Edited version of private advice

Authorisation Number: 1052345716565

Date of advice: 15 January 2025

Ruling

Subject: Employee share scheme

Question 1

Will the irretrievable contributions by Company X to the Trustee to fund the acquisition of, or subscription for, ordinary shares in Company X (Shares) for the purposes of the Plan be assessable income of the Trust under section 6-5 or 6-10 of the 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 Shares held by the Trustee 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 Trust?

Answer

Yes.

This ruling applies for the following period:

DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

1.  Company X is an Australian registered company that is listed on the Australian Stock Exchange (ASX).

2.  Company X is the head entity of a tax consolidated group.

3.  Company X established a trust to administer issues of performance rights and shares under Company X's equity plans.

The Company Plan

4.  The Plan is governed by the Plan Rules adopted by the Board.

5.  The Plan allows the Board to offer Awards to Eligible Employees.

6.  An Award may be made in the form of:

•                     A Right, being an entitlement to be allocated a Share or a Deferred Share (or receive a Cash Equivalent Value), which may be subject to service and/or performance-based Conditions, and/or

•                     A Deferred Share, being the award of a Share that is subject to a Trading Restriction, and which may also be subject to service and/or performance-based Conditions.

7.  For the purposes of this Ruling, an Eligible Employee who is granted Awards under the Plan is referred to as a Participant.

Granting and vesting of Awards

8.  The Board may, from time to time, operate the Plan and invite an Eligible Employee to apply for, or accept, a grant of Awards upon the terms of the Plan as determined by the Board.

9.  The Board will provide each Eligible Employee with a Grant Letter which contains information regarding the grant of Awards.

Unvested Awards

10.  Rights will be granted with an exercise price (which may be nil) and for no consideration unless otherwise stated in the Grant Letter.

11.  For each Right allocated, a Participant shall not be entitled to vote, receive dividends or distributions, or have any other rights of a Shareholder in respect of the Right until the underlying Shares (or Deferred Shares) are allocated to the Participant following vesting and, if applicable, Exercise (Participant elects to receive (or be allocated) the Shares with respect to their Award by complying with the applicable exercise procedure determined by the Board) of the Award.

12.  For each Deferred Share allocated, unless the Board determines otherwise, a Participant is entitled to vote, receive dividends or distributions, and have any other rights of an ordinary Shareholder in respect of the Deferred Share.

13.  Unless the Board determines otherwise, a Participant's unvested Awards will Lapse in whole or in part upon the first to occur of:

(a)          the date specified in the Grant Letter, or if no date is specified, 15 years after the Award was granted to the Participant

(b)          a circumstance or event described in the Rules or the Grant Letter that has the effect of Lapsing an Award, or

(c)          any Condition imposed under the Rules or a Grant Letter not being satisfied.

14.  The Board will only allow the transfer of an Award in exceptional circumstances, such as death or permanent disability.

15.  Where an Award is in the form of a Right that is settled in Deferred Shares, the Deferred Shares will be subject to a Trading Restriction from allocation until the end of the applicable Restriction Period.

Vesting of Awards

16.  Where an Award is subject to any Conditions, the Board will determine the extent to which the applicable Conditions have been satisfied and Awards Vest, and the date that the Awards will Vest.

17.  The Board must notify Participants of the extent to which any applicable Conditions have been satisfied and the date the Awards Vested or will Vest.

18.  Awards will Lapse, in full or in part, to the extent that the Board determines that the Conditions have not been satisfied, or in the Board's view, that the Conditions are incapable of being satisfied by the end of the relevant Period.

19.  After Vesting of Awards, Company X must:

(a)          for Rights that do not require Exercise, allocate or procure the transfer of the relevant number of Shares and/or Deferred Shares for each Vested Award,

(b)          for Rights that require Exercise, upon valid Exercise and payment of the Exercise Price, allocate or procure the transfer of the relevant number of Shares and/or Deferred Shares for each validly Exercised Award,

to, or for the benefit of, the relevant Participant.

20.  Rights that have Vested (and where applicable, have also been Exercised) may be satisfied, at the discretion of the Board, in cash rather than Shares (or Deferred Shares), by payment to the Participant of the Cash Equivalent Value.

The Trust

21.  In accordance with the Plan Rules, the Trust Deed was executed and established the Trust for the sole purpose of subscribing for, acquiring, holding and transferring shares in connection with equity incentive plans established by Company X for the benefit of Participants in those plans. Unless otherwise defined, capitalised words in this section take their definition from the Trust Deed.

22.  The Trust is not involved in the process of satisfying any cash settled Awards under the Plan and any cash settled Awards will be settled outside the Trust directly by Company X.

23.  Company X will remunerate the Trustee for providing the trustee services.

24.  Company X must not establish any Plan which is to operate with the Trust without consulting with, and obtaining the written consent of, the Trustee (which consent must not be unreasonably withheld or delayed).

Trust Assets

25.  The Trustee must hold the following on trust for, and on behalf of, a Participant under the terms of the Deed, the relevant Plan Rules and the Participant's relevant Terms of Participation:

(i)          the Participant's Allocated Shares

(ii)          prior to their distribution, the proceeds arising from any sales by the Trustee of rights under a Rights Issue relating to the Participant's Allocated Shares, and

(iii)          all other benefits and privileges related to, or arising from, the Participant's Allocated Shares.

26.  Each Participant will be the beneficial owner of and absolutely entitled to their Allocated Shares and all benefits and privileges attached to, or resulting from holding, those Allocated Shares.

27.  The Trustee must hold all Trust Assets (including without limitation, any Unallocated Shares) on trust for, and on behalf of, the following general beneficiaries from time to time and under the terms of the Deed:

(a)          the Participants who have one or more Trust Shares credited to their Trust Share Account from time to time, and

(b)          the Employees.

28.  Nothing in the Deed confers or is intended to confer on the Company any charge, lien or any other proprietary right or beneficial interest in the Trust Assets.

Administration of the Trust

29.  The Trustee is not entitled to be paid from the Trust Assets or any Participant any fees or charges for administering the Trust, other than reasonable disbursements charged against the Trust Assets.

30.  Company X and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4) of the ITAA 1997.

Acquisition of Trust Shares

31.  The Board may by notice in writing (Dealing Notice) instruct the Trustee from time to time to:

(i)          subscribe for, purchase or allocate a number of Shares specified in the Dealing Notice to be held by the Trustee as Allocated Shares in respect of an identified Participant or Participants

(ii)          subscribe for, purchase or allocate a number of Shares specified in the Dealing Notice to be held by the Trustee as Unallocated Shares

(iii)          participate in any Rights Issue in respect of an Unallocated Share, or

(iv)          dispose of any rights issued under any Rights Issue in respect of an Unallocated Share.

32.  If the Trustee has received a Dealing Notice, subject to the Trustee receiving sufficient funds or having sufficient capital as required by that Dealing Notice, the Trustee must promptly following receipt of the Dealing Notice:

(a)          purchase the requisite number (or a proportion of that number determined by the Board) of Shares on behalf of the relevant Participant(s) or beneficiaries of the Trust generally (as the case may be)

(b)          subscribe for the requisite number (or a proportion of that number determined by the Board) of Shares on behalf of the relevant Participant(s) or beneficiaries of the Trust generally (as the case may be)

(c)          allocate any Unallocated Shares to one or more Participants

(d)          participate in any Rights Issue in respect of an Unallocated Share

(e)          dispose of any rights issued under any Rights Issue in respect of an Unallocated Share, or

but subject at all times to the relevant Plan Rules, the relevant Terms of Participation and to any Applicable Law which may prevent a dealing in respect of Shares during any particular period.

33.  The Company must provide the Trustee or cause the provision to the Trustee, of any funds required by the Trustee.

34.  All funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee, other than as consideration for the subscription for Shares provided such Shares are held under the terms of the Deed.

Unallocated Shares

35.  The Trustee must deal with each Unallocated Share (including any bonus shares or other Accretions in respect of such Unallocated Share) in the manner set out in a Dealing Notice.

36.  In respect of each Unallocated Share held by the Trustee under the Deed, the Trustee:

(i)          if instructed by the Board by way of physical or electronic notice (including by way of Dealing Notice):

(A)         must dispose of that Unallocated Share (including pursuant to a buy-back being conducted by the Company)

(B)         must participate in any Rights Issues in respect of that Unallocated Share, or

(C)         must dispose of any rights issued under any Rights Issue in respect of that Unallocated Share

(ii)          must not exercise any voting rights in relation to the Unallocated Share

(iii)          must hold any bonus shares issued in respect of that Unallocated Share on trust for the purposes of this Deed, and

(iv)          may apply any capital receipts, dividends or other distributions received in respect of that Unallocated Share or a right issued pursuant to a Rights Issue in respect of that Unallocated Share to purchase further Shares to be held on trust for the purposes of the Trust.

37.  Disposal is only allowed if the Unallocated Share is a Forfeited Share.

Transfer of Allocated Shares

38.  The Trustee and each Participant must not assign, transfer, sell, or grant an encumbrance over, or otherwise deal with, an interest in that Allocated Share of that Participant during any applicable Restriction Period.

39.  After the expiry of the Restriction Period and subject to any administrative guidelines established by the Board (including any securities trading policy), the relevant Plan Rules and the relevant Terms of Participation, a Participant may give to the Trustee a Withdrawal Notice requiring the Trustee to transfer legal title in some or all of the Participant's Allocated Shares to the Participant or to any third party nominated by the Participant.

40.  The Trustee must do all things required by it to transfer some or all of a Participant's Allocated Shares to the relevant recipient and pay to the Participant any other monies held on the account for the Participant:

(a)          on receipt of a valid Withdrawal Notice, and subject to the Board approving that Withdrawal Notice;

(b)          where required to do so by the relevant Plan Rules and the relevant Terms of Participation;

(c)          if the Trust is terminated; or

(d)          otherwise, if the Trustee so determines, following a written instruction from the Board.

Termination

41.  The Trust will terminate and be wound up as provided by law or upon the first to occur of the following events:

(a)          an order being made or an effective resolution being passed for the winding up of the Company (other than for the purpose of amalgamation or reconstruction)

(b)          a person compulsorily acquiring all the Shares;

(c)          the Board determining that the Trust is to be wound up; and

(d)          the day 29 days before the 80th anniversary of the establishment of the Trust.

42.  The Trustee must not pay any of the Surplus Assets to any Group Company.

Contributions to the Trust

43.  The Trustee received Dealing Notices from Company X on how many shares should be acquired, with Company X transferring to the Trust the funds equivalent to the cost of the Shares plus any brokerage fees. The Shares acquired were allocated to Participants.

44.  Company X does not and will not pay cash contributions to the Trust prior to the issue of Rights under the Plan.

45.  Company X may make contributions to the Trust prior to the grant of Deferred Shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Subsection 83A-10(1)

Income Tax Assessment Act 1997 Subsection 83A-10(2)

Income Tax Assessment Act 1997 Subsection 83A-105(1)

Income Tax Assessment Act 1997 Subsection 104-75(1)

Income Tax Assessment Act 1997 Subsection 130-85(4)

Income Tax Assessment Act 1997 Paragraph 130-85(4)(a)

Income Tax Assessment Act 1997 Paragraph 130-85(4)(b)>

Income Tax Assessment Act 1997 Paragraph 130-85(4)(c)

Income Tax Assessment Act 1997 Section 130-90

Income Tax Assessment Act 1997 Subsection 130-90(1)

Income Tax Assessment Act 1997 Paragraph 130-90(1)(a)

Income Tax Assessment Act 1997 Paragraph 130-90(1)(b)

Income Tax Assessment Act 1997 Paragraph 130-90(1)(c)

Income Tax Assessment Act 1997 Paragraph 130-90(1)(d)

Income Tax Assessment Act 1997 Subsection 130-90(1A)

Income Tax Assessment Act 1997 Paragraph 130-90(1A)(a)

Income Tax Assessment Act 1997 Paragraph 130-90(1A)(b)

Income Tax Assessment Act 1997 Paragraph 130-90(1A)(c)

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Summary

The irretrievable cash contributions made by Company X to the Trustee to fund the acquisition of or subscription for Shares for the purposes of the Plan will not be assessable income of the Trust under section 6-5 or section 6-10.

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) and 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 Company X to the Trustee will therefore not be included in the assessable income of the Trust under section 6-10.

The contributions made by Company X are irretrievable and non-refundable to it in accordance with the Trust Deeds. The funds provided to the Trustee are used in accordance with the Trust Deeds and the Plan for the sole purpose of the employee share scheme. 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

Summary

A capital gain or capital loss made by the Trustee as a result of CGT event E5 happening in respect of Shares held by the Trustee will be disregarded under section 130-90 if the Participants acquire the Shares for the same or less than the cost base of the Shares in the hands of the Trust.

Detailed reasoning

CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against a trustee (subsection 104-75(1)). The time of the event is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)).

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:

(a)          the beneficiary acquires an ESS interest under an employee share scheme

(b)          Subdivision 83A-B or 83A-C applies to the ESS interest, and

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

Participants acquire ESS interests under an employee share scheme

An 'employee share scheme' is a scheme under which ESS interests in a company are provided to employees of the company, or a subsidiary of the company, in relation to the employees' employment (subsection 83A-10(2)).

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

The Deferred Shares issued under the Plan are ESS interests for the purposes of subsection 83A-10(1) at the time they are granted because they are beneficial interests in a share in Company X.

The Rights granted under the Plan are indeterminate rights at the time they are granted for the purposes of section 83A-340. That is because the Rights can be settled by either Shares or by making a payment of a cash equivalent amount. Therefore, the Rights are not rights to acquire a beneficial interest in Shares unless and until the time when it is determined by the Board that they will be satisfied by the provision of Shares. Once it is determined that they will be satisfied by the provision of Shares, section 83A-340 operates to treat these Rights as though they had always been rights to acquire beneficial interests in Shares (therefore, an ESS interest) for the purposes of section 83A-10.

Paragraph 130-85(1)(a) is satisfied because:

•                     the Participants of the Plan are beneficiaries of the Trust which was established for the purpose of administering the Plan

•                     the Plan is a scheme under which Participants are provided with Rights or Deferred Shares (i.e. the Awards) in relation to their employment (and therefore, an employee share scheme), and

•                     the Awards are ESS interests provided under an employee share scheme as they provided the Participants with either beneficial interests in Shares or rights to acquire beneficial interests in Shares.

Subdivision 83A-B or 83A-C applies to the Awards:

As Participants acquire the Awards under the Plan for nil consideration, they are acquired by those Participants at a discount and Subdivision 83A-B would apply to those Awards (unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C would apply instead).

Accordingly, paragraph 130-85(1)(b) is satisfied.

The Awards arose because of an interest the Participants hold in an employee share trust

The Awards granted to Participants under the Plan provide the Participants with an interest in the shares held in the Trust.

Subsection 130-85(4) defines an 'employee share trust', for an employee share scheme, as 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 associate 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).

Paragraphs 130-85(4)(a) and (b) of the definition of an employee share trust are satisfied because the Trust:

•                     acquires shares in a company, namely Company X, and

•                     ensures that ESS interests (being the Awards that are settled with Shares) are provided under an employee share scheme (that is, the scheme established by the Plan) by allocating Shares to Participants in accordance with the governing documents of the scheme.

Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraph 130-85(4)(a) and (b). The Commissioner's view on the type of activities that are and are not merely incidental is set out in Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'?

Company X has confirmed that where vested Rights are to be cash settled, any cash payments will be made by Company X directly to the Participant and will not flow through the Trust.

The Commissioner is satisfied that the Trust Deed contains only powers and/or duties that are merely incidental, as required by subsection 130-85(4)(c). Therefore, the Trust established by the Trust Deed also satisfies the definition of an employee share trust in subsection 130-85(4).

Accordingly, paragraph 130-85(1)(c) is satisfied.

As all the conditions in subsection 130-85(1) are satisfied, the Participants are taken to be absolutely entitled to the Shares held by the Trustee from the time they were granted the Awards under the Plan pursuant to subsection 130-85(2), and CGT event E5 will happen at that time.

Exemption under section 130-90

However, subject to subsection 130-90(2), any capital gain or capital loss made by an employee share trust, to the extent that it results from CGT event E5, is disregarded if either subsection 130-90(1A) or subsection 130-90(1) applies.

Subsection 130-90(1A)

Subsection 130-90(1A) states that any capital gain or capital loss made by an employee share trust to the extent that it results from CGT event E5 is disregarded if:

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

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

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

Subsection 130-90(1A) applies to the Shares held by the Trust to satisfy the grant of Deferred Shares under the Plan because:

•                     the Shares (which are ESS interests under subsection 83A-10(1)) are CGT assets of the Trust (shares are CGT assets pursuant to subsection 100-25(2))

•                     CGT event E5 happens to those Shares as Participants (who are beneficiaries of the Trust) become absolutely entitled to them when they are allocated those Shares by the Trustee, and

•                     as explained earlier, Subdivision 83A-B or 83A-C would apply to those Shares as they are acquired by the Participants at a discount.

Subsection 130-90(1)

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

(a)          the CGT event is CGT event E5

(b)          the CGT event happens in relation to a share

(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 applied.

Subsection 130-90(1) applies to the Shares held by the Trust to satisfy the grant of Rights under the Plan because:

•                     CGT event E5 happens when the Rights are granted to Participants under the Plan

•                     CGT event E5 happens in relation to shares in Company X

•                     Participants acquire a beneficial interest in those Shares when they exercise their Rights, and

•                     as explained earlier, Subdivision 83A-B or 83A-C would apply to those Rights as they acquired by Participants at a discount.

Conclusion

As the requirements under subsections 130-90(1A) and 130-90(1) are met in relation to the Shares held by the Trust for the Plan, any capital gain or capital loss that arises for the Trust as a result of CGT Event E5 happening will be disregarded, if the employees acquire the Shares for the same or less than the cost base of the Shares in the hands of the Trust.

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