Edited version of private ruling

Authorisation Number: 1011841981750

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Ruling

Subject: Employee share trust

Question 1

Will the non-refundable cash contributions made by the Company to the Trustee of the Employee Share Trust (EST) to fund the acquisition of the Company shares by the EST, in accordance with the EST Trust Deed entered into by the Company and the Trustee, be assessable income of the EST in accordance with Part 1-3, Division 6 of the ITAA 1997?

Answer

No.

Question 2

In respect of shares acquired by the Trustee of the EST under the terms of the Employee Share Options Plan (ESOP), will any capital gain or capital loss made by the Trustee of the EST under section 104-75 of the ITAA 1997 (CGT event E5) be disregarded when eligible employees become absolutely entitled to shares in the Company?

Answer

Yes.

Question 3

In respect of shares disposed of by the Trustee of the EST to participants under the terms of the ESOP, will the Trustee of the EST make a capital gain or capital loss under section 104-85 of the ITAA 1997 (CGT event E7) when the participants "acquire" the shares?

Answer

No.

Relevant facts and circumstances

The scheme the subject of this Ruling has been ascertained from the following documents:

· Application for Private Ruling

· The Trust Deed of the EST

· The ESOP Rules

· Annual report of the Company

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997
Section 6-10 of the Income Tax Assessment Act 1997
Section 83A-10 of the Income Tax Assessment Act 1997
Section 83A-20 of the Income Tax Assessment Act 1997
Section 104-75 of the Income Tax Assessment Act 1997
Section 104-85 of the Income Tax Assessment Act 1997
Section 130-85 of the Income Tax Assessment Act 1997

Section 130-90 of the Income Tax Assessment Act 1997
Subsection 995-1(1) of the Income Tax Assessment Act 1997
Subsection 95(1) of the Income Tax Assessment Act 1936

Reasons for decision

Question 1

Summary

The non-refundable cash contributions made by the Company to the Trustee of the EST to fund the acquisition of Company shares by the EST in accordance with the EST Trust Deed entered into between the Company and the Trustee will not be assessable income of the EST.

Detailed reasoning

The basic trust income assessing provisions are contained in Division 6 in Part III of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 95(1) of the ITAA 1936 defines net income of a trust as the total assessable income of the trust calculated as if the trustee were the resident taxpayer in respect of that income, less all allowable deductions.

Subsection 6-5(1) of the ITAA 1997 states: 'Your assessable income includes income according to ordinary concepts, which is also called ordinary income.'

Subsection 6-10(1) of the ITAA 1997 states: 'Your assessable income also includes some amounts that are not ordinary income.'
Subsection 6-10)2) of the ITAA 1997 states: 'Amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.'
'Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5.'

An employee share trust is defined in subsection 130-85(4) of the ITAA 1997 as follows:

Meaning of employee share trust

130-85(4) an employee share trust, for an employee share scheme, is 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

iii. other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b).

An 'employee share scheme' is defined in subsection 83A-10(1) 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) in relation to the employees' employment.

A trust will satisfy the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997, and be an 'employee share trust' as defined, where the activities of the trustee of the trust are limited to managing an employee share plan and the general administration of the trust.

The EST Deed was established effective 24 June 2011.

The terms and conditions set out in the EST Trust Deed confirm that EST is an 'employee share trust' as defined in subsection 130-85(4) of the ITAA 1997.

The non-refundable cash contributions made by the Company to the Trustee of the EST are not particular kinds of assessable income contained in the list of provisions in section 10-5.

Accordingly, the non-refundable cash contributions made by the Company to the Trustee of the EST are used in accordance with the EST Trust Deed and plan rules for the sole purpose of and under the employee share scheme. The contributions constitute capital receipts to the EST, and are not assessable under section 6-5 of the ITAA 1997 (ordinary income) or section 6-10 of the ITAA 1997 (statutory income) (ATO ID 2002/965).

Question 2

Summary

A capital gain or capital loss will not arise under section 104-75 of the ITAA 1997 (CGT event E5) for the Trustee of the EST at the time when an eligible employee becomes absolutely entitled to the fully paid ordinary shares in the Company provided the participant does not acquire the beneficial interest in the share for more than its cost base in the hands of the Trustee of the EST at the time the CGT event happens.

Detailed reasoning

Section 130-90 of the ITAA 1997 operates to ensure that any capital gain or loss made by an employee share trust (EST) is disregarded if it arises as a result of a beneficiary of the trust becoming absolutely entitled to an employee share scheme share, or as a result of a disposal of an employee share scheme share or right to a beneficiary.

Section 130-90 of the ITAA 1997 states:

SECTION 130-90 Shares held by employee share trusts

130-90(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.

130-90(2) Subsection (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.

The EST is an employee share trust for the purposes of subsection 130-85(4) of the ITAA 1997.

Section 104-75 of the ITAA 1997 contains the rules dealing with CGT event E5. CGT event E5 happens if a beneficiary of a trust becomes absolutely entitled to an asset of the trust as against the trustee of the trust (subsection 104-75(1)).

In determining whether a beneficiary is absolutely entitled to the asset, any legal disability, e.g. if the beneficiary is under 18, is ignored. In Draft Taxation Ruling TR 2004/D25, the Commissioner stated his view that the core principle underlying the concept of absolute entitlement in the CGT rules is the ability of a beneficiary who has a vested and indefeasible interest in the entire trust asset to call for the asset to be transferred to them or as they so direct.

Subdivision 130-D of the ITAA 1997 treats an employee who acquires an ESS interest through an 'employee share trust' to be 'absolutely entitled' to the share or right to which the ESS interest relates from the time that they acquire the ESS interest (subsections 130-85(1) and (2) of ITAA 1997).

Subsection 995-1(1) of ITAA 1997 defines a share to mean a share in the capital of a company. An ordinary share in the Company held by the Trustee of the EST and to which a participant is entitled upon exercise of an option is a share in the capital of the Company (paragraph 130-90(1)(b) of the ITAA 1997).

A participant will have acquired a beneficial interest in a share in the Company by exercising an option granted under the ESOP (paragraph 130-90(1)(c) of the ITAA 1997).

Subsection 83A-20(1) of Subdivision 83A-B of the ITAA 1997 states:

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

The term 'employee share scheme' is defined in subsection 83A-10(2). Subsection 83A-10(2) states:

An employee share scheme is 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 of the company

in relation to the employees' employment.

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

scheme means:

(a) any ^*arrangement; or

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

The ESOP is an employee share scheme for the purposes of Division 83A as it is an arrangement/plan (scheme) under which an ESS interest, i.e. a beneficial interest in an option to acquire a beneficial interest in a share of the Company, is provided to eligible participants in relation to their employment by the Company in accordance with the EST Trust Deed. The options are acquired under the ESOP at no cost.

Subdivision 83A-B will apply to options acquired under the ESOP as pursuant to subsection 83A-20(1) of the ITAA 1997 the ESS interest will be acquired under an employee scheme at a discount (paragraph 130-90(1)(d) of the ITAA 1997).

It should be noted however that whether a participant is ultimately taxed upfront on some or all of any discount received (under Subdivision 83A-B of the ITAA 1997) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C of the ITAA 1997), will depend on which of the additional requirements in subdivision 83A-B or subdivision 83A-C of the ITAA 1997 have been satisfied.

Accordingly, all the conditions in subsection 130-90(1) of the ITAA 1997 have been satisfied.

Provided the participant does not acquire the beneficial interest in the share for more than its cost base in the hands of the EST at the time that CGT event E5 happens, subsection 130-90(2) of the ITAA 1997 will also have been satisfied.

Under these circumstances, section 130-90 of the ITAA 1997 operates to disregard any capital gain or capital loss made by the Trustee of the EST on any share when a participant becomes absolutely entitled to that share.

Question 3

Summary

In respect of the shares acquired by or subscribed by the Trustee of the EST under the terms of the ESOP, any capital gain or capital loss made by the Trustee of the EST under section 104-85 (CGT event E7) will be disregarded when the trustee disposes of the shares in the EST to a participant.

Detailed reasoning

Section 130-90 of the ITAA 1997 operates to ensure that any capital gain or loss made by an employee share trust is disregarded if it arises as a result of a beneficiary of the trust becoming absolutely entitled to an employee share scheme share, or as a result of a disposal of an employee share scheme share or right to a beneficiary.

Section 130-90 of the ITAA 1997 states:

SECTION 130-90 Shares held by employee share trusts

130-90(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.

130-90(2) Subsection (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.

The EST is an employee share trust for the purposes of subsection 130-85(4) of the ITAA 1997.

Section 104-85 of the ITAA 1997 contains rules dealing with CGT event E7. CGT event E7 happens if the trustee of a trust 'disposes of' a CGT asset of the trust to a beneficiary so as to satisfy the beneficiary's interest, or part of an interest, in the capital of the trust (subsection 104-85(1) of the ITAA 1997).

The time that CGT event E7 happens is when the asset is disposed of from the trustee to the beneficiary (subsection 104-85(2) of the ITAA 1997).

Upon transfer of the legal title in those trust shares in accordance with the relevant ESOP rules, CGT event E7 will occur at the time legal title in the shares is transferred to either the participant, or a third party as directed by the participant.

A capital gain arises to the Trustee of the EST if the market value of the share at the time of disposal to the participant is more than the share's cost base (subsection 104-85(3)of the ITAA 1997). A capital loss arises to the Trustee if the market value of the share at the time of disposal to the participant is less than the share's reduced cost base (subsection 104-85(3) of the ITAA 1997).

As discussed in question 2, all the conditions in subsection 130-90(1) of the ITAA 1997 have been satisfied.

Provided the participant does not acquire the beneficial interest in the share for more than its cost base in the hands of the EST at the time that CGT event E7 happens, subsection 130-90(2) of the ITAA 1997 will also have been satisfied.

Under these circumstances, section 130-90 of the ITAA 1997 operates to disregard a CGT event E7 capital gain or capital loss made by the Trustee.