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Ruling

Subject: Equity Incentive Plan

Question 1

Will the irretrievable cash contributions made by Company A to the Trustee of the EST to fund the acquisition of Company A shares in accordance with the deed of trust and associated deed of amendment between Company A and the Trustee be assessable income of the Trust?

Answer

No

Question 2

Will a capital gain or capital loss that arises for the Trustee of the Trust at the time participants become absolutely entitled to the Company A shares under the Incentive Plan be disregarded under section 130-90 of the Income Tax Assessment Act 1997 (ITAA 1997) if the participants acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee?

Answer

No

This ruling applies for the following periods:

Income tax year ending 30 June 2012

Income tax year ending 30 June 2013

Income tax year ending 30 June 2014

Income tax year ending 30 June 2015

Income tax year ending 30 June 2016

The scheme commences on:

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The following documents form part of the relevant facts:

§ Application for Private Ruling

§ Incentive Plan Rules (Rules)

§ Employee Share Plan Trust Deed and Deed of Amendment of Employee Share Plan Trust Deed (together referred to be below as the Trust Deed).

Employee share plans have been established by Company A to allow employees to share in the ownership of the company and to promote its long term success as a goal shared by all employees.

Company A is offering an Equity Incentive Plan (Plan) comprised of both options (Options) and performance rights (Rights) which provide eligible executives with an opportunity to acquire an ownership interest or exposure to an ownership interest in the company.

Operation of the Plan

Company A may, at the discretion of the board, offer or issue Options or Rights which are rights to be issued, transferred or allocated a share upon the satisfaction of specified vesting conditions.

Specific clauses of the Rules require that any offer and corresponding acceptance must be made in writing to the employee and Company A respectively prior to the offer closing date stipulating the key terms and conditions of the offer.

Further, the awards held by a Participant (as defined in the Trust Deed) will vest in and become exercisable by that Participant upon the satisfaction of any vesting conditions specified in the offer or the Rules.

Options also require the payment of an exercise price; rights have a nil exercise price. The Options or Rights are Restricted Awards until they are exercised or expire and an offer may specify a restriction period for shares issued, transferred or allocated on the exercise of the Options or Rights.

Operation of the EST

The applicant has noted the following commercial benefits of using an EST:

§ Greater flexibility for Company A to accommodate the long term incentive arrangements both now and into the future as the group continues to expand operations and therefore employee numbers.

§ Capital management flexibility for Company A, in that the EST can use the contributions made by Company A either to acquire shares in Company A on market, or alternatively to subscribe for new shares in Company A.

§ Providing an arm's-length vehicle through which shares in Company A can be acquired and held in the company on behalf of the relevant employee. This assists Company A to satisfy corporate law requirements relating to a company dealing in their own shares.

The EST has been established with the sole purpose to subscribe, acquire, allocate, hold and deliver shares under the Plan for the benefit of eligible Company A employees, as outlined in the Trust Deed.

As per the Trust Deed, Company A may direct the Trustee to purchase shares to be held on behalf of a Participant, or subscribe for shares in Company A.

How the EST will facilitate the provision of Options and Rights under the Plan is summarised as follows:

Step 1 - Company A grants an award of Options or Rights to eligible employees.

Step 2 - Company A will, following validation that the vesting criteria have been satisfied:

§ contribute the required funds to the EST to enable the EST to either purchase shares on-market, or subscribe for shares, at market value, in Company A, and

§ send a written notice to the Trustee giving directions as to how shares are to be acquired (ie on-market or new subscription).

Step 3 - The Trustee will then use the cash and act upon the written instructions to acquire the shares. Where the Trustee subscribes for new shares, Company A will receive cash consideration equal to the market value of the shares. Where the Trustee acquires shares on-market, the Trustee will disperse the funds for the shares acquired to the vendor shareholder, such that Company A will not receive any cash.

Step 4 - On exercise of the Option or vesting date of the Rights or Shares, the eligible employees contribute the exercise price, if any to Company A.

Step 5 - The shares acquired will be allocated to the Participant concerned. The shares can continue to be held in the name of the Trustee albeit that the Participant will have a beneficial interest in the shares with rights to vote and receive dividends, etc. At the same time restrictions can be imposed on sale of the shares through the requirements of the participant to provide Company A with a withdrawal notice.

Further, the applicant has stated that it is not intended that the Trustee will buy shares in advance of exercise however the Rules provide that shares may be acquired by the Trustee on behalf of Participants by purchasing shares on the ASX or by the company issuing shares to the Trustee.

Further, the company will issue or cause to be transferred to the Trustee the number of shares required as soon as practical after the exercise of the Option or Right.

Trust Deed

Additional key features of the Trust Deed relevant to the current Plan are:

§ the Trust Deed provides that Company A may direct the Trustee to acquire, hold and allocate shares for Participants.

§ the Trust Deed, Company A may provide the EST with funds for the purpose of acquiring shares in Company A in accordance with the EST Deed.

§ the Trust Deed provides that funds provided to the EST pursuant to the Trust Deed will not be refundable to Company A, a Group Company or a Participant.

§ the Trust Deed provides that shares allocated by the Trustee for a Participant will be held by the Trustee on behalf of the relevant Participant, who is the beneficial owner of the shares and all interests and benefits are strictly personal to that Participant.

§ As per the Trust Deed, all contributions by Company A to the EST for the purpose of acquiring Company A shares constitute accretions to the corpus of the EST.

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 83 A-C

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Section 130-90

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Former section 139E

Reasons for decision

Question 1

Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) defines net income in relation to a trust as follows, insofar as it is relevant:

net income , in relation to a trust estate, means 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

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states:

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Further, subsection 6-10(1) states:

Your assessable income also includes some amounts that are not ordinary income.

Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5.

None of the provisions listed in section 10-5 of the ITAA 1997 are relevant in this situation. Therefore irretrievable contributions made by Company A to the Trust will not be assessable income under section 6-10 of the ITAA 1997. They will only be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936 if they are assessable as income according to ordinary concepts under section 6-5 of the ITAA 1997.

The Trust Deed states that 'the Trust will operate for the sole purpose of acquiring shares on behalf of eligible employees under the employee share plans. Pursuant to … the Trust Deed, all contributions by Company A to the Trust for the purpose of acquiring Company A shares constitute accretions to the corpus of the Trust.

Consistent with ATO Interpretative Decision ATO ID 2002/965, the irretrievable cash contributions made by Company A to the Trustee of the Trust to fund the acquisition of Company A shares by the Trust in accordance with the Trust Deed will not be assessable income of the Trust pursuant to sections 6-5 or 6-10 of the ITAA 1997.

Question 2

When a participant becomes absolutely entitled to the shares as against the Trustee, CGT Event E5 will occur and under section 104-75 of the ITAA 1997, the Trustee will make a capital gain or loss. However, section 130-90 of the ITAA 1997 may operate to disregard that gain or loss where specified conditions are satisfied.

Division 13A of the ITAA 1997 - former section 130-90 of the ITAA 1997

(NB - all references to section 130-90 of the ITAA 1997 under this heading are references to the former section 130-90 of the ITAA 1997)

Section 130-90 of the ITAA 1997, insofar as it is relevant, states:

130-90(1)

A capital gain or a capital loss a trustee or a beneficiary makes when the beneficiary becomes absolutely entitled to a share or right in a company is disregarded if these conditions are satisfied.

130-90(1A)

The beneficiary must be:

(a) an individual who receives (or is entitled to receive) withholding payments covered by subsection (5) from the company or from another company (at the time the beneficiary first became beneficially entitled to the share or right); or

(b) an associate or affiliate company of such an individual; or

(c) an individual who is engaged in foreign service (within the meaning of section 139GBA of the Income Tax Assessment Act 1936), or an associate or affiliate company of such an individual.

130-90(2)

The terms of the trust must have required or authorised the trustee to transfer the share or right to the individual, associate or affiliate company.

130-90(3)

Either:

(a) the individual, associate or affiliate company must have acquired the share or right:

(i) under an employee share scheme; or

(ii) alternatively in the case of a share - as a result of exercising a right acquired under an employee share scheme;

(b) the share or right must, because of section 139DQ of the Income Tax Assessment Act 1936 , be a share or right that is treated, for the purposes of Division 13A of Part III of that Act, as if it were a continuation of a share or right acquired under an employee share scheme;

(c) if the share was acquired as a result of exercising a right, the right must, because of section 139DQ of the Income Tax Assessment Act 1936 , be a right that is treated, for the purposes of Division 13A of Part III of that Act, as if it were a continuation of a right acquired under an employee share scheme.

130-90(4)

The individual, associate or affiliate company must not have acquired the share or right for more than the cost base of the share or right (in the hands of the trustee) at the time of the transfer

130-90(5)

This subsection covers a withholding payment covered by any of the provisions in Schedule 1 to the Taxation Administration Act 1953 listed in the table.

Paragraph 130-90(1A)(a) of the ITAA 1997 is satisfied as eligible employees who participate in the plans receive salary or wages that are withholding payments.

The terms of the Trust Deed satisfy subsection 130-90(2) in that the Trustee is authorised to transfer any shares where the employee requests it by issuing Company A with a Withdrawal Notice (as defined in the Trust Deed) notwithstanding that the shares may be subject to a holding lock of the Trust Deed.

The condition in subsection 130-90(3) of the ITAA 1997 stipulates that the share or right must have been acquired under an employee share scheme or alternatively, in the case of a share, as a result of exercising a right acquired under an employee share scheme. Section 139C of the ITAA 1936 outlines the requirements for a plan to be considered an employee share scheme. The requirements relevant to the present Plan are that the Rights or Options must have been acquired by the taxpayer in respect of his or her employment (subsection 139C(1)) and must have been acquired for less than market value (subsection 139C(3)). The Plan satisfies both these requirements (Rights and Options are granted to eligible employees in respect of their employment with Company A pursuant to the Plan for nil consideration).Therefore, the condition in subsection 130-90(3) of the ITAA 1997 is met, in the case of the Plan, under subparagraph 130-90(3)(a)(ii).

Finally, provided that the condition in subsection 130-90(4) of the ITAA 1997, requiring that the Participant must not have acquired the share or right for more than its cost base in the hands of the Trustee, is met, all of the provisions of section 130-90 will have been satisfied. A final exercise price is payable by a participant for a share in respect of Options whereas no such price is required to be paid by a participant in respect of Rights. Provided then, that the option exercise Price paid by a participant in accordance with the terms of the Plan is not more than the cost base in the hands of the Trustee and a participant continues not to be required to pay/contribute any price that is more than the cost base in the hands of the Trustee under the Plan, subsection 130-90(4) will have been satisfied.

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

Division 83A of the ITAA 1997 - current section 130-90 of the ITAA 1997

Preliminary - application of Division 83A of the ITAA 1997

Division 83A of the ITAA 1997 will apply to ESS Interests issued on or after 1July 2009 and also, in certain circumstances, to ESS Interests that were provided under an employee share scheme prior to 1 July 2009.

The Plan: Options and Rights issued on or after 1 July 2009

Division 83-A of the ITAA 1997 will apply to Rights and Options issued under the Plan on or after 1 July 2009 as they will have been acquired on or after 1 July 2009 thereby satisfying subsection 83A-5(1) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997).

Pursuant to subsection 83A-5(1) of the IT(TP)A 1997, Division 83A will also apply to Rights or Options issued under the Plan where the Right or Options were acquired on or after 1 July 2009 and were not acquired before 1 July 2009 in accordance with paragraph 83A-5(1)(b) of the IT(TP)A 1997.

LTIP: Rights issued before 1 July 2009

The applicant has advised that Rights and Options were issued under the previous plans before 1 July 2009. From 1 July 2009, Subdivision 83A-C of the ITAA 1997 will apply to Rights and Options issued under the Plan if all of the following subparagraphs of paragraph 83A-5(2)(a) of the IT(TP)A 1997 are satisfied:

(a) at the pre-Division 83A time, subsection 139B(3) of the Income Tax Assessment Act 1936 applied in relation to the interest;

(b) the interest was acquired (within the meaning of former Division 13A) before 1 July 2009;

(c) the cessation time mentioned in subsection 139B(3) of the Income Tax Assessment Act 1936, as in force at the pre-Division 83A time, for the interest did not occur before 1 July 2009.

Current section 130-90 of the ITAA 1997

The current section 130-90 of the ITAA 1997 states:

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 (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.

Employee share trust

Subsection 130-85(4) of the ITAA 1997 states:

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

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

The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997.

An 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) in relation to the employees' employment.

The Plan is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which rights to acquire shares in the company are provided to employees in relation to the employee's employment (see further discussion of the term 'employee share scheme' below).

Under the Plan, the employer has established the employee share trust to acquire shares in the company and to allocate those shares to employees to satisfy the Rights and Options acquired under the scheme. The beneficial interest in the share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights to acquire the shares are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997.

Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

§ the employee share trust acquires shares in the company

§ the employee share trust ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the governing documents of the scheme.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require a Trustee to undertake incidental activities that are a function of managing the employee share scheme and administering the trust.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental, as set out in ATO Interpretative Decision ATO ID 2010/108, include:

§ the opening and operation of a bank account to facilitate the receipt and payment of money

§ the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee

§ the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme

§ dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme

§ the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares

§ the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries

§ receiving and immediately distributing shares under a demerger.

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental.

For the purposes of the EST, the powers of the Trustee are set out in the Trust Deed. Specific clauses limit the powers given to the Trustee under the Trust Deed so as to ensure that the powers of the Trustee under the Trust Deed are exercised pursuant to the Trust Deed for the "..sole purpose of acquiring Shares on behalf of Eligible Employees" under the Employee Share Scheme thereby making it clear that the Trustee can only use the contributions received exclusively for the acquisition of shares for eligible employees in accordance with the Plan. To this end, all other duties/general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the shares to be acquired for Plan participants for the purposes of the Plan.

Therefore, the EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 as concluded above, and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Paragraph 130-90(1)(a) of the ITAA 1997

CGT event E5 is the CGT event that will apply under the terms of the Plan at the time the participant becomes absolutely entitled to the shares in Company A as against the Trustee. Therefore paragraph 130-90(1)(a) will be satisfied.

Paragraph 130-90(1)(b) of the ITAA 1997

Section 995 of the ITAA 1997 defines a share to mean a share in the capital of a company. An ordinary share in Company A held by the Trustee and to which a participant is entitled to upon the vesting of a Right or upon exercise of an Option is a share in the capital of a company ie Company A. Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph.

Paragraph 130-90(1)(c) of the ITAA 1997

Paragraph130-90(1)(c) is satisfied as a participant will have acquired a beneficial interest in a share (in Company A) by the vesting of a Right or by exercising an Option granted under the Plan.

Paragraph 130-90(1)(d) 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 scheme at a discount.

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

in relation to the employees' employment.

For the purposes of subsection 83A-10(2) of the ITAA 1997, section 995 of the ITAA 1997 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 Plan is an employee share scheme for the purposes of Division 83A of the ITAA 1997 as it is an arrangement/plan (scheme) under which an ESS interest i.e. a beneficial interest in a right to acquire a beneficial interest in a share of Company A, is provided to eligible executives in relation to their employment by Company A or its subsidiaries (see definition of Executive, Group Company and Company in the Rules). Rights are acquired under the Plan at no cost. Options can be exercised upon the payment of an exercise price.

Accordingly, prima facie Subdivision 83A-B of the ITAA 1997 will apply to Rights or Options acquired under the Plan as pursuant to subsection 83A-20(1) of the ITAA 1997 the ESS interest (i.e. issued under the Plan) will be acquired under an employee scheme (for the reasons stated immediately in the preceding paragraph) at a discount. (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 of the ITAA 1997 or Subdivision 83A-C of the ITAA 1997 have been satisfied. Under either circumstance subparagraph 130-90(d) of the ITAA 1997 will be satisfied).

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

Provided (as stipulated in Question 2 above) that the beneficiary does not acquire 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, subsection 130-90(2) of the ITAA 1997 will also have been satisfied.

In relation to Rights, Participants will not pay any amount to acquire their ESS interests or Company A shares upon the vesting of the Rights and therefore, subsection 130-90(2) of the ITAA 1997 will not apply to shares acquired by the grant of Rights.

However, participants are required to pay an exercise price upon vesting of an Option in order to acquire one Company A share. Provided then, that this total exercise price paid by a Participant in accordance with the terms of the Plan is not more than the cost base in the hands of the Trustee, and a participant continues not to be required to pay/contribute any price that is more than the cost base in the hands of the Trustee under the LTIP, subsection 130-90(2) will have been satisfied.

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