1052403301737 | Legal database

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: 1052403301737

Date of advice: 04 June 2025

Ruling

Subject: Employee share scheme

Question 1

Will irretrievable contributions made by Company X to the Trustee for Company X Employee Share Trust (Trust) to fund the acquisition of Company X Shares (Shares) be assessable income of the Trust pursuant to sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) or Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1

Question 2

Will a capital gain or capital loss that arises for the Trustee at the time when Participants become absolutely entitled to Shares (CGT Event E5) be disregarded under section 130-90 of the ITAA 1997 if the employees acquire the share for the same or less than the cost base of Shares in the hands of the Trustee?

Answer 2

Yes

Question 3

If the Trustee receives and accumulates distributions on unallocated Shares held in the Trust, will the distributions and any franking credits be assessed under section 95 and section 99A of the ITAA 1936 in relation to the Trustee?

Answer 3

Yes

Question 4

If the Trustee receives and accumulates distributions on unallocated Shares held in the Trust, will the Trustee be entitled to a tax offset for any franking credits attaching to the distributions under Subdivision 207-B of the ITAA 1997?

Answer 4

Yes, provided the Trustee is a qualified person in relation to the distributionsfor the purposes of Division 1A of the former Part IIIAA of the ITAA 1936.

Question 5

If the Trustee receives a distribution on allocated Shares held for a Participant in the Trust during an income year, and applies the Trust property representing it for the benefit of the Participant by the end of the income year, will the distribution and any franking credit calculated and included under section 95 of the ITAA 1936 be assessed under section 99A of the ITAA 1936 in relation to the Trustee?

Answer 5

Question 6

Answer 6

No.

This ruling applies for the following periods:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

In a particular income year

Relevant facts and circumstances

1. Company X provides services in a specific industry.

2. Company X is the head company of an income tax consolidated group comprising itself and a number of wholly-owned Australian resident subsidiaries, including Company Z, which is the Employer Entity for the group.

The plan

Background

3. Company X has implemented the Plan whereby rights to Company X shares (Rights) are issued for no consideration, which upon vesting entitle participating Company X employees (Participants) to receive shares in Company X (Shares).

4. The purpose of the Plan is, among other things, to provide market competitive compensation to attract, motivate and retain talent across diverse employment segments. The Plan operates broadly to provide Participants with the opportunity to acquire Shares.

5. In order to receive Shares, the Participant must satisfy all relevant criteria outlined in the:

• relevant offer letters and documentation

• the Plan Rules.

Operation of the Plan

6. The Plan Rules outline that the Plan is structured to operate as follows:

• Participation in the Plan is by annual invitation. Participants will be nominated annually having regard to performance, future potential, and retention risk. Eligibility is determined by the Company X Board.

• Participants will be awarded Rights which convert to Shares upon satisfaction of the Vesting Conditions at the Vesting Date unless the Board determines in its absolute discretion to pay the participant a cash consideration in lieu of the issue or transfer of Shares equal to the participant's entitlement.

• No issue price will be payable by the participant upon grant of the Right or on vesting of the Share.

• Rights do not carry any rights to receive dividends prior to the Vesting Date.

• Rights will vest and convert into a Share subject to the continued employment of the participant at the relevant Vesting Date.

• Unless otherwise specified in the Invitation, 100% of the total number of Shares will vest four years from the date after the grant dates of the Right is approved by the Board (or such other period prescribed by law or regulatory authority).

• Unless otherwise determined by the Board and specified in the Invitation, Rights do not carry any rights to receive dividends prior to the Vesting Date. However, unless otherwise determined by the Board acting reasonably, on the Vesting Date, the participant will be entitled to receive a dividend equivalent payment in cash (less any applicable statutory deductions) for the relevant number of Rights to Shares that vest.

• On resignation or termination, the participant will lose their eligibility to Rights that have not met relevant Vesting Conditions. In the case of redundancy or retirement (and in any other circumstances), the participant will retain their eligibility to receive Rights that have not met relevant Vesting Conditions.

• Section X of the Rules outlines various considerations relevant to participation in the Plan. Relevantly, these include:

o While each Right entitles the participant, upon vesting of the Right, to acquire one Share, a Righ is not a Share and is at risk of lapsing or being forfeited, in the circumstances specified in the Plan rules.

o If a Right lapses or is forfeited (for example, because the participant resigns prior to the Vesting Date), all the participant's rights under the Plan in respect of that Right (including the participant's right to acquire a Share) will be forfeited.

o Whether the Rights granted to the participant will vest will depend on the Vesting Conditions being satisfied or waived by the Board.

Employee share trust

7. Company X established the Trust to facilitate opportunities to align the interests of its executive employees with, and to enable employees to be involved and participate in, the future growth and profitability of Company X, including by administering and holding Shares for the benefit of employees who participate in the Plan.

8. Company X will make contributions to the Trustee in order to facilitate the Trust's acquisition of Shares on behalf of the Participants in respect of the Plan. Company X has and will continue to fund the Trustee to pay the broker buying Shares on behalf of the Trust.

9. Shares acquired by the Trustee are held on trust for all Participants as beneficiaries in accordance with the Trust Deed.

10. Company Y, which is an independent third party, has agreed to act as Trustee of the Trust in accordance with the terms of the Trust Deed.

11. The Trust uses contributions to either acquire Shares on-market, or subscribe for new Shares.

Operation of the Trust

12. Broadly, the Trust operates as follows:

13. The Trustee must not charge any fees or charges for administering the Trust, other than reasonable disbursements charged to the Trust or amounts charged to Company X. (Clause XXX)

14. Subject to clause XXX, the Trustee holds the Trust Fund on trust for all Beneficiaries (General Trust Property) and in the manner required by the Plan Rules. (Clause XXX)

15. The Trustee must comply with any direction of the Board to acquire Shares on behalf of a Participant in accordance with the relevant Rules and must apply any amount paid to it by a Group company or a Participant pursuant to the relevant Rules in accordance with any such direction of the Board. (Clause XXX)

16. At the request of the Board, the Trustee will set aside and hold for the benefit of identified Participants identified parts of the Trust Fund (Allocated Trust Property) upon such terms and subject to such conditions as may be required by the relevant Rules or, to the extent not inconsistent with the relevant Rules, as the Board may stipulate from time to time. (Clause XXX)

• Where any Allocated Trust Property is forfeited, it will be held as General Trust Property. (Clauses XXX)

• Participants who are Allocated Trust Property Beneficiaries are entitled to receive all dividends and other distributions, bonus issues or other benefits payable to the Trustee in respect of those Shares. (Clause XXX)

• The Trustee may direct Company X to pay dividends and other distributions or benefits directly to the Allocated Trust Property Beneficiary. (Clause XXX)

• If the Trustee acquires Shares after taking up rights on behalf of an Allocated Trust Property Beneficiary under clause XXX, the Trustee must, as soon as reasonably practicable, transfer those Shares to the Allocated Trust Property Beneficiary (Clause XXX)

• The balance (if any) of Distributable Income of the Trust to which no Beneficiary is presently entitled immediately prior to the end of the relevant Year of Income after the application of clauses XXX will be accumulated by the Trustee and form part of the Trust Fund. (Clause XXX)

• Company X will keep the Trustee in funds necessary to do any act requested by the Board. (Clause XXX)

• Company X acknowledges that it, and each Group company, is not a Beneficiary and has no entitlement to any Shares forming part of the Trust Fund at any time. (Clause XXX)

Assumptions

• Company X, the Trustee and the Trust are currently all residents of Australia under the income tax laws of Australia and no other jurisdiction, and are assumed to remain residents of Australia.

• Company X will not have any charge, lien, or other proprietary right or interest in the Shares acquired by the Trustee according to the Trust Deed at any time.

• The Participants are not under a legal disability.

Reasons for decision

All legislative references in these reasons are to the Income Tax Assessment Act 1997 unless otherwise specified.

Question 1

Will irretrievable cash contributions made by Company X to the Trustee to fund the acquisition of Shares issued pursuant to the Plan be assessable income of the Trust pursuant to sections 6-5 and 6-10 or Division 6 of the ITAA 1936?

Summary

No. The irretrievable cash contributions made by Company X to the Trustee to fund the acquisition of Shares issued pursuant to the Plan will not be assessable income of the Trust under sections 6-5 or 6-10 or Division 6 of the ITAA 1936.

Detailed reasoning

Assessable income includes both ordinary income and statutory income according to sections 6-5 and 6-10 respectively.

Ordinary income

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called 'ordinary income'.

As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In GP International Pipecoaters v. Federal Commissioner of Taxation [1990] HCA 25 (Pipecoaters), the High Court of Australia found that:

To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by 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.

The contributions received by the Trustee to fund the acquisition of Shares issued pursuant to the Plan are for the sole purpose of acquiring Shares for the benefit of Participants in accordance with the Plan and as such, the contributions will form part of the corpus of the Trust. The cash contributions received by the Trustee are therefore of a capital nature and therefore not assessable to the Trust under section 6-5.

Statutory income

Subsection 6-10(1) provides that your assessable income also includes some amounts that are not ordinary income which are called 'statutory income' (subsection 6-10(2)). Section 10-5 provides a list of provisions of assessable income for section 6-10 purposes. None of the provisions apply to a cash contribution made by an employer to a trust established under an employee share scheme (ESS).

Therefore, the irretrievable cash contributions made by Company X to the Trustee of the Trust to fund acquisition of Shares are also not assessable income of the Trust pursuant to section 6-10 (see also, ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme).

Division 6 of ITAA 1936

As the irretrievable cash contributions made by Company X to the Trustee are neither ordinary income or statutory income, they will not be included in the net income of the Trust, and hence cannot be assessed to the Trustee pursuant to Division 6 of Part III of the ITAA 1936.

Question 2

Summary

Yes. A capital gain or capital loss that arises for the Trustee at the time when Participants become absolutely entitled to Shares (CGT Event E5) will be disregarded under section 130-90, if the employees acquire Shares for the same or less than the cost base of Shares in the hands of the Trustee.

Detailed reasoning

CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the 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

Participants acquire ESS interests under an employee share scheme

A Share, or a Right that vests and is settled with a Share, is an ESS interest as it represents a share in the capital of Company X. (subsection 83A-10(1)).

The Plan is an employee share scheme as defined in subsection 83A-10(2), as it is a scheme under which ESS interests in Company X are provided to employees in relation to their employment.

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

Subdivision 83A-B will apply to the Rights as they are acquired for nil consideration (i.e. at a discount).

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

The Rights granted to Participants under the Plan provides Participants with an interest in the Shares held in the Trust.

Subsection 130-85(4) defines an employee share trust 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 associates of employees, of:

i. the company; or

ii. a subsidiary of the company; and

Paragraphs 130-85(4)(a) and (b) of the definition of an employee share trust are satisfied because the Trustee acquires Shares; and the Trustee ensures that ESS interests are provided under an ESS by allocating those Shares to the employees in accordance with the Trust Deed and the Plan.

Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(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'? (TD 2019/13).

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 under the Plans pursuant to subsection 130-85(2), and CGT event E5 will happen at that time.

If CGT event E5 happens, any capital gain or 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

(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

(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 *share for more than its *cost base in the hands of the *employee share trust at the time the *CGT event happens.

Section 130-90 is satisfied 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 Shares by exercising a Right granted under the Plan and

• Subdivision 83A-B will apply as the Participant acquired the Rights at a discount.

As such, a capital gain or capital loss under CGT Event E5 that arises for the Trustee at the time when Participants become absolutely entitled to Shares will be disregarded under section 130-90, if the employees acquire Shares for the same or less than the cost base of Shares in the hands of the Trustee.

Question 3

Summary

Yes. If the Trustee receives and accumulates distributions on unallocated Shares held in the Trust, the distributions and any franking credits will be assessed under section 95 and section 99A of the ITAA 1936 in relation to the Trustee.

Detailed reasoning

Section 95

Net income is defined by section 95 to mean the total assessable income of the trust estate calculated under the ITAA 1936 as if the trustee were a resident taxpayer in respect of that income, less allowable deductions.

Under subsection 44(1) of the ITAA 1936, the assessable income of a resident shareholder in a company includes dividends that are paid to the shareholder by the company out of profits derived by it from any source.

Under clause XXX of the Trust Deed, unallocated Shares are held by the Trustee for the general purpose of the Trust and under clause XXX, if the Trustee receives any distributions derived from unallocated Shares, the income is held by the Trustee for the general purpose of the Trust and as an accretion to the Trust.

Therefore, distributions received by the Trustee in respect of unallocated Shares will be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936.

Section 99A

Under section 99A of the ITAA 1936, the trustee of a trust estate is assessed and liable to pay tax on the part of the net income of the trust estate:

• that is not included in the assessable income of a beneficiary of the trust estate under section 97 of the ITAA 1936 (paragraphs 99A(4)(a) and 99A(4A)(a) of the ITAA 1936)

• in respect of which the trustee is not assessed and is not liable to pay tax under section 98 of the ITAA 1936 (paragraphs 99A(4)(b) and 99A(4A)(b) of the ITAA 1936), and

• that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident of, and is also attributable to sources out of, Australia (paragraphs 99A(4)(c) and 99A(4A)(c) of the ITAA 1936).

The critical requirement for these three exclusion categories is that a beneficiary is presently entitled to a share of the income of a trust estate.

Under clause XXX of the Trust Deed, a Participant is absolutely entitled to allocated Shares only and a Participant only has a right to receive income, including any distributions, deriving from allocated Shares. In accordance with clause XXX, unless and until the Shares are allocated to Participants, no Participant has any interest in any particular Shares or any other part of the General Trust Property.

Therefore, as a Participant is not presently entitled to any income derived from unallocated Shares, none of the three exclusion categories apply, and the Trustee will be assessed and liable to pay tax under section 99A of the ITAA 1936 on any distributions and other income received by the Trustee in respect of unallocated Shares.

Question 4

Summary

Yes, provided the Trustee is a qualified person in relation to the distributions for the purposes of Division 1A of the former Part IIIAA of the ITAA 1936.

Detailed reasoning

Tax offset

Section 207-45 provides that trustees, who are liable to be assessed under section 99A of the ITAA 1936 and to whom a franked distribution flows indirectly, are entitled to a tax offset for that income year equal to its share of franking credit attached to the distribution.

Pursuant to subsection 207-50(4), a franked distribution will be taken to flow indirectly to the trustee of a trust where, relevantly, the trustee is liable to be assessed on all or part of the trust's net income for that year under section 99A of the ITAA 1936.

As stated in Question 3, the Trustee will be liable to be assessed under section 99A of the ITAA 1936 in relation to distributions received by the Trustee in respect of unallocated Shares. Therefore, the requirements of section 207-45 are satisfied, and the Trustee will be entitled to a tax offset equal to its share of the franking credits attached to the distributions.

However, subsection 207-150(1) denies a tax offset otherwise available under section 207-45 where the person is not a qualified person for the purposes of Division 1A of the former Part IIIAA of the ITAA 1936.

Broadly, a person will be taken to be a qualified person in respect of a distribution paid on Shares if the Shares are held at risk for a period of 45 days and the person or an associate does not make a related payment in respect of the distribution (former section 160APHO of the ITAA 1936).

Question 5

Summary

No.

Detailed reasoning

As stated in Question 3 which considered the application of both section 95 and section 99A, subsection 97(1) of the ITAA 1936 determines that the assessable income of the beneficiary of a trust estate includes so much of the net income of the trust estate as the beneficiary is presently entitled.

Under clause XXX of the Trust Deed, a Participant is absolutely entitled to allocated Shares only and a Participant only has a right to receive income, including any distributions, deriving from allocated Shares. Hence, distributions on allocated Shares must be held and applied by the Trustee for the benefit of the Participant.

As a Participant is presently entitled to any income derived from allocated Shares, the Trustee will not be assessed and liable to pay tax under section 99A on any distributions and other income received by the Trustee in respect of allocated Shares.

Question 6

Answer 6

No.

Detailed reasoning

If the Trustee receives a distribution on allocated Shares in the Trust during an income year and applies Trust property representing it for the benefit of the Participant by the end of the income year, it is not the Trustee but the Participant who is entitled to a tax offset for any franking credits attaching to the distribution under Subdivision 207-B. This is because section 207-45 provides that an entity to whom a franked distribution flows indirectly in an income year is entitled to a tax offset for that income year equal to its share of the franking credit on the distribution. That is, the Participant is the ultimate taxpayer in respect of the distribution and thus entitled to the tax offset (Note in section 207-45).

Copyright notice

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).