Edited version of your written advice

Authorisation Number: 1012681043885

Ruling

Subject: Employee share trust (EST)

Question 1

Will a capital gain or loss that arises for the trustee at the time the participant becomes absolutely entitled to the shares under the employee share plans (ESS) be disregarded under section 130-90 of the ITAA 1997 if the participant acquires the shares for the same amount as or less than the cost base of the shares in the hands of the trustee?

Answer

Yes.

Question 2

Is the trustee a qualified person for the purposes of paragraph 207-145(1)(a) of the ITAA 1997 if the shares are held for the requisite period?

Answer

Yes.

Question 3

Will contributions from the company be assessable income of the employee share trust (EST), pursuant to either section 6-5 or section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

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

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on

1 September 2009

This ruling applies for FBT purposes to the following periods

Year ended 31 March 2015

Year ended 31 March 2016

Year ended 31 March 2017

Year ended 31 March 2018

Year ended 31 March 2019

Relevant facts and circumstances

The taxpayer company (the company) is a large Australian public company.

The company submitted an application for a private binding ruling (application) relating to its ESS.

The ESS is considered an important component of the company's employment offer.

The company established an EST to manage and administer its ESS.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 Division 1A of Part IIIAA

Income Tax Assessment Act 1936 section 160APHN (repealed)

Income Tax Assessment Act 1936 subsection 160APHN(1) (repealed)

Income Tax Assessment Act 1936 subsection 160APHN(5) (repealed)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 6-10(1)

Income Tax Assessment Act 1997 section 10-5

Income Tax (Transitional Provisions) Act 1997 section 83A-5

Income Tax (Transitional Provisions) Act 1997 subsection 83A-5(1)

Income Tax (Transitional Provisions) Act 1997 subsection 83A-5(2)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

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

Income Tax Assessment Act 1997 section 83A-10(2)

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 section 83A-20

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

Income Tax Assessment Act 1997 section 83A-35

Income Tax Assessment Act 1997 Subdivision 83A-C

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 Subdivision 130-D

Income Tax Assessment Act 1997 subsection 130-85(4)

Income Tax Assessment Act 1997 paragraph 130-85(4)(a)

Income Tax Assessment Act 1997 paragraph 130-85(4)(b)

Income Tax Assessment Act 1997 paragraph 130-85(4)(c)

Income Tax Assessment Act 1997 section 130-90

Income Tax Assessment Act 1997 section 130-90(d)

Income Tax Assessment Act 1997 subsection 130-90(1)

Income Tax Assessment Act 1997 paragraph 130-90(1)(a)

Income Tax Assessment Act 1997 paragraph 130-90(1)(b)

Income Tax Assessment Act 1997 paragraph 130-90(1)(c)

Income Tax Assessment Act 1997 paragraph 130-90(1)(d)

Income Tax Assessment Act 1997 subsection 130-90(2)

Income Tax Assessment Act 1997 section 207-145

Income Tax Assessment Act 1997 paragraph 207-145(1)(a)

Income Tax Assessment Act 1997 section 207-150

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Corporations Act 2001

Corporations Regulations 2001

Reasons for decision

Summary

Section 130-90 of the ITAA 1997 operates to disregard that gain or loss where the specified conditions are satisfied.

Detailed reasoning

Section 130-90 CGT event E5 and E7 exemption under Section 130-90

Section 130-90 of the ITAA 1997 ensures that any capital gain or loss under CGT event E5 or E7 that happens in relation to shares held by an employee share trust are disregarded.

Where a participant becomes absolutely entitled to the shares as against a trustee, CGT event E5 will occur and therefore under section 104-75 of the ITAA 1997, the trustee will make a capital gain or loss. CGT Event E7 will happen at the time the trustee disposes of shares according to the relevant trust deed and in satisfaction of a beneficiary's interest. However, section 130-90 of the ITAA 1997 operates to disregard that gain or loss where the specified conditions are satisfied:

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 (EST)

The term 'employee share trust' referred to in subsection 130-90(1) of the ITAA 1997 is defined in section 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 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.

Application of the facts

The ESS comprises an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which offers to acquire shares in the company are provided in relation to the employee's employment (see further discussion of term 'employee share scheme' under the heading 'Paragraph 130-90(1)(d) of the ITAA 1997' below).

Under the ESS the employer has established the EST to acquire shares in the company and to allocate those shares to employees to satisfy the invitations, awards and offers under the scheme. The beneficial interest in the share is itself provided under an ESS because it is provided under the same scheme under which the opportunities 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 general powers of the trustee are set out in Appendix C of the trust deed. Other clauses effectively read down the general powers given to the trustee so as to ensure that the general powers are exercised for the purposes of the ESS, thereby making it clear that the trustee can only use the contributions received exclusively for the acquisition of shares for eligible employees. To this end, all other duties and general powers listed in the trust deed are considered to be merely incidental to the functions of the trustee in relation to its dealing with the shares to be acquired for eligible employees for the purposes of the ESS.

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 and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c).

CGT event E5

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

Draft Taxation Ruling TR 2004/D25 provides that the core principle underlying the concept of absolute entitlement in the CGT rules in the ability of a beneficiary who has a vested and indefeasible interest in the trust asset to be transferred to them or as they direct.

Subdivision 130-D of the ITAA 1997 treats an employee who acquires an ESS interest through an EST to be absolutely entitled to the share or right to which the ESS interest relates from the time that they acquire the ESS interest (subsection 130-85(2)). The deemed absolute entitlement happens when the ESS interest is granted to the employee, and it happens regardless of any risk of forfeiture or disposal restrictions applying to the ESS interest.

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.

Subsection 130-90(1A) of the ITAA 1997 - Shares held for future acquisition under employee share schemes

Under subsection 130-90(1A) of the ITA 1997 any capital gain or capital loss made by an employee share trust to the extent that it results from a CGT event will be disregarded, if:

(a) immediately before the event happens, an ESS interest is a CGT asset of the trust; and

(b) either of the following subparagraphs applies:

(i) the event is CGT event E5, and the event happens because a beneficiary of the trust becomes absolutely entitled to the ESS interest as against the trustee;

(ii) the event is CGT event E7, and the event happens because the trustee disposes of the ESS interest to a beneficiary of the trust; and View history reference

(c) Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest.

ESS Shares Offer

Under the ESS, eligible employees are granted or invited to acquire shares in the company, which will make contributions to the trustee in order to allow it to either subscribe for shares from the company or acquire them on-market to satisfy the offers made to the eligible employees under the relevant share plans.

Subsection 130-90(1A) of the ITAA 1997 provides that any capital gain or loss made by an employee share trust is disregarded where it results from a CGT event if immediately before the event happens an ESS interest is a CGT asset of the trust and a beneficiary of the trust becomes absolutely entitled to the ESS interest (CGT event E5), or the trustee disposes of the ESS interest to a beneficiary of the trust (CGT event E7).

Subparagraph 130-90(1A)(a) of the ITAA 1997 is satisfied as the shares held by the trust are ESS interests which are CGT assets of the EST.

CGT events E5 and E7 occur at the time of allocation of shares to eligible employees as a result of the offers. Therefore, subparagraph 130-90(1A)(b) of the ITAA 1997 is satisfied.

The ESS is comprised of share plans that are employee share schemes for the purpose of Division 83A of the ITAA 1997 as each share offer is an arrangement under which the ESS interest (i.e. the beneficial interest in a Share) is provided to an eligible employee in relation to their employment by the company.

Subsection 83A-20(1) of Subdivision 83A-B of the ITAA 1997 provides:

"This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount."

Prima facie, Subdivision 83A-B of the ITAA 1997 will apply to the shares acquired under the offers, as pursuant to subsection 83A-20(1) of the ITAA 1997, the ESS interests will be acquired under an employee share scheme at a discount.

Prima facie, Subdivision 83A-C of the ITAA 1997 will apply to the shares acquired under the offers, as pursuant to Subdivision 83A-C of the ITAA 1997, the shares are subjected to real risk of forfeiture.

Therefore, whether a participant is taxed upfront on the 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 whether the additional requirements of Subdivision 83A-B and Subdivision 83A-C of the ITAA 1997 have been satisfied. Under either circumstance, subparagraph 130-90(1A)(c) of the ITAA 1997 will be satisfied.

Conclusion

As all the conditions in subsection 130-90(1A) of the ITAA 1997 are satisfied and provided the participants do not acquire the beneficial interest in the share for more than its cost base in the hands of the trustee, the trustee should be exempt from any capital gain or loss when CGT event E5 or E7 happens in relation to the Share.

Subsection 130-90(1) of the ITAA 1997 - Shares held to satisfy the future exercise of rights acquired under employee share schemes

Under subsection 130-90(1) of the ITAA 1997 any capital gain or capital loss made by an employee share trust to the extent that it results from a CGT event will be disregarded, 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.

Under subsection 130-90(2) of the ITAA 1997, subsection 130-90(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.

Executive Shares Rights Offer

In the case of the share rights offered under the executive plan, CGT event E5 or event E7 occurs when the shares are allocated to the participants, i.e. when the participants become absolutely entitled to the shares after the trustee transfers the shares to their respective account. Therefore paragraph 130-90(1)(a) of the ITAA 1997 will be satisfied.

Section 995 of the ITAA 1997 defines a share to mean a share in the capital of a company. A share held by the trustee and to which a participant is entitled upon exercise of a right is a share in the capital of the company. Accordingly, paragraph 130-90(1)(b) of the ITAA 1997 is satisfied as happens in relation to a share for the purposes of that paragraph.

Paragraph 130-90(1)(c) of the ITAA 1997 is satisfied as a participant will have acquired a beneficial interest in a share (in the company) by exercising a right granted under the executive share rights offer.

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, as follows:

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 executive share rights offer is an employee share scheme for the purposes of Division 83A of the ITAA 1997 as it is an arrangement (scheme) under which an ESS interest i.e., 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 or its subsidiaries.

Accordingly, prima facie, Subdivision 83A-B of the ITAA 1997 - Immediate inclusion of discount in assessable income, will apply to share rights acquired under the executive share rights offer pursuant to subsection 83A-20(1) of the ITAA 1997 as the ESS interests will be acquired under an employee scheme at a discount.

Prima facie, Subdivision 83A-C of the ITAA 1997 will apply to the shares acquired under the executive share rights offer, as the shares are subjected to real risk of forfeiture.

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 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 EST at the time that CGT event E5 or E7 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 under CGT event E5 or E7 by the trustee on any share when a participant becomes absolutely entitled to that share.

Question 2

Summary

If the Shares are held for the requisite period the trustee is a qualified person.

Detailed reasoning

The wording of sections 207-145 and 207-150 of the ITAA 1997 makes it clear that the rules in former Division 1A of Part IIIAA of the ITAA 1936 must be applied in determining whether a person is a 'qualified person' for the purposes of these provisions in respect of a franked distribution. Former subsection 160APHU(1) of the ITAA 1936 provides that where the trustee is not a qualified person in relation to a dividend, the beneficiary will also not be a qualified person in relation to that dividend.

Therefore, a gross-up and tax credit entitlement for franked distributions received indirectly through a trust requires a trustee receiving the franked distribution to be a qualified person in relation to the distribution for the purposes of former Division 1A of Part IIIAA of the ITAA 1936. (Paragraph 207-145(1)(a) of the ITAA 1997)

Former Division 1A of Part IIIAA of the ITAA 1936 introduces two rules which must be satisfied before a taxpayer is entitled to a franked distribution. A taxpayer who satisfies both rules is a 'qualified person' in relation to the dividend.

The first rule is the 'holding period rule' under which the taxpayer must hold shares at risk for a continuous period of more than 45 days.

Former section 160APHL of the ITAA 1936 sets out when a beneficiary of a trust to whom dividend income has been distributed has an 'at-risk' position in the shares held by the trust. However, that section does not apply when determining whether the trustee itself has an 'at-risk' position.

The applicant has advised that the trustee does not intend to take any position to hedge against the movement in the value of the shares it holds. Furthermore, the trust deed and the ESS rules do not of themselves amount to any position taken by the trustee, long or short, for the purposes of former section 160APHJ of the ITAA 1936. The conditional rights of participants to shares that arise from the ESS restrictions do not constitute positions of the trustee. As the trust beneficiaries commonly have at least a conditional right to trust property, the legislation could not have intended that the rights of the beneficiaries would constitute the position of the trustee.

The net position of a person with respect to shares is determined in accordance with the former subsection 160APHJ(5) of the ITAA 1936. However, former subsection 160APHJ(2) of the ITAA 1936, in defining the meaning of position provides:

....if a share, or an interest in a share, is an employee share scheme security, a condition attached to the share or interest, or a term of the document that created the interest, that prevents the holder of the share or interest from disposing of it or could result in the share or interest being forfeited is not a position in relation to the share or interest.

The Shares acquired by a participant or the trustee will be employee share scheme securities, as defined in former section 160APHD of the ITAA 1936, as they will be qualifying shares for the purposes of former Division 13A of Part III of the ITAA 1936. Although the definition refers to Division 13A of Part III of the ITAA 1936, which only applies to an ESS interest awarded before 1 July 2009 (i.e. it has not been legislatively updated to refer to Division 83A of the ITAA 1997), the awards under the ESS should meet the conditions set out in that definition.

As the terms of the plan do not give rise to a position that may affect the calculation of the net position with respect to the shares, the operation of the plan itself will not consequently result in a material diminution of risks or opportunities for gain with respect to the shares.

Therefore, in the absence of any other long or short positions in respect of the shares that may result in a material diminution in the risk of loss or opportunity for gain, the plan will not prevent a participant or the trustee from being a qualified person for the purposes of section 207-145 of the ITAA 1997 with respect to dividends received by them on shares acquired under the plan, provided the shares are held for the requisite period of time during the relevant qualification period.

The second rule that has to be satisfied is the 'related payments rule'. In order to be a qualified person in relation to a dividend (or distribution), the shareholder was at risk in respect of the shares for the relevant period or the taxpayer or an associate must not make a related payment in respect of the dividend (or distribution).

Former section 160APHN of the ITAA 1936 explained a 'related payment'. Former subsection 160APHN(5) of the ITAA 1936 provided that the distribution by a trustee of a dividend to a beneficiary did not constitute the making of a related payment in respect of the dividend, which in the circumstances of this ruling means that the second rule is satisfied.

Therefore, if the Shares are held for the requisite period the Trustee is a qualified person for the purposes of paragraph 207-145(1)(a) of the ITAA 1997.

Question 3

Summary

The irretrievable cash contributions made by the company to the trustee to fund the acquisition of shares by the EST 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.

Detailed reasoning

Section 95 of the 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 ITAA 1997 states:

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

and 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 of these provisions, see section 10-5.

None of the provisions listed in section 10-5 of the ITAA 1997 is relevant to the facts and circumstances of this ruling and therefore irretrievable contributions made by the company to the EST will not be assessable income under section 6-10 of the ITAA 1997. They will only be included in the calculation of the net income of the trust under section 95 of the ITAA 1936, if they are assessable as income according to ordinary concepts under section 6-5 of the ITAA 1997, which is considered in the following section of the reasons for decision.

Pursuant to the trust deed, all contributions by the company to the EST for the purpose of acquiring shares constitute accretions to the corpus of the EST. Furthermore, pursuant to clauses of the trust deed the trustee must, when directed by the company, acquire shares on behalf of participating employees and use the contributions made by the company and the employees to do so.

The general powers granted to the trustee pursuant to the trust deed must be exercised only for the purposes of the EST and only to give effect to the plans which the EST supports. To this end, the contributions received from the company and participating employees must, therefore, only be used to acquire shares in accordance with the terms of the trust deed and the ESS.

Accordingly, the irretrievable contributions made by the company to the trustee to acquire shares will not be assessable income under section 6-5 of the ITAA 1997, but will constitute capital receipts of the trustee. Therefore, the irretrievable cash contributions made by the company to the trustee of the EST to fund the acquisition of shares by the EST 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. This accords with the view expressed in ATO ID 2002/965.

The trust deed provides that whilst the trustee is not entitled to receive any fees, commissions or remuneration in respect of the performance of its obligations, the company may pay to the trustee from its own resources any fees, commission or remuneration as the company and the trustee may agree, from time to time. Such receipts will be assessable income of the trustee in contrast to the irretrievable contributions made to facilitate the acquisition of shares.