or until Plan Shares are allocated to a participant following vesting or exercise (as applicable) of their Convertible Securities, the participant has no interest in those shares in respect of which the Convertible Security was granted
• Where, in the opinion of the Board, a participant acts fraudulently or dishonestly; or is in breach of his or her obligations to Company A, the Board may deem any unvested Securities held by the participant to have lapsed where unvested Securities have not lapsed automatically, or deem any vested Securities held by the participant to have lapsed where vested Securities have not been exercised, and
• Where Plan Shares have been allocated to the participant following the exercise of Convertible Securities, the Board may appoint an officer of the company as the participant's agent and attorney to sell the Plan Shares and/or transfer those Plan Shares into the name of the company's nominee. Where any Plan Shares already allocated to the participant following the exercise of Convertible Securities have been sold by the participant, require the participant to pay to the company all or part of the proceeds realised on that sale.

If the Options or Performance Rights are cash settled, the cash settlement will not be actioned via the Trust, it will be actioned via Company A's payroll system as a cash bonus.

Company A Employee Share Plan Trust

The Trust was established for the sole purpose of obtaining shares for the benefit of participants under the Plan. The Trust Deed was executed on XX month 20XX.

The Trust acquires shares on behalf of participants or in advance of allocating those shares to participants which are held by the Trust on an unallocated basis.

Broadly the Trust operates as follows:

• Company A and the Trustee agree that, subject to the terms of the Trust Deed, the Trust has been established to be an employee share trust whose sole activities are consistent with subsection 130-85(4) of the ITAA 1997
• Company A must provide the Trustee with any funds required to comply with its obligations. The Trustee is not required to acquire shares if it does not receive sufficient payment from Company A or if it does not have sufficient funds to do so out of the property of the Trust or if sufficient shares are not otherwise available for purchase
• The Trust Assets, other than those referred to in the Trust Deed, and the unallocated Plan Shares, are to be held by the Trustee on trust for the participants to be nominated by Company A from time to time in accordance with the terms of the Trust Deed and the Plan Rules until the termination of the Trust under the Trust Deed or by operation of law
• The Trustee agrees that in respect of each participant, the Plan Shares, the proceeds of sales arising from the sale of rights under a rights issue on behalf of that participant, and accretions and other Trust Assets related to or arising from Plan Shares held by the Trustee on behalf of the participant, will at all times, be held by the Trustee on Trust for and on behalf of each participant on the term of the Trust Deed and subject to the relevant Plan Rules
• The Plan Trustee agrees that each participant is absolutely entitled to those allocated Plan Shares held by the Trustee on their behalf, all Trust Assets in respect of those allocated Plan Shares and all other benefits and privileges attached to or resulting from holding those Plan Shares. The Trustee agrees that it will deal with Plan Shares and any Trust Assets in respect of Plan Shares in accordance with the directions of Company A and will not be held liable for having acted on such information provided by Company A
• The Trustee must not participate in any rights issue (not being by way of a bonus share issue) to acquire shares or securities in respect of the unallocated share without the express consent of Company A
• Before the allocation or transfer the Trust Deed, the Plan Trustee must not exercise any voting rights in relation to the unallocated shares and is not permitted to pay income or accrued capital from unallocated Plan Shares to any employee who does not hold a beneficial interest in Company A under the Trust
• The Trustee must establish and maintain a separate share account or record in respect of each participant
• Nothing in the Trust Deed confers, or is intended to confer, on Company A any encumbrance, proprietary right or proprietary interest in the shares acquired by the Trustee under the Trust Deed, and at no time will Company A, or any related Body Corporate of Company A of the Trustee be entitled to obtain any beneficial interest in the Trust Assets, other than in respect of the Trustee's right of indemnity set out in the Trust Deed
• Forfeiture of shares by a participant will result in the Plan Shares being held by the Trustee for the benefit of participants generally from time to time as though they were unallocated Plan Shares, or for the benefit of any company plan as directed by Company A
• On termination of the Trust, the Trustee must wind up the Trust and transfer the allocated Plan Shares and all other benefits and privileges attached to or resulting from those allocated Plan Shares that are in the form of capital or income to the relevant participant in the manner as directed by Company A. The balance of the capital or income of the Trust to which no participant is entitled may be applied in whole or in part as the Trustee thinks fit, pursuant to the Trust Deed, and
• Upon termination of the Trust, the Plan Trustee must not pay any balance under the Trust Deed to Company A or a company in the group.

Contributions to the Trust

Company A is the employer entity which provides contributions to the Trustee of the Trust to fund the subscription for, or acquisition of Plan Shares pursuant to the Plan Rules and Trust Deed. Company A will arrange for the Trustee to subscribe for newly issued shares or to purchase shares from existing shareholders so that the shares can be provided to participants in accordance with the Plan.

All funds received by the Trustee will constitute an increase to corpus, represented by Trust Assets, and no participant is entitled to receive these funds. Further, any contributions to the Trustee are irretrievable and under no circumstances may the Trustee repay to Company A or any company in the group, any amount received as contributions for the acquisition of shares (other than to subscribe for new shares as issued by the company).

Relevant legislative provisions

Does IVA apply to this private ruling?

Reasons for decision

Legislative references in these reasons for decision are to provisions of the ITAA 1997 unless otherwise indicated.

Question 1

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

Subsection 130-85(4) provides that an employee share trust, for an employee share scheme, is a trust whose sole activities are:

(a) obtaining shares or rights in a company

(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).

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'?

As the activities listed in the Trust Deed are consistent with the requirements of subsection 130-85(4) including activities which the Commissioner considers are 'merely incidental' under paragraph 130-85(4)(c) (set out in paragraph 12 of TD 2019/13), it is considered that the Trust meets the definition of an employee share trust for the purposes of the ITAA 1997.

Question 2

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

Participants become absolutely entitled to a share under the Plan - CGT event E5

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 a beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)).

If CGT event E5 happens, the trustee may make a capital gain or 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 (subsection 104-75(3)).

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

Subsection 130-85(2) treats a beneficiary as absolutely entitled to the relevant share from the time of acquisition of the ESS interest until they no longer have the ESS interest in the share. Subsection 130-85(2) only applies if the following requirements under subsection 130-85(1) are satisfied:

•         the beneficiary acquires an ESS interest under an employee share scheme

•         Subdivision 83A-B or 83A-C applies to the ESS interest, and

•         the ESS interest is, or arises because of, an interest the beneficiary holds in an employee share trust.

Participants acquire ESS interests under the Plan which is an employee share scheme (paragraph 130-85(1)(a))

Under the Plan, participants are granted awards in relation to their employment, which provide them with a beneficial interest in Plan Shares, or the right to acquire a beneficial interest in Plan Shares. As such, participants will be taken to have acquired ESS interests under an employee share scheme and paragraph 130-85(1)(a) will be satisfied.

Subdivision 83A-B or 83A-C applies to the Plan Shares, Options and Performance Rights (paragraph 130-85(1)(b))

Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states:

This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

Under the Plan, Plan Shares, Options, or Performance Rights may be acquired for no consideration or at a discount.

As Subdivision 83A-B or Subdivision 83A-C will apply to those Plan Shares, Options and Performance Rights, therefore, paragraph 130-85(1)(b) is satisfied.

The ESS interest arose because of an interest the participants hold in an employee share trust (paragraph 130-85(1)(c)).

The awards granted to participants under the Plan provide participants with an interest in the Plan Shares, or the right to acquire an interest in Plan Shares held in the Trust.

The Commissioner considers the Trust to be an employee share trust based on the terms of the Trust Deed and paragraph 130-85(1)(c) is satisfied.

As all of the conditions in subsection 130-85(1) are satisfied, CGT event E5 will happen under the terms of the Plan at the time a participant becomes absolutely entitled to the Plan Shares as against the Trustee.

Question 3

Under section 130-90, a capital gain or capital loss made by an employee share trust, or a beneficiary of the trust, is disregarded if CGT event E5 happens.

Shares held for future acquisition under employee share scheme: subsection 130-90(1A)

Subsection 130-90(1A) applies to disregard any capital gain or capital loss made by an employee share trust to the extent that it results from a CGT event if:

•         immediately before the event happens, an ESS interest is a CGT asset of the trust (paragraph 130-90(1A)(a))

•         either of the following applies:

o        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 (subparagraph 130-90(1A)(b)(i))

o        the event is CGT event E7, and the event happens because the trustee disposes of the ESS interest to a beneficiary of the trust (subparagraph 130-90(1A)(b)(ii))

•         Subdivision 83A-B or 83A-C applies to the ESS interest (paragraph 130-90(1A)(c)).

Paragraph 130-90(1A)(a) is satisfied as the Plan Shares held by the Trustee are ESS interests (as defined by paragraph 83A-10(1)(a)) which are CGT assets of the Trust.

Paragraph 130-90(1A)(b)(i) is satisfied as CGT event E5 is the CGT event that will happen under the terms of the Plan at the time the participant becomes absolutely entitled to the Plan Shares as against the Trustee.

Paragraph 130-90(1A)(c) is satisfied as:

•         the Plan is an employee share scheme for the purpose of Division 83A as it is an arrangement under which ESS interests are provided to a participant in relation to their employment

•         Subdivision 83A-B or 83A-C will apply, as participants may acquire Plan Shares under the Plans at a discount.

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

Shares held to satisfy the future exercise of rights acquired under employee share schemes: subsection 130-90(1)

Subsection 130-90(1) applies to disregard any capital gain or loss made by an employee share trust, or a beneficiary of the trust if:

•         the CGT event is CGT event E5 or E7 (paragraph 130-90(1)(a))

•         the CGT event happens in relation to a share (paragraph 130-90(1)(b))

•         the beneficiary had acquired a beneficial interest in the share by exercising a right (paragraph 130-90(1)(c))

•         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 (paragraph 130-90(1)(d)).

As stated above, paragraph 130-90(1)(a) is satisfied as CGT event E5 will happen under the terms of the Plan when the participant becomes absolutely entitled to Plan Shares as against the Trustee.

Paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a Plan Share, being a fully paid ordinary share in the capital of Company A held by the Trustee, to which a participant becomes absolutely entitled to under the Plan.

Paragraph 130-90(1)(c) is satisfied as a participant will have acquired a beneficial interest in a Plan Share on vesting of Options and Performance Rights, and if applicable, by exercising an award after vesting, in accordance with the Plan.

Paragraph 130-90(1)(d) is satisfied as:

•         the Plan is an employee share scheme for the purpose of Division 83A as it is an arrangement under which an ESS interest is provided to a participant in relation to their employment, and

•         Subdivision 83A-B or 83A-C will apply, as participants may acquire Options or Performance Rights under the Plan at a discount.

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

As all of the conditions in subsection 130-90(1A) and subsection 130-90(1) are satisfied, any capital gain or capital loss that arises for the Trust at the time when CGT event E5 happens will be disregarded if the Plan Shares are acquired by the employee for the same or less than the cost base of the Plan Shares in the hands of the Trust.

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).