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Authorisation Number: 1011497592634

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Ruling

Subject: Employee Share Scheme (Trust issues)

Question 1

Are irretrievable cash contributions to the trustee of an Employee Share Trust (EST) assessable income of the EST under Division 6 of Part 1-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will a capital gain or capital loss arise under section 104-75 of the ITAA 1997 for the trustee of the EST at the time when an eligible employee becomes absolutely entitled to the fully paid ordinary shares in the employer company?

Answer

No.

This ruling applies for the following periods:

Other/Substituted Accounting Period 1 May 2010 to 30 April 2011 (in lieu of income year ending 30 June 2011)

Other/Substituted Accounting Period 1 May 2011 to 30 April 2012 (in lieu of income year ending 30 June 2012)

Other/Substituted Accounting Period 1 May 2012 to 30 April 2013 (in lieu of income year ending 30 June 2013)

Other/Substituted Accounting Period 1 May 2013 to 30 April 2014 (in lieu of income year ending 30 June 2014)

Other/Substituted Accounting Period 1 May 2014 to 30 April 2015 (in lieu of income year ending 30 June 2015)

Relevant facts and circumstances

The employer company (Employer) is the head company of an income tax consolidated group (Employer Group).

The Employer has an equity based compensation plan, the Employee Option Plan (EOP), which is administered by the Employer in accordance with governing rules (Plan Rules). The EOP has been operating since its inception prior to 1 July 2009.

The Employer has established the EST that is operated by a trustee company (Trustee), in accordance with the EST Deed (Trust Deed).

The EST is established for the sole purpose of obtaining fully paid ordinary shares in the capital of the Employer (Employer Shares) for the benefit of eligible employees of the Employer Group.

The EST constitutes an employee share trust under subsection 130-85(4) of the ITAA 1997.

Under the EOP, the Employer invites eligible employees of the Employer Group (Participants) to apply for a specified number of options to acquire fully paid ordinary shares in the Employer. The options are acquired for nil consideration by the Participants.

For options acquired prior to 1 July 2009, each option constitutes a 'qualifying right', for the purposes of former section 139CD of the Income Tax Assessment Act 1936 (ITAA 1936).

The Employer provides irretrievable cash contributions to the Trustee to be used in accordance with the Trust Deed and Plan Rules for the sole purpose of subscribing for and/or acquiring Employer Shares for the benefit of Participants.

In order to exercise an option, the Participant pays an exercise price to the Employer Group equal to the closing price on the Stock Exchange Automated Trading System, excluding special crossings, overnight sales and exchange traded option exercises of the shares on the grant date or such other price as is determined by the Board.

Subsequently, the Trustee acquires or subscribes for Employer Shares utilising the cash contributions paid by the Employer as directed by the board of directors of the Employer in accordance with the Plan Rules and Trust Deed.

Employer Shares acquired by the Trustee are allocated to the relevant Participant who becomes absolutely entitled to those shares at that time.

Reasons for decision

Question 1

Detailed reasoning

The irretrievable cash contributions paid to the Trustee of the EST will be used by the Trustee to acquire Employer Shares for Participants in accordance with the Trust Deed and Plan Rules.

The Trustee will not derive anything in the nature of income or profit, but rather the contributions will constitute capital receipts. Therefore, in accordance with ATO ID 2002/965, the contributions will not constitute assessable income in the hands of the Trustee under Division 6 of Part 1-3 of the ITAA 1997.

Question 2

Detailed reasoning

Under section 104-75 of the ITAA 1997, CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust against the trustee.

However, under section 130-90 of the ITAA 1997, any capital gain or capital loss made by an employee share trust will be disregarded to the extent that it results from:

(a) CGT event E5; 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,

unless the beneficiary acquired the beneficial interest in the share for more than its cost base in the hands of the EST at the time the CGT event happens.

The requirements of section 130-90 of the ITAA 1997 are satisfied for the following reasons:

(a) Employee share trust

The term 'employee share trust' referred to in subsection 130-90(1) of the ITAA 1997 is defined in subsection 995-1(1) of the ITAA 997 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

It is a fact of the scheme that the EST constitutes an employee share trust under subsection 130-85(4) of the ITAA 1997.

(b) CGT Event E5 happens in relation to a share: paragraphs 130-90(1)(a) and (b)

An Employer Share satisfies the definition of a share under subsection 995-1(1) of the ITAA 1997 as it constitutes a share in the capital of the Employer.

As explained above, CGT Event E5 happens in relation to the Employer Shares at the time a Participant becomes absolutely entitled to Employer Shares as against the Trustee. As a result, paragraphs 130-90(1)(a) and (b) will be satisfied.

(c) Acquisition of beneficial interest: paragraph 130-90(1)(c) of the ITAA 1997

Under the EOP Rules, the options constitute rights to acquire Employer Shares.

By a Participant exercising their option, the Participant will acquire a beneficial interest in the Employer Share that is held by the Trustee of the EST on behalf of the Participant. Accordingly, the requirements of paragraph130-90(1)(c) will be met.

(d) ESS interest to which Subdivision 83A-B or 83A-C applies: paragraph 130-90(1)(d) of the ITAA 1997

Pursuant to subsections 995-1(1) and 83A-10(1) of the ITAA 1997, 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.

A Participant's beneficial interest in an option will constitute an ESS interest as it is a right to acquire a beneficial interest in an Employer Share to be held on their behalf by the Trustee.

Options issued on or after 1 July 2009

Pursuant to subsection 83A-5(1) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997), Division 83A of the ITAA 1997 will apply to options acquired on or after 1 July 2009.

Division 83A will apply, broadly, if an ESS interest is acquired at a discount, under an employee share scheme. If Division 83A applies, then either Subdivision 83A-B or 83A-C will apply.

The term 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as:

...a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of:

a) the company; or

b) *subsidiaries ….

in relation to the employees' employment.

For the purposes of subsection 83A-10(2) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 defines the term 'scheme' as follows:

... (a)  any ^*arrangement; or

(b)  any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The EOP is an employee share scheme as it constitutes an arrangement that is operated in accordance with the Plan Rules and incorporates the use of the EST operated in accordance with the Trust Deed.

Under the EOP, an ESS interest (being a beneficial interest in an option) is provided to Participants - being employees of the Employer or subsidiaries of the Employer - in relation to their employment.

The ESS interests will be acquired at a discount as the Participants will acquire the options for no consideration.

As a result, either Subdivision 83A-B or 83A-C will apply to options acquired under the EOP on or after 1 July 2009. Thus, paragraph 130-90(1)(d) of the ITAA 1997 will be met.

Options issued before 1 July 2009

Subdivision 83A-C of the ITAA 1997 (and the rest of Division 83A of that Act, to the extent that it relates to that Subdivision) will apply to all options issued before 1 July 2009, that satisfy subsection 83A-5(2) of the IT(TP)A 1997.

Subsection 83A-5(2) of the IT(TP)A 1997 is satisfied as the relevant options have yet to been exercised, which would be the relevant cessation time for the purposes of former subsection 139B(3) ITAA 1936, and fall within the definition of 'qualifying right' for the purposes of former section 139CD ITAA 1936.

Consequently, in respect of options granted before 1 July 2009, Subdivision 83A-C of the ITAA 1997 (and the rest of Division 83A of that Act, to the extent that it relates to that Subdivision) applies and thus, paragraph 130-90(1)(d) of the ITAA 1997 will be met.

(e) Acquisition at less than EST cost base: subsection 130-90(2) of the ITAA 1997

Subsection 130-90(2) of the ITAA 1997 will preclude the application of subsection 130-90(1) if a beneficiary acquires the beneficial interest in the share for more than its cost base in the hands of the employee share trust at the time that CGT event E5 happens.

The amount paid by a Participant to acquire a beneficial interest in an Employer Share will be the exercise price.

The cost base of an Employer Share in the hands of the Trustee is determined in accordance with Division 110 of the ITAA 1997. The cost base will be the amount of the cash contributions utilised by the Trustee as directed by the Employer board of directors in accordance with the Plan Rules and Trust Deed to acquire the Employer Share. This is subject to the modifications under Division 112 of the ITAA 1997, which may occur from the time the Trustee acquires the relevant Employer Share to when a Participant becomes absolutely entitled to that Share and CGT Event E5 happens. However, subsection 130-80(4) of the ITAA 1997 excludes the application of the market value substitution rule in section 112-20 of the ITAA 1997.

Accordingly, section 130-90 of the ITAA 1997 will apply if a Participant does not acquire their beneficial interest in the Employer Share for more than its cost base in the hands of the EST at the time that CGT event E5 happens. Under these circumstances, section 130-90 of the ITAA 1997 will disregard any capital gain or capital loss made by the Trustee under section 104-75 of the ITAA 1997.