Edited version of private advice

Authorisation Number: 1052386011221

Date of advice: 16 April 2025

Ruling

Subject: CGT - Employee share schemes

Question 1

Will the Trust be an 'employee share trust' for the purposes of section 130-85 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

Will the irretrievable cash contributions made by Company X Co to the trustee of the Trust (Trustee) to fund the acquisition of, or subscription for, ordinary shares in Company X Co (Shares) be assessable income of the Trust under sections 6-5 or 6-10 of the ITAA 1997?

Answer 2

No.

Question 3

Will the Trustee be able to disregard under section 130-90 of the ITAA 1997 the capital gain or capital loss that arises when CGT event E5 happens in relation to the Shares held by the Trustee, 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 3

Yes.

This ruling applies for the following periods:

Income tax years ended 30 June 20XX to 30 June 20XX

The scheme commenced on:

In a particular income year

Relevant facts and circumstances

While the facts and circumstances may identify participants broadly, this private ruling is confined to expenses paid and rights/shares provided for the benefit of participants directly employed by Company X Co or any of its subsidiaries within the income tax consolidated group who engage in activities that derive income assessable in Australia.

This ruling is based on the facts stated in the description of the scheme that is set out below including the following documents, or relevant parts of them, which are to be read with the description:

1.            Plan 1 and Plan 1 Offer Document

2.            Plan 2 and Plan 2 Offer Document

3.            Plan 3 and Plan 3 Offer Document

4.            Plan 4 and Plan 4 Offer Document

5.            Trust Deed

Company X Co

Company X Co is an Australian incorporated company involved in a particular industry.

Company X Co is the head entity of the Company X Co income tax consolidated group (Company X Co TCG) consisting of itself and its wholly owned Australian subsidiaries.

As part of the overall remuneration strategy, in addition to fixed remuneration, Company X Co offers certain employees and executives payments of shares upon the satisfaction of certain performance conditions. This is implemented through the following share plans (collectively the 'Plans'):

a.            Plan 1

b.            Plan 2

c.             Plan 3; and

d.            Plan 4.

The purpose of the Plans is to assist in the reward, retention and motivation of Eligible Participants, link the reward of Eligible Participants to Shareholder value creation and align the interests of Eligible Participants with Shareholders.

Company X Co has confirmed that all options or performance rights will be granted for nil consideration under the Plans.

Plan 1

Plan 1 was approved on a certain date. The terms and conditions of Plan 1 are set out in the Plan 1 Rules.

The terms on which Participants are invited to participate in Plan 1 are set out in the Plan 1 Offer Letter.

Broadly under Plan 1, the Board may issue an invitation to Employees granting to Employees a number of rights (for nil consideration), being the right to acquire a fully paid ordinary share in Company X Co (Share) and will only vest once the board determines that any relevant conditions have been satisfied.

Plan 2

Plan 2 was approved on a certain date. The terms and conditions of Plan 2 are set out in the Plan 2 Rules.

The terms on which Participants are invited to participate in Plan 2 are set out in the Plan 2 Offer Letter.

Broadly under Plan 2, the Board may issue an invitation to Employees granting to Employees a number of options (for nil consideration), being the right to acquire a fully paid ordinary share in Company X Co (Share) and will only vest once the board determines that any relevant conditions have been satisfied.

Plan 3

Plan 3 was approved on a certain date. The terms and conditions of Plan 3 are set out in the Plan 3 Rules.

The terms on which Participants are invited to participate in Plan 3 are set out in the Plan 3 Offer Letter.

Broadly under Plan 3, the Board may issue an invitation to Employees granting to Employees a number of Shares (for nil consideration) subject to the board determining that any relevant conditions have been satisfied.

Plan 4

Plan 4 was approved on a certain date. The terms and conditions of Plan 4 are set out in the Plan 4 Rules.

The terms on which Participants are invited to participate in Plan 4 are set out in the Plan 4 Offer Letter.

Broadly under Plan 4, the Board may issue an invitation to Employees granting to Employees a number of Shares (for nil consideration) subject to the board determining that any relevant conditions have been satisfied.

Company X Co Employee Share Trust (Trust)

The Trust was established by means of the Company X Co Employee Share Trust Deed (Trust Deed).

Company Y Co is the trustee of the Trust (Trustee). It is a wholly owned company of Company X Co. The board of directors of the Trustee will include common directors with Company X Co, however board meetings will be held independently to those of Company X Co.

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.

Under the Trust Deed, the Trust broadly operates as follows:

•                     Company X Co must by Notice instruct the Trustee to subscribe for, acquire and/or allocate a number of Shares specified in the Notice, to be held by the Trustee as Plan Shares in respect of an identified Participant or Participants.

•                     Company X Co must offer to the Trustee to have Company X Co or a member of the Group provide funds for the purpose of acquiring Shares, request the Trustee to apply some of the capital of the Trust for the purposes of acquiring Shares; or effect a combination of these acts.

•                     Company X Co covenants with the Trustee that it will indemnify and keep the Trustee indemnified from its funds, in respect of all Liabilities, costs and reasonable expenses incurred by the Trustee in the execution of the Trust.

•                     Any funds provided to the Trustee will constitute accretions to the corpus of the Trust and cannot be repaid to Company X Co or a member of the Group.

•                     These funds will be used by the Trustee to acquire the shares in Company X Co either by acquiring or via a subscription for new shares in Company X Co based on the Notice provided by Company X Co.

•                     Upon direction of Company X Co, the Trustee must allocate Shares as Plan Shares to the account established for a Participant provided:

­                             the Trustee receives sufficient payment from Company X Co or a member of the Group or having sufficient capital to subscribe for or acquire the relevant Shares;

­                             the Trustee holds sufficient Shares on an unallocated basis; or

­                             any combination of (a) and (b) above applies, as directed by Company X Co.

•                     Plan Shares must be held on the terms of the Trust Deed by the Trustee on behalf of the relevant Participant who is the beneficial owner of the Plan Shares until such time as the Plan Shares are transferred or disposed of or forfeited by the Participant.

•                     The Trustee must transfer or dispose of Plan Securities in accordance with the Plan Rules and any Terms of Participation.

•                     Company X Co may by Notice instruct the Trustee to subscribe for, or acquire, a number of Shares as specified in a Notice, to be held by the Trustee on an unallocated basis on trust for Participants generally.

•                     On forfeiture of Plan Shares by a Participant, Plan Shares will cease to be Plan Shares, and those forfeited Shares will be held by the Trustee on an unallocated basis as general Trust Property. The Board may direct the Trustee to:

­                             reallocate any of those forfeited Shares for the benefit of one or more Participants; or

­                             hold the proceeds of sale of any such forfeited Shares, provided that such disposal and holding of proceeds is in accordance with the Deed.

•                     Nothing in the Trust Deed confers on any Group Company any Security Interest, proprietary right, proprietary interest or beneficial interest in the Plan Securities or Trust Property. Group Company is defined as Company X Co and any of its subsidiaries.

•                     Nothing in the Trust Deed confers on Company X Co or any Group Company any charge, lien, or any other proprietary right, proprietary interest or beneficial interest in the Shares.

•                     At any time after expiry of the Restriction Period (if any), the Trustee must transfer the relevant number of Shares or Plan Securities into the name of the relevant Participant or any third party nominated by the Participant upon a Withdrawal Notice being given to Company X Co

•                     The Trustee can sell Plan Securities to which the Participant is entitled on behalf of a Participant where permitted to do so by the Participant, less any taxes and costs incurred by the Trustee to sell these shares, with the Participant receiving the balance of the proceeds.

•                     The Trustee is not entitled to receive from the Trust any remuneration in respect of its performance of its obligations as trustee of the Trust. However, Company X Co may pay the Trustee such remuneration and reimburse the Trustee any expenses incurred by the Trustee as Company X Co and the Trustee agree in writing, from Company X Co 's own resources.

•                     In the event that the Trust is terminated, the Trustee must not pay any of the remaining Trust Property to any Group Company.

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 102-20

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 130-90

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

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 104-85

Reasons for decision

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

Question 1

Summary

Yes, the Trust is considered to be an employee share trust for the purposes of section 130-85 of the ITAA 1997.

Detailed reasoning

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

(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).

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

•                     the Trust acquires shares in Company X Co, and

•                     the Trust ensures that rights and options (which are ESS interests) are provided to Participants under an employee share scheme by allocating shares to them in accordance with the governing documents of the scheme.

Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'? sets out the Commissioner's view on the type of activities that are and are not considered merely incidental for the purposes of paragraph 130-85(4)(c).

Whether the Trust is an employee share trust for the purposes of subsection 130-85(4) requires an analysis of what the Trustee actually does, not only the powers and duties that are prescribed in the Trust deed.

The Commissioner considers the Trust to be an employee share trust for the purposes of section 130-85 of the ITAA 1997 based on the terms of the Trust deed.

Question 2

Summary

No, the irretrievable cash contributions will not be assessable income of the Trust under sections 6-5 or 6-10.

Detailed reasoning

Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) provides for the assessment of income tax on the income of a trust estate and on amounts of income distributed by the trust estate.

Subsection 95(1) of the ITAA 1936 defines 'net income', in relation to a trust estate, as the total assessable income of the trust estate calculated under 'this Act' as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions.[1]

Subsection 6(1) of the ITAA 1936 states that 'assessable income' has the meaning given by subsection 995-1(1), which relevantly has the meaning given by sections 6-5 and 6-10.

Irretrievable cash contributions not ordinary income under section 6-5

Subsection 6-5(1) provides that your assessable income includes income according to ordinary concepts, which is called 'ordinary income'.

Whether or not a particular receipt is income depends upon its character in the hands of the recipient.[2] This depends on various factors such as the periodicity, regularity or recurrence of the receipt, the character of a right or thing disposed of in exchange for the receipt, the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.[3]

The cash contributions that the Trustee receives from Company X Co are not receipts of income for the Trust as there is no disposal of any right or thing by the Trust in exchange for the contributions and they form the corpus of the Trust which the Trustee will use to subscribe for, or acquire, Shares that will be held on trust for the benefit of participants of the Plans.

Accordingly, the irretrievable cash contributions received by the Trustee from Company X Co is not ordinary income of the Trust under section 6-5.

Irretrievable cash contributions not statutory income under section 6-10

Subsection 6-10(1) provides that your assessable income also includes some amounts that are not ordinary income. Such amounts are included in your assessable income by provisions about assessable income and are called 'statutory income' (subsection 6-10(2)). Section 10-5 provides a list of provisions that include in your assessable income amounts that are statutory income.

None of the provisions listed in section 10-5 are relevant in the present circumstances.

Accordingly, the irretrievable cash contributions received by the Trustee from Company X Co are not statutory income of the Trust under section 6-10.

Conclusion

Subsection 6-15(1) states that if an amount is not ordinary income, and is not statutory income, it is not assessable income.

As the irretrievable cash contributions received by the Trustee from Company X Co are neither ordinary income under section 6-5 nor statutory income under section 6-10, they are not assessable income of the Trust.

Question 3

Summary

Yes, any capital gain or capital loss that arises for the Trust, when participants of the Plans become absolutely entitled to the shares, are disregarded by the Trustee under section 130-90, if the employees acquire the Shares for the same or less than the cost base of the Shares in the hands of the Trust.

Detailed reasoning

Subsection 102-5(1) states that your assessable income includes your net capital gain (if any) for the income year. You make a capital gain or capital loss if and only if a CGT event happens (section 102-20).

CGT event E5 happens when participants become absolutely entitled to the Shares

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)).

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 an employee share scheme

An 'employee share scheme' is defined in subsection 83A-10(2) as 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(1) defines an 'ESS interest' in a company as a beneficial interest in either a share in the company or a right to acquire a beneficial interest in a share in the company.

As Participants are granted Performance Rights or Options under the Plans in relation to their employment, which provide them with the right to acquire shares in Company X Co, they are taken to have acquired ESS interests under an employee share scheme and paragraph 130-85(1)(a) is satisfied.

Subdivision 83A-B or 83A-C applies to the Rights or Options

As Participants acquire rights or options under the Plans for nil consideration (i.e., at a discount), Subdivision 83A-B will apply to those rights or options (unless Subdivision 83A-C applies instead) and paragraph 130-85(1)(b) is satisfied.

The Rights or Options arose because of an interest the Participants hold in an employee share trust

The rights or options granted to Participants under the Plans provide the Participants with an interest in the shares held in the Trust.

As per Question 1, 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 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 rights and options under the Plans pursuant to subsection 130-85(2), and CGT event E5 will happen at that time.

Exemption under section 130-90

If CGT event E5 happens, any capital gain or capital loss that the Trustee makes, is disregarded if section 130-90 applies. Section 130-90 provides as follows:

(1A) Disregard any *capital gain or *capital loss made by an *employee share trust to the extent that it results from a *CGT event, if:

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

(b)           either of the following subparagraphs applies:

(i)            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;

(ii)           the event is CGT event E7, and the event happens because the trustee *disposes of the ESS interest to a beneficiary of the trust; and

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

(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.

The exemption in section 130-90 will apply because:

•                     the Trust is an employee share trust as defined in subsection 130-85(4)

•                     at the time the Participant becomes absolutely entitled to the shares as against the Trustee, CGT event E5 happens

•                     CGT event E5 happens in relation to shares

•                     the Participant acquires the share by exercising a right or option granted under the Plans and

•                     the Participant acquired the right or option under the Plan for nil consideration (i.e., at a discount) and therefore Subdivision 83A-B will apply to those right or option (unless Subdivision 83A-C applies instead).

Conclusion

As all the conditions in section 130-90 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 shares are acquired by the employee for the same or less than the cost base of the shares in the hands of the Trust.

[1] Section 6 of the ITAA 1936 defines 'this Act' to include the ITAA 1997.

[2] Scott v Federal Commissioner of Taxation [1966] HCA 48, The Federal Coke Company Pty Limited v The Commissioner of Taxation of the Commonwealth of Australia [1977] FCA 29.

[3] Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18, GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) [1990] HCA 25.

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