Edited version of your private ruling

Authorisation Number: 1012574007282

Ruling

Subject: Company Equity Plans

Question 1

Will the irretrievable contributions made by the Company to the Trustee be assessable income of the Company Employee Share Trust (EST) under sections 6-5 or 6-10 of the ITAA 1997?

Answer

No

Question 2

In respect of shares acquired in the Company by the Trustee of the EST under the Company Equity Plans, will any capital gain or capital loss made by the Trustee under CGT event E5 (section 104-75 of the ITAA 1997) be disregarded when the participants of the Company Equity Plans become 'absolutely entitled' to the Company shares?

Answer

Yes

Question 3

In respect of shares disposed of by the Trustee of the EST under the Company Equity Plans, will any capital gain or capital loss made by the Trustee under CGT event E7 (section 104-85 of the ITAA 1997) be disregarded when the participants of the Company Equity Plans 'acquire' the Company shares?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Company conducts a business in Australia and engages employees.

The Company has introduced the Company Equity Plans, consisting of two types of equity incentives:

· Performance Rights, and

· Unlisted Options.

The Company has adopted the Employee Incentive Plan (EIP) to formalise the structure for the granting of Performance Rights.

Unlisted Options have been provided in accordance with the company's constitution.

The Company Employee Share Trust (EST) was established to facilitate the provision of Company shares under current and future incentive plans. The EST will be managed by the Trustee and governed by the Trust Deed.

The stated key purpose of each of the Company Equity Plans is to:

· Offer a share / equity-based bonus to employees;

· Focus employees on the Company's strategic performance targets; and

· Recognise and reward employees for creating superior value for shareholders through their individual performance.

While the plans allow for provision of rights and options to employees (and associates of employees) of group companies, the applicant has stated that the rulee only contemplates providing rights and options to employees (and associates of employees) of the Company.

Employee Performance Rights Plan (EPRP)

The key features of the EPRP are as follows:

· At the Board's absolute discretion, it may grant Performance Rights to employees or associates of employees.

· A Performance Right is a conditional right to acquire one fully paid ordinary share in the Company granted under the plan.

· No payment is required by the employee / associate on grant of the Performance Rights, unless the Board otherwise determines. No payment or exercise price is required once the rights vest.

· The Board grants Performance Rights by deed. The Board determines the terms of the Performance Right

· 'Vesting' means an employee becomes entitled to have the shares subject to a Performance Right transferred to him or her.

· Before vesting, the employee has no right to vote or receive dividends or to participate in any new issue of securities as a result of holding their Performance Rights.

· Satisfaction of the performance criteria is assessed by the Company Board after the end of the relevant performance period. The vesting dates for the Performance Rights are spread over a three year period.

· The Company Board has absolute discretion to cause a Performance Right to lapse where a participant:

· requests for the rights to lapse

· transfers, assigns or otherwise disposes of the rights

· participates in fraudulent and dishonest behaviour

· ceases employment with the Company, or

· was an associate but is no longer an associate of an employee.

· However, the Company Board may decide that a Performance Right does not lapse if the employee's employment with the Company is terminated due to ill health, injury or disability, the employing company ceases to be under the control of the Company, death or any other reason if the Board so decides in any particular case. The Board also has absolute discretion to decide that any unvested Performance Rights will vest immediately on an employee's termination date.

· A Performance Right will also lapse if, at the end of the relevant performance period, the performance conditions are not satisfied.

· Subject to the employee's continued employment until the vesting date, where the Board determines that any performance condition has been satisfied or waived during the performance period, the employer will, within 30 days of vesting, arrange for the transfer or issue to the employee (or associate) of the shares.

· The Company EST intends to acquire shares to satisfy the Performance Rights at or about the same time that the rights vest.

Employee Incentive Plan (EIP)
The Board has resolved to adopt the EIP. The key features of the EIP are as follows:

· All permanent salaried employees of the Company, who commenced employment prior to a certain date, are eligible to participate in the EIP, except for the Chief Executive and General Managers of the company. Contractors, consultants and temporary personnel are not eligible to participate.

· Employees would only be invited to participate in the EIP if the Company Board determined that the Company achieved the necessary corporate performance rating, and the Chief Executive of the Company ratified, after moderation by the Executive Leadership Team of the Company, that the eligible employee had achieved an individual performance rating that met a certain level.

· If an employee accepts an offer to participate in the ElP, the Company will grant the employee with Performance Rights under the EPRP, which are subject to vesting conditions which have been determined under the terms of the EIP. Under the ElP, the Performance Rights will only vest if the employee is employed by the Company at the vesting date.

· Offers to participate will be made where the employer achieves the corporate performance rating AND the eligible employee achieves a sufficient individual performance rating. The number of rights offered is calculated using a formula based on the performance ratings, the employee's salary and the percentage of days employed during the year.

· No payment is required by the employees on grant of the Performance Rights. When a vesting condition is satisfied, the employee will be entitled to receive one fully paid ordinary share in the Company for each right vested, without any further payment or consideration.

· Some of the Performance Rights granted to the employee will vest immediately on grant, and the remaining rights will vest approximately two years after the grant date.

· If an employee ceases to be employed by the Company before the vesting date, the Performance Right will lapse, unless otherwise determined by the Company Board.

· The Company Board also has discretion to cause a Performance Right to lapse if the employee participates in fraudulent and dishonest behaviour, transfers, assigns or otherwise disposes of the right or requests for the rights to lapse.

· The Company Board may decide that a Performance Right does not lapse if the employee's employment with the Company is terminated due to ill health, injury or disability; the employing company ceases to be under the control of the Company, or death.

· The Company EST intends to acquire shares to satisfy the Performance Rights under the EIP at or about the same time that the rights vest.

Unlisted Options

Unlisted Options are not issued under any specific "employee option plan". Rather, in accordance with the Company Constitution, the Board has the power to issue unlisted options to certain key employees and associates of the company, for the purpose of providing them with equity based incentives in the company and focusing them on achieving the strategic performance targets of the company.

The key features of Unlisted Options are as follows:

· It is at the Board's discretion to invite certain employees and associates (including contractors) of the Company to apply for a number of Unlisted Options specified on the invitation / offer document.

· The number of Unlisted Options made available to the employee / associate is determined at the Board's discretion and depends on various factors such as their position in the company or the relationship they have with the company.

· The conditions which must be satisfied in order for the Unlisted Options to vest and the vesting period for each tranche of unlisted options issued by the company are determined at the Board's discretion and depend on various factors such as their position in / relationship with the company. The vesting condition which generally applies to all Unlisted Options issued to date is a retention period with the company of at least one year from the issue date. The majority of Unlisted Options vest over a period of three or four years from the issue date.

· The EST intends to acquire shares to satisfy the Unlisted Options at or about the same time that the Unlisted Options are exercised.

· Each Unlisted Option entitles the holder to subscribe for and be allotted one fully paid ordinary share in the Company.

· The Unlisted Options are not transferable and during the period of time in which an employee / associate holds an Unlisted Option and prior to it vesting or being exercised, the employee / associate is not entitled to participate in any new issue of securities in the Company as a result of their holding of the Unlisted Options.

The applicant has submitted with the ruling application an example of the key terms and conditions of Unlisted Options currently on issue. The terms and conditions include:

· Exercise price

· Expiry date

· Vesting date/s (example up to three years from issue)

· Lapse on expiry date, resignation or termination with cause

· No lapse on termination without cause

· Not transferrable

· Shares issued within 10 days of exercise

· Shares rank pari passu in all respects with other shares

· No participation rights for option holders

Operation of the Company EST

· The Company established the Company Employee Share Trust (EST) for the purpose of managing its incentive plans (current and future) and delivering shares under these incentive plans. The Trustee is an unrelated third party.

· The stated purpose of the EST is to acquire shares and/or subscribe for newly issued shares in the Company for past and future offers of Performance Rights and Unlisted Options for delivery to the Company employees under the Company Equity Plans.

· The Trustee has the full power to do all things a trustee is permitted to do by law in respect of the EST, the trust shares and the trust assets.

· It is intended that the EST will be managed and administered so that it satisfies the definition of 'employee share trust' in subsection 130-85(4) of the ITAA 1997.

· Pursuant to the Trust Deed, the Trustee will deal with trust assets in accordance with the directions of the Company under the terms of the Trust Deed, and subject to any inconsistency with the terms of the Trust Deed:

· to the extent the relevant shares are Allocated Shares, the directions of the relevant Participant

· the terms of the relevant Plan Rules, and/or

· the relevant Terms of Participation,

except where it would be required to incur a cost, expense or liability in so doing for which it is not fully indemnified.

· The Trustee is not permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the EST. In addition, it will not be permitted to carry out activities which result in the participants in the Company Equity Plans being provided with additional benefits other than the benefits that arise from the relevant plan rules.

· Pursuant to the Trust Deed, the Board will instruct the Trustee, by way of notice in writing, to purchase, subscribe for or allocate the requisite number of shares in the Company specified in the notice.

· Pursuant to the Trust Deed, the Board 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 (after application of any capital).

· The Trustee will, in accordance with instructions received pursuant to the relevant plan rules in place at the time, purchase, subscribe and allocate shares.

· The subscription price for each of the shares must be the market value of the shares on the date on which the shares are issued to the Trustee.

· 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 the Trust Deed.

· While Allocated shares are held in trust, the participant will be entitled to dividend and voting rights. By written notice, participants can apply for legal title to the shares held in the EST to be transferred to them or to a third party.

· The contributions by the Company to the Trustee of the EST are not refundable to the Company. They may however be applied by the Trustee to a subscription for shares in the Company pursuant to the Trust Deed.

The applicant has stated that the amount of each cash contribution to be made by the Company to the EST will broadly equal the fair market value of shares to be acquired by the EST at that time. Further, the EST will generally acquire shares to satisfy the EPRP, EIP and Unlisted Options at or about the same time that the awards vest.

The applicant has stated that the Trustee of the EST holds all Company shares pursuant to each of the Company Equity Plans on capital account for income tax purposes.

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 83A-10

Income Tax Assessment Act 1997 - section 83A-20

Income Tax Assessment Act 1997 - section 104-75

Income Tax Assessment Act 1997 - section 130-85

Income Tax Assessment Act 1997 - section 130-90

Income Tax Assessment Act 1997 - section 106-50

Reasons for decision

Question 1

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 a 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

(a). 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 executed Trust Deed indicates that it has been executed for the purpose of managing the operation of the Company's incentive plans and the allocation and delivery of shares to employees under its incentive plans.

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

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

Accordingly, the irretrievable cash contributions made by the Company 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).

Any such receipts will be assessable income of the Trust in contrast to the irretrievable contributions made to facilitate the acquisition of the Company shares.

Question 2

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 respect of Performance Rights, participants will be absolutely entitled to Allocated shares after meeting vesting conditions, once shares have been acquired and allocated by the Trustee of the EST to the participant. In respect of Unlisted Options, participants will be absolutely entitled to Allocated shares following exercise of options, acquisition and allocation of shares to participants.

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

As discussed at Question 1, the terms of the Trust Deed indicate that the EST 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 EPRP, EIP and Unlisted Options at the time each participant becomes absolutely entitled to shares, on the exercise of the Unlisted Options and Performance Rights in the Company as against the Trustee. Therefore paragraph 130-90(1)(a) will be satisfied.

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

Section 995-1 of the 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 and to which a participant is entitled upon exercise of an Unlisted Option or Performance Right is a share in the capital of a company i.e. the 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 Company) by exercising an Unlisted Option or Performance Right granted under the Company Equity Plans.

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 995-1 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 scheme 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 the Company, is provided to eligible employees in relation to their employment by the Company. The ESS interests are acquired at a discount.

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

Because the beneficiary will 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 loss made by the Trustee on any share when a participant becomes absolutely entitled to that share.

Question 3

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.

Participants, on allocation of shares by the Trustee of the EST, become absolutely entitled to those shares.

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 such 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 Company Equity Plans (by way of transfer to a participant), the Trustee will not make a capital gain or capital loss under CGT event E7.