Edited version of your private ruling

Authorisation Number: 1012504582969

Ruling

Subject: Employee Share Scheme

Question 1

Will the irretrievable cash contributions made by the entity to the Trustee for the entity's Employee Share Trust (EST) to fund the acquisition of the entity's shares by the EST be assessable income of the EST?

Advice/Answers

No

Question 2

In respect of shares acquired by the Trustee of the EST under the terms of the Long Term investment Plan (LTIP), will any capital gain or capital loss made by the Trustee under CGT event E5 (section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997) be disregarded when participants become absolutely entitled to shares in the entity?

Advice/Answers

Yes

Question 3

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

Advice/Answers

No

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

1 July 2012

Relevant facts and circumstances

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

· Application for Private Ruling

· The entity's Long Term Investment Plan Rules

· The Trust Deed of the EST

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 130-91 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 1997

Question 1

Will the irretrievable cash contributions made by the entity to the Trustee to fund the acquisition of the entity's shares by the EST 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

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

The irretrievable cash contributions made by the entity to the Trustee are not particular kinds of assessable income contained in the list of provisions in section 10-5 of the ITAA 1997.

Accordingly, the irretrievable cash contributions made by the entity to the Trustee are used in accordance with the Trust Deed and Plan rules for the sole purpose of and under the employee share scheme. The contributions constitute capital receipts to the Trust, 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

In respect of shares acquired by the Trustee of the EST under the terms of the LTIP, will any capital gain or capital loss made by the Trustee under CGT event E5 (section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997) be disregarded when Participants become absolutely entitled to shares in The entity?

Detailed reasoning

CGT event E5

Section 104-75 of the ITAA 1997 provides that CGT event E5 happens at the time a beneficiary becomes 'absolutely entitled' to a CGT asset of a trust as against the Trustee.

Section 130-90 of the ITAA 1997 operates to ensure that any capital gain or loss made by an EST is disregarded if it arises as a result of the beneficiary of the trust becoming absolutely entitled to an employee share scheme share (CGT event E5), or as a result of a disposal of an employee share scheme share or right to a beneficiary (CGT event E7).

In determining whether a beneficiary is absolutely entitled to the asset, any legal disability (i.e. beneficiary 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 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) of the ITAA 1997).

A Clause the EST Trust Deed states that each participant will be absolutely entitled to shares held by the Trustee of the EST from the time the Trustee of the EST acquires shares on their behalf as a result of the participant exercising their options.

Subsections 130-90(1) and 130-90(2) state:

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.

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 of the ITAA 997 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust for an employee share scheme (having the meaning given by subsection 83A-10(2) of the ITAA 1997) 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 terms and conditions set out in the Trust Deed confirm that the Trust is an 'employee share trust' as defined in subsection 130-85(4) 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 LTIP at the time the participant becomes absolutely entitled to the shares. Under the terms of the Trust Deed, the Trustee is required to deal with the shares in accordance with the relevant LTIP Rules. The relevant LTIP Rules have conditions that may restrict the participant's access to the shares. These restrictions may affect a participant's absolute entitlement to the shares as against the Trustee. When the participants are no longer restricted by any of the conditions under the LTIP Rules from calling for and receiving the shares, then the participants will become absolutely entitled to the shares and CGT event E5 happens, and paragraph 130-90(1)(a) of the ITAA 1997 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 the entity held by the Trustee and to which a participant is entitled upon exercise of a right is a share in the capital of a company. 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 the entity) by exercising a right granted under the LTIP.

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 LTIP is an employee share scheme for the purposes of Division 83A of the ITAA 1997 as it is an arrangements under which an ESS interest i.e. a beneficial interest in a right to acquire a beneficial interest in a share of the entity, is provided to eligible employees in relation to their employment by the entity. The rights are acquired at no cost.

Accordingly, prima facie Subdivision 83A-B of the ITAA 1997 will apply to the rights acquired. Pursuant to subsection 83A-20(1) of the ITAA 1997 the ESS interest will be acquired under an employee share scheme 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 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.

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

Question 3

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

Detailed reasoning

CGT event E7

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

Section 130-90 of the ITAA 1997 operates to ensure that any capital gain or loss made by an EST is disregarded if it arises as a result of a beneficiary of the trust becoming absolutely entitled to an employee scheme share (CGT event E5), or as a result of a disposal of an ESS share or right to a beneficiary (CGT Event E7).

The EST is an employee share trust within the meaning of subsection 130-85(4).

In regard to the plans, the transfer of trust shares is contained in a Clause of the Trust Deed.

Upon transfer of the legal title in those trust shares, in accordance with the relevant Plan 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 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 shares reduced cost base (subsection 104-85(3) of the ITAA 1997).

In regards to the entity's LTIP, paragraphs 130-90(1) (a) to (d) have been satisfied.

Provided the participant in the entity's LTIP 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 operates to disregard a CGT event E7 capital gain or capital loss made by the Trustee or a beneficiary of the EST.