Edited version of your private ruling

Authorisation Number: 1012611856029

Ruling

Subject: Employee share option plan

Question 1

Will the irretrievable cash contributions by the Company to the Trustee to fund the acquisition of Company shares by the employee share trust (EST) be assessable income of the EST under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will a capital gain or capital loss that arises for the Trustee at the time the Participants become absolutely entitled to the Company shares (acquired on exercise of options acquired under the employee share option plan) be disregarded under section 130-90 of 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 September 2009

Year ended 30 September 2010

Year ended 30 September 2011

Year ended 30 September 2012

Year ended 30 September 2013

Year ending 30 September 2014

Year ending 30 September 2015

Year ending 30 September 2016

Year ending 30 September 2017

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

1. A request for a Private Binding Ruling (Ruling) in relation to certain tax implications of the employee share option plan of the Company was made.

2. The scheme to which this Ruling applies has been ascertained from the following documents:

(i) Application for the Ruling (Application);

(ii) Employee share option plan rules (Plan);

(iii) Trust Deed

(iv) Deed of Amendment of Trust Deed

3. The company is an Australian publicly listed company listed on the Australian Stock Exchange.

4. This Ruling is based on the assumption that Participants acquire the Shares for the same or less than the cost base of the shares in the hands of the Trustee.

Employee Share Option Plan (Plan)

5. The Company currently operates the Plan.

6. The Plan involves the issue to Eligible Employees of Options to acquire fully paid ordinary shares in the Company on the terms and conditions specified in the Plan document.

7. Through the Plan, the Company rewards Participants and allows them to share in the growth of the value of the business.

8. An Eligible Employee is defined as any Employee who is designated by the Board as an eligible employee for the purposes of the Plan.

9. Employee is defined as any employee of, or contractor to, the Group.

10. Participant means a former, current or future employee or director of the Group who is participating, or who may participate in the future, under the terms of a Plan or Plans and who receives Shares held by the Trustee.

11. The Plan defines Group to mean the company and its related Bodies Corporate.

12. Option means an option to acquire a Share to be issued in accordance with the Plan.

13. Share means a fully paid ordinary share in the Company.

14. The Trustee has been appointed by the Company and has agreed to act as trustee of the employee share trust (EST) on the terms and condition set out in the Trust Deed.

The Plan broadly operates as follows:

15. It is at the discretion of the Board of the Company (the Board) to extend an invitation to certain Employees to apply for a number of Options specified on the invitation.

16. A rule of the Plan states invitations will be extended on such terms and conditions as the Board decides, from time to time, including:

a. The number of Options which may be applied for;

b. The Grant Date;

c. The Exercise Date;

d. The Expiry Date;

e. Any Exercise Condition; and

f. Any supplementary terms and conditions attaching to the Options

17. After Options have been exercised and the relevant Exercise Price (if any) has been paid to the Company, within a specified time after receiving notice of exercise of the options the Board will in its absolute discretion either:

a. issues Shares directly to the relevant Eligible Employee , or

b. Direct the Trustee to subscribe for, acquire and/or allocate, and hold on behalf of the relevant Eligible Employee, the Shares.

18. The exercise price of the Option will be specified in the invitation and may reflect a discount to the weighted average sale price (WAP) of Company shares sold during the days immediately prior to the grant date. It should be noted that at the discretion of the Executive Chairman, the discretion may be waived if the Executive Chairman is not satisfied with the contribution made by the Employee during the term of the Option, in which case, the Exercise Price would be the WAP or a price between the discounted price and the WAP.

19. The Options will become exercisable on the Exercise Date, specified in the invitation, subject to the Participant meeting the exercise conditions. An example of these conditions is remaining an employee of the Group as at the Exercise Date. The Plan defines Group to mean the company and its related Bodies Corporate.

20. Certain circumstances are provided in the Plan where the Options will immediately lapse, for example, where the Participant is lawfully terminated by a member of the Group, the Participant resigns from employment with any member of the Group.

21. Options are not transferrable without the permission of the Board.

Employee Share Trust

22. The EST was established through the execution of the Trust Deed.

23. Parties to the Trust Deed are the Company and the Trustee.

24. The EST has been established as a sole purpose trust to acquire Shares for Employees of the Company pursuant to the Company's equity plans.

The EST broadly operates as follows:

25. The EST is funded by cash contributions from the Company for the purchase of Shares in accordance with the Trust Deed, the relevant Plan rules or relevant Terms of Participation.

26. These funds will be used by the Trustee to acquire Shares in the Company either on-market or via a subscription for new Shares based on written instructions from the Company.

27. The structure of the EST and the Plan are such that Shares allocated on exercise of Options post vesting will be held by the Trustee. At the direction of the Participant, the Shares may be sold by the Trustee or transferred into the name of the Participant.

28. The Trustee is a party external to the Company and its associated entities.

29. All Shares held by the Trustee have and will continue to be held on capital account.

30. The Trust Deed states that each Participant will be absolutely entitled to Shares held by the Trustee from the time the Trustee purchases shares on their behalf as a result of the Participant exercising their Options.

31. The Trust Deed states that Eligible Employees will not be required to pay any consideration for the Options to be issued to them.

32. The Trust Deed limits the Trustee to be bound by any applicable law with respect to the offer, issue or acquisition of any Share or any right to any Share. Similarly, the Trustee is not permitted to carry out activities which are not necessary to maintaining the Trust for its sole purpose.

33. The Trust Deed provides that the Trust be managed so that it satisfies the legislated sole activity test. The Trust Deed also states that the Company wishes to establish a trust for the sole purpose of obtaining Shares for the benefit of Participants.

34. The Trust Deed allows for separate cash contributions to be made by the Company to the Trustee for the purpose of remuneration.

35. The Trust Deed provides for the sale of Shares held by the Trustee on behalf of Participants. From the proceeds of sale paid to the Participant, sale costs will first be applied. A clause provides for the transfer of Shares to a Participant when required to do so under the Plan, if the Trust is terminated or at the Board's discretion.

36. To date, the period between the contributions to the EST and the allocation of Shares to Participants in the Plan has not been significant (i.e. less than 30 days). However, it is contemplated that the Company may, in future, consider acquiring shares on-market over time and holding those Shares in the EST for a period longer than 30 days e.g. say up to 6 months. This would occur for several reasons as follows:

• Due to liquidity issues i.e. lack of available shares, the Company may choose to acquire the shares progressively rather than all at the once to ensure that sufficient shares are acquired for Employees by the relevant date that those shares will need to be handed over to the Employees; and

• Company shares are not heavily traded on a daily basis and large purchases of shares within a very short period of time could potentially have a significant impact on the share price which may not be desirable.

Use of a Share Trust to facilitate the Plan

37. It is stated in the Application that the establishment of the EST provides the Company greater flexibility to accommodate the long term incentive arrangements of the Company. Similarly, it allows for a streamlined approach to the administration aspect of its equity plans. The EST can also be used to provide a range of incentives involving shares in the Company as circumstances change in the labour market that require different incentives to be provided in order to attract, reward and retain key executives and employees.

38. It is stated in the Application that it is increasingly common for Australian listed companies to use a trust to facilitate the provision of shares to employees as part of equity based employee incentive and retention strategies.

39. In summary, commercial benefits of using the EST include:

• Greater flexibility for the company 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 the Company, in that the EST can use the contributions made by the Company either to acquire shares in the Company on market, or alternatively to subscribe for new shares in the Company.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Subsection 83A-10(1)

Income Tax Assessment Act 1997 Subsection 83A-20(1)

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Section 104-85

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 Subdivision 130-D

Income Tax Assessment Act 1997 Subsection 130-75

Income Tax Assessment Act 1997 Subsection 130-85

Income Tax Assessment Act 1997 Section 130-90

Income Tax Assessment Act 1997 Section 995

Income Tax Assessment Act 1936 Part III of Division 6

Income Tax Assessment Act 1936 Section 95

Reasons for decision

Question 1

Summary

Irretrievable cash contributions by the Company to the Trustee to fund the acquisition of Company shares by the EST will not be assessable income of the EST under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

The basic trust assessing provisions are contained in Division 6 in Part III of the Income Tax Assessment Act 1936 (ITAA 1936). In general terms, it is the beneficiaries of a trust who are ultimately entitled to receive and retain the income of a trust and are taxable on that income. The trustee is generally taxed on the balance of the net income defined for tax purposes, this is referred to as income to which no beneficiary is presently entitled. 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 provides that your assessable income includes income according to ordinary concepts, which is also called ordinary income.

Subsection 6-10(1) of the ITAA 1997 provides that assessable income also includes some amounts that are not ordinary income.

Subsection 6-10(2) of the ITAA 1997 details that amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income are called statutory income.

Trust capital gains are dealt with under Subdivision 115-C of the ITAA 1997. Trust net capital gains are treated as capital gains made by the beneficiary entitled to those parts. Shares are considered to be a CGT asset.

ATO Interpretive Decision ATO ID 2002/965 - Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme provides the Commissioner's view on whether the Trustee of an employee share trust will be assessed under section 6-5 or 6-10 of the ITAA 1997 on contributions made to it by an employer for the purpose of and under the employer's employee share scheme. In the reasons for decision, ATO ID 2002/965 states that when the funds provided to the Trustee are used in accordance with the Trust Deed and the Plan Rules for the sole purpose of and under the employee share scheme, the contributions constitute capital receipts to the Trustee and are not assessable under sections 6-5 or 6-10 of the ITAA 1997.

Therefore, provided the sole purpose of the contributions is to procure shares to satisfy awards made to employees of the company under the employee share scheme, the contributions will be a capital receipt and not assessable.

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

An employee share trust, for an *employee share scheme, is a trust whose sole activities are:

a) obtaining *shares or rights in a company; and

b) ensuring that *ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to *associates of employees, of:

(i) the company; or

(ii) a *subsidiary of the company; and

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

An employee share scheme is defined in subsection 83A-10(1) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment.

Australian Taxation Office Interpretive Decision ATO ID 2010/108 - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities sets out the Commissioner's views on whether a trust is an employee share trust within the meaning of subsection 130-85(4). The Commissioner recognises that to undertake the activities in subsections (a) and (b), it will be necessary to undertake further incidental activities that are a function of managing the employee share trust. The Commissioner considers these activities to 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 trustee, and the retention of those dividends or their distribution to employee beneficiaries of the trust (unless to a default beneficiary - see below);

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

• the transfer of shares to employee beneficiaries or the transfer to them of the proceeds from the sale of those shares on their behalf, at the time an employee calls on the trustee to either transfer or sell the shares.

Activities which the Commissioner considers will not be merely incidental, include:

• any activities that are not a necessary function of managing an employee share scheme or administering a trust; and

• any activities which result in employees being provided with additional benefits (for example, the provision of a loan to acquire shares).

In the Application, it is stated that the EST has not and will not engage in any of the activities which the Commissioner has expressed do not satisfy the sole activities test.

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.

In your circumstances,

The Trust Deed states that a trust will be established for the sole purpose of obtaining Shares for the benefit of Participants under the Plan.

The Trust Deed includes a clause stating that it will satisfy the definition of an employee share trust in section 130-85(4) of the ITAA 1997.

The Trust Deed provides certain limitations on the Trustee such as not being able to offer issue or acquire Shares which would contravene any applicable law, is only able to carry out activities which carry out the sole purpose of the trust and cannot provide additional benefits other than those specified in the Trust Deed.

A Clause of the Trust Deed states that the Board must instruct the Trustee to purchase or allocate Shares.

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

It is also noted that under the Trust Deed, all funds received by the Trustee will constitute accretions to the corpus of the Trust and will not be repaid to the Company and no Participant shall be entitled to receive such funds.

The irretrievable cash contributions made by the Company to the Trustee for the sole purpose of obtaining Shares for the benefit of Participants are to be used in accordance with the Trust Deed and the Plan for the sole purpose of and under the employee share scheme. Consequently, these 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).

Question 2

Summary

A capital gain or capital loss that arises for the Trustee at the time the Participants become absolutely entitled to the Company Shares (acquired on exercise of Options acquired under the Plan) will be disregarded under section 130-90 of 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.

Detailed reasoning

Subsections 130-90(1) and 130-90(2) of the ITAA 1997 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.

In order for the Trustee to be able to disregard any capital gain or capital loss made under CGT event E5 or E7 under section 130-90, it is first necessary for the EST to fall within the definition of an employee share trust as defined in subsection 130-90(1) of ITAA 1997.

As detailed in question 1, 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.

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 104-85 of the ITAA 1997 provides that CGT event E7 happens if the trustee 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.

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

CGT event E5

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 determining whether a beneficiary is absolutely entitled to the asset, any legal disability is ignored. In Draft Taxation Ruling TR 2004/D25 - Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 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 (section 130-85 of the ITAA 1997).

The Trust Deed states Participants are absolutely entitled to Shares held by the Trustee, subject to the relevant Plan rules and Terms of Participation:

Shares are allocated after Participants meet the restrictions in the Plan Rules and conditions in the Terms of Participation and exercise their Options. Thus, the Trust Deed states that at this time 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. CGT event E5 occurs, and paragraph 130-90(1)(a) of the ITAA 1997 will be satisfied.

CGT event E7

CGT event E7 is the event that will apply under the Plan at the time the Trustee disposes of the Shares.

The transfer of Trust Shares is contained in the Trust Deed, which states they can be sold or transferred by the Trustee subject to the Plan rules and Terms of Participation, for the benefit of the Participant.

Upon transfer of the legal title in those Trust Shares, in accordance with the relevant Plan rules and the relevant Terms of Participation, 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.

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 company held by the Trustee and to which a Participant is entitled upon exercise of an Option is a share in the capital of the company. Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 or E7 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 the Company by exercising an Option granted under the Plan.

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

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 under which an ESS interest i.e. a beneficial interest in an option or 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 Trust Deed states that Eligible Employees will not be required to pay any consideration for the Options to be issued to them. Accordingly, Subdivision 83A-B of the ITAA 1997 will apply to the Options acquired and pursuant to subsection 83A-20(1) of the ITAA 1997 the ESS interest will be acquired under an employee share scheme (for the reasons stated in the preceding paragraph) at a discount. However, Subdivision 83A-B will not apply if Subdivision 83A-C applies.

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 paragraph 130-90(1)(d) of the ITAA 1997 will be satisfied.

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

Subsection 130-90(2) of the ITAA 1997

Question 2 has been framed on the assumption that the Participants will acquire the Shares for the same or less than the cost base of the Shares in the hands of the EST.

Provided 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 or E7 happens, subsection 130-90(2) of the ITAA 1997 is also satisfied.

Under these circumstances, section 130-90 of the ITAA 1997 will operate to disregard a CGT event E5 or E7 capital gain or capital loss made by the Trustee or a beneficiary of the EST.