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Ruling

Subject: Equity Incentive Plan

Question 1

Will the non-refundable cash contributions made by Company A to the Trustee of the Employee Share Trust (EST) to fund the acquisition of Company A shares in accordance with the deed of trust between Company A and the Trustee be assessable income of the EST?

Answer

No.

Question 2

Will a capital gain or capital loss that arises for the Trustee of the EST at the time participants become absolutely entitled to the Company A shares under the Incentive Plans 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

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2011

Relevant facts and circumstances

As part of its reward and retention strategy Company A operates an Employee Share Option Plan (ESOP) and a Performance Rights Plan (PRP). The ESOP and PRP are collectively referred to below as the Incentive Plans.

Company A has established a single EST to facilitate the provision of fully paid ordinary shares in Company A to employees and executives under the existing Incentive Plans and any future executive and employee equity plans. The EST is managed by a corporate trustee company, and governed by the deed of trust between Company A and the Trustee (Trust Deed).

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

· providing Company A with capital management flexibility by enabling it to direct the Trustee of the EST to either buy shares on-market or to subscribe for an issue of new shares in Company A;

· providing a single vehicle to whom the administration of the Incentive Plans and any plans which Company A introduces in the future can be conveniently outsourced and more efficiently managed; and

· providing an arm's-length vehicle for acquiring and holding shares in Company A. This will assist Company A meet its Corporations Law obligations and help it to facilitate the management of potential insider trading issues and any other risks associated with a company dealing in its own shares.

The ESOP

In accordance with the Rules of the ESOP (ESOP Rules) the Board, at its discretion, will offer Share Options (Options) to an Eligible Person after considering various factors including the seniority and position of that person within Company A, the length of their service, their record of employment and their potential contribution to the growth of the company.

Administration of the ESOP is vested in the Board.

The Eligible Person may accept the offer by providing to the Board with a notice of acceptance in writing or nominating a nominee in whose favour they wish to renounce the offer. The Board may, in it its absolute discretion and without reason, resolve not to allow such renunciation.

Upon acceptance of an offer, Certificates for Share Options will be dispatched by Company A to the Eligible Person within 10 business days after their Issue Date and the certificate will state the number of Options issued and their Issue Date and Exercise Price (if applicable). Until determined otherwise by the Board, Options are granted for nil consideration.

The Options will vest twelve months from the allotment date (being the Issue Date as defined in the ESOP Rules) and may be exercised at any time up until the Expiry Date, which is five years from the date of their allotment. Options may also be exercised in the circumstances set out in clauses 11.2 and 11.4 of the ESOP Rules.

Each Option is convertible into one fully paid ordinary share in Company A.

Options may only be exercised by way of notice in writing (Exercise Notice) provided to the Board at the registered office of Company A. Such notice must specify the number of Options being exercised and must be accompanied by the total Exercise Price (if applicable) for all Options being exercised and the Certificate for those Options (for cancellation by the company).

The method of calculation of the Exercise Price (if applicable) of each Option will be determined by the Board with regard to the market value of the shares when it resolves to offer the Option and will be based upon a premium of approximately 10% to the closing price of the shares as traded on the ASX.

Options will automatically lapse if they are not validly exercised on or before their Expiry Date or if the participant ceases to be an Eligible Person for any reason other than retirement, permanent disability, redundancy or death.

Within 10 business days after the Exercise Notice has become effective in accordance with clause 11.5 of the ESOP Rules, Company A must instruct the Trustee to subscribe for, acquire and/or allocate the number of shares specified in the Exercise Notice. The Trustee will hold those shares in accordance with the terms of the Trust Deed. All shares allotted and transferred will be of the same class and rank equally with all existing ordinary shares in Company A.

The Board may determine that a Restriction Period will apply to shares issued, transferred or allocated to a participant following exercise, up to a maximum of seven years from the allotment date. The Board may, in its sole discretion, waive a Restriction Period. A participant cannot dispose of or otherwise deal with any shares while the shares are restricted.

A participant on whose behalf the Trustee holds shares may submit a Withdrawal Notice to Company A in respect of some or all of the shares which are not restricted shares and which the Trustee of the EST holds on behalf of the participant. At this point, Company A must then direct the Trustee to transfer legal title of the shares or to dispose of the shares in accordance with the terms of the approved Withdrawal Notice.

Operation of the PRP

At the discretion of the Board and in accordance with the PRP Rules, Company A may offer Performance Rights (Rights) and Phantom Performance Rights to an Eligible Employee by providing them with an Invitation to Participate in the PRP (PRP Invitation). However, as the Phantom Performance Rights will not be administered by the EST, they are not covered by this Ruling.

Unless otherwise determined by the Board, Rights are granted pursuant to the PRP Invitation for nil consideration.

The terms and conditions of Rights offered to each Eligible Employee will be set out in the PRP Invitation and include, if applicable, the number of Rights, Fee payable, Exercise Price, Exercise Period, Vesting Conditions, Performance Conditions, the Restriction Period and rights or restrictions attaching to the Rights administered through the EST.

A Right granted pursuant to the PRP entitles the participant to one fully paid ordinary share in Company A.

Unless otherwise determined by the Board, no exercise price is payable by a participant on exercise of a Right.

The final number of Rights that may be exercised will depend on the extent to which the Performance Exercise Conditions and Time Based Conditions specified in the PRP Invitation are satisfied.

Where the Exercise Price of the Right is nil, the Right will be exercisable when a participant receives an Exercise Notice from Company A notifying the participant of the extent to which the Exercise Conditions have been satisfied and the number of Rights which may be exercised.

Where an Exercise Price is payable, the Right must be exercised within the Exercise Period and by delivering to the registered office of Company A a signed Notice of Exercise and payment of the exercise price.

Upon their exercise Rights will automatically lapse and Company A must instruct the Trustee to either subscribe for new shares or acquire shares on market and/or allocate shares held in the EST equal to the number of shares for which the participant was entitled through the exercise of the Rights.

All shares allocated and transferred to a participant pursuant to the exercise of Rights granted under the PRP will be of the same class and rank equally with all other shares then on issue in Company A.

The Board may determine whether there will be a Restricted Period and what restrictions on the disposal of, granting and Security Interest in or over, or otherwise dealing with shares will apply during the Restricted Period. The Board may waive the Restricted Period having regard to the circumstances at the time of making the invitation. A participant cannot dispose of or otherwise deal with any shares while the shares are restricted.

Company A may irrevocably authorise the Trustee to apply a Holding Lock to the shares of a participant and undertake not to request removal of the Holding Lock applied to the shares while the shares are held subject to the PRP.

A participant may submit a Withdrawal Notice to Company A in respect of some or all of the shares the Trustee holds on behalf of a participant, which are not restricted shares. At this point, Company A must direct the Trustee to transfer legal title to the shares to the participant in accordance with the terms of the approved Withdrawal Notice.

Operation of the EST

The ESOP and PRP will be subject to the same EST ie the Trust Deed and its terms. Accordingly, the following provisions will apply to both these plans:

The EST will be established for the sole purpose of subscribing for, acquiring, holding and allocating shares in Company A under the Incentive Plans (as well as any future plans established by Company A requiring shares to be held by the Trustee under the terms of the EST).

Pursuant to clauses 6.1 and 6.2 of the Trust Deed the appropriately convened Board of Company A will, on behalf of a participant, instruct the Trustee, by way of notice in writing, to purchase, subscribe for or allocate the requisite number of shares in Company A specified in the notice.

Pursuant to subclause 6.4(a) of the Trust Deed Company A must provide the necessary funds to the Trustee for the purpose of enabling it to acquire shares as specified in the notice in accordance with the Trust Deed.

Shares issued to or acquired by the Trustee will be allocated to the relevant employees and held on trust on their behalf (Clause 12.2 of the Trust Deed)

Shares may be dealt with at any time after any restrictive period lapses by either:

Shares allocated to each employee being transferred into the name of the employee upon a Withdrawal Notice being lodged with and approved by the Board (Clause 11 of the Trust Deed) or

The Trustee selling shares on behalf of the employee, where permitted to do so by the employee, resulting in a cashless exercise for them. That is, the employee receives proceeds on sale of the shares by the EST less the Exercise Price (if applicable) and any brokerage costs (Clause 12.1 of the Trust Deed)

Subclause 3.1(b) of the Trust Deed provides that subject to the relevant plan rules and terms of participation, each participant is the beneficial owner of the Trust shares held by the Trustee on their behalf and absolutely entitled to all other benefits and privileges attached to, or resulting from holding those Trust shares.

The Trustee will, in accordance with instructions received pursuant to the relevant plan rules in place at the time, acquire or subscribe for, allocate and transfer shares for the benefit of participants provided that the Trustee receives, when required and necessary, sufficient payment to subscribe for or purchase shares and/or has sufficient unallocated Trust shares available (see clauses 3.3 and 8.1 of the Trust Deed).

The subscription price for each of the shares must be the market value of the shares as ascertained by Company A on the date on which the shares are issued to the Trustee (see clause 6.3 of the Trust Deed).

The Trustee (or any other party which the Trustee considers appropriate) will establish and maintain a separate Trust Share Account or record in respect of each participant in accordance with subclause 7.1 of the Trust Deed.

While shares are held in trust, the participant will be entitled to dividend and voting rights (see clauses 9.1 and 10 of the Trust Deed). The shares may be subject to a sale restriction under an ASX administered holding lock. By written notice, participants can apply for legal title to the shares held in the EST to be transferred to them (see clauses 11 and 13.2 of the Trust Deed).

All funds received by the Trustee from Company A will constitute accretions to the corpus of the trust and no participant will be entitled to receive such funds. The contributions will not be repaid to Company A unless they are used to subscribe for shares in Company A (see subclause 6.4(b) of the Trust Deed).

Where an amount paid by Company A to the Trustee in respect of the acquisition of shares for the benefit of a participant is in excess of the amount required by the Trustee to acquire those shares, Company A may require the Trustee to apply such amount to subscribe for or acquire, allocate or transfer shares in accordance with the Trust Deed, the relevant plan rules or the relevant terms of participation or deposit the funds into any account opened and operated by the Trustee (see subclause 6.4(d) of the Trust Deed).

The Trustee will not be permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the EST. It will not be permitted to carry out activities which result in the participant being provided with additional benefits other than the benefits that arise from the relevant plan rules (see subclauses 4.4(b) and 4.4(c) of the Trust Deed).

The applicant has advised that some Options issued under the ESOP will be subject to Division 83A of the ITAA 1997, some Options may be subject to Division 83A of the ITAA 1997 by operation of the transitional legislation and some Options may be subject to former Division 13A of the ITAA 1936. All Rights granted pursuant to the PRP are subject to Division 83A of the ITAA 1997 only.

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 Division 83A

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Section 104-85

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 130-90

Income Tax Assessment Act 1997 Section 130-85

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Former Section 139-90

Income Tax Assessment Act 1936 Former Section 139C

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 the present circumstances. Therefore non-refundable contributions made by Company A to the Trustee 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 EST 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.

Subclause 6.4(b) of the Trust Deed provides that all contributions by Company A to the EST for the purpose of acquiring Company A shares constitute accretions to the corpus of the EST and that funds provided to the EST in excess of the amount required by the Trustee will not be refundable to Company A, a Related Body Corporate or a Participant. Further, the applicant has noted at page 17 of its application that the Trustee of the EST holds all Company A shares pursuant to the incentive plans on capital account.

The non-refundable cash contributions made by Company A to the Trustee of the EST to fund the acquisition of Company A shares in accordance with the Trust Deed will not be assessable income of the EST 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 Incentive 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 or restrictive period (see clause 11 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 Incentive Plans are that the Rights or Options must have been acquired by the taxpayer in respect of his or her employment (subsection 139C(1) of the ITAA 1936) and must have been acquired for less than market value (subsection 139C(3) of the ITAA 1936).

The Incentive Plans satisfy both these requirements (Rights and Options are granted to eligible employees in respect of their employment with Company A pursuant to the Incentive Plans for nil consideration).Therefore, the condition in subsection 130-90(3) of the ITAA 1997 is met, in the case of the Incentive Plans, under subparagraph 130-90(3)(a)(ii) of the ITAA 1997.

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 of the ITAA 1997 will have been satisfied. An exercise price is payable by a participant for a share in respect of Options (see the ESOP Offer) whereas no such price is required to be paid by a participant in respect of Rights (see the PRP Invitation).

Provided then, that the Option Exercise Price paid by a participant in accordance with the terms of the Incentive Plans 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 Incentive Plans, subsection 130-90(4) of the ITAA 1997 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.

Incentive Plans: Options and Rights issued on or after 1 July 2009

Division 83A of the ITAA 1997 will apply to Rights and Options issued under the Incentive Plans 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).

ESOP: Options issued before 1 July 2009

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

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

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

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 Incentive Plans are employee share schemes within the meaning of subsection 83A-10(2) of the ITAA 1997 because they are 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 Incentive Plans the employer has established the EST 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 EST acquires shares in the company

the EST 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, 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 Clause 4.1 of the Trust Deed. Clause 4.4 limits 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 sole activities test in clause 4.2 of the Trust Deed so that '..the Trust will be managed and administered so that it satisfies the definition of "employee shares trust" for the purposes of section 130-85(4) of the ITAA 1997' 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 Incentive Plans.

To this end, all other duties/general powers listed (at Clause 4.1 in particular) 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 Participants for the purposes of the Incentive Plans.

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 Incentive Plans 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 (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

Paragraph 130-90(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 under the PRP or by exercising an Option granted under the ESOP.

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 Incentive Plans are employee share schemes for the purposes of Division 83A of the ITAA 1997 as they are an arrangement/plan (scheme) under which an ESS interest, being a beneficial interest in a right to acquire a beneficial interest in a share of Company A, is provided to eligible employees or executives in relation to their employment by Company A or its subsidiaries. Rights are acquired under the PRP at no cost. Options are also granted for nil consideration and may be exercised upon the payment of an exercise price (if applicable).

Accordingly, prima facie Subdivision 83A-B of the ITAA 1997 will apply to Rights or Options acquired under the Incentive Plans as pursuant to subsection 83A-20(1) of the ITAA 1997 the ESS interest (issued under the Incentive Plans) will be acquired under an employee scheme (for the reasons stated immediately in the preceding paragraph) at a discount (no cost). 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 above) that the beneficiary 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.

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 ESOP 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 ESOP, 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 under CGT event E5 on any share when a participant becomes absolutely entitled to that share.

Note:

CGT Event E7

Subsection 104-85(1) of the ITAA 1997 provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital.

However, section 106-50 of the ITAA 1997 provides:

If you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

The participant, on allocation of the shares by the Trustee, becomes absolutely entitled to those shares. In accordance with subclause 3.1(b) of the Trust Deed each participant is the beneficial owner of the trust shares held by the Trustee on their behalf; and absolutely entitled to all other benefits and privileges attached to, or resulting from holding, those trust shares (subject to the relevant Incentive Plan rules and relevant terms of participation).

Once the participants are absolutely entitled to shares held on their behalf by the EST, section 106-50 of the ITAA 1997 will deem the disposal of the shares by the Trustee to be done by the participant.

Therefore, section 106-50 of the ITAA 1997 will apply, such that if the Trustee disposes of the shares under the relevant Incentive Plan (by way of transfer to a participant), the Trustee will not make a capital gain or capital loss under CGT event E7.