Edited version of your written advice

Authorisation Number: 1012729447067

Ruling

Subject: Company A Equity Plans

Question 1

Will the irretrievable contributions made pursuant to the Company A Employee Option Plan (AESOP) to Company B as trustee (the Trustee) for the Company A Employee Share Trust (the EST) to fund the acquisition of Company A shares by the EST in accordance with the EST deed, be assessable income of the EST under sections 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 of the EST at the time the Participants become absolutely entitled to the Company A shares under the AESOP be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Company A 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 period

Year ending 30 June 2013 - year ending 30 June 2017

Relevant facts and circumstances

Overview

One aspect of Company A's success has been its ability to attract and retain high quality employees. Developing suitable remuneration packages to recruit and retain personnel is an ongoing problem for Company A. The remuneration policy of Company A is designed to be competitive and equitable with the aim of aligning the economic interest of employees with those of its shareholders, by providing an opportunity for employees to earn significant rewards by acquiring an equity interest in the company based on creating shareholder value. Accordingly, as part of its remuneration package, Company A has implemented and operates the Company A Employee Option Plan (AESOP).

The purpose of Company A operating the AESOP is too primarily recognise and reward the ability and efforts of employees who have contributed to the success of Company A by providing an incentive to employees to achieve the long term objectives of Company A and to improve its overall performance.

To support the operation of the AESOP, Company A established the Company A Employee Share Trust (EST) pursuant to the Trust Deed for Company A Employee Share Trust entered into between Company A and Company C (Trust Deed) to facilitate the provision of shares in Company A to Eligible Employees (defined below) under the AESOP.

By way of Deed of Appointment and Removal of Trustee Company C was removed, and Company B was appointed, the trustee of the EST.

The applicant has stated that this scheme utilising the EST and to which this ruling relates is intended to provide greater flexibility to accommodate the long term incentive arrangement of Company A by:

• streamlining its approach to the administration of its plans by providing greater flexibility for Company A to accommodate the long term incentive arrangements both now and into the future as Company A continues to expand operations and therefore employee numbers

• offering capital management flexibility for Company A in that the EST can use the contributions made by Company A either to acquire shares in Company A on market or alternatively, to subscribe for new shares in Company A

• providing an arm's-length vehicle through which shares in Company A can be acquired and held on behalf of the relevant employee - this assists Company A to satisfy Corporate Law requirements relating to a company owning its own shares

Operation of the AESOP

The AESOP is governed by the Rules of the Company A Employee Option Plan (AESOP Rules).

Pursuant to the AESOP Rules an Eligible Employee may be granted options (Options) at the discretion of the Board of Directors, being the Board of Directors of Company A so comprised from time to time (the Board).

Pursuant to the Trust Deed, one Option represents one right to acquire a share in Company A (Company A share)

An Eligible Employee is defined in the AESOP Rules to mean a full-time or permanent part-time employee of any Group company listed in the AESOP and includes executive Directors.

An Invitation to Apply for Options given to an Eligible Employee will be extended on such terms and conditions as the Board decides, from time to time, including:

• the number of Options

• the Exercise Price (if any)

• the Exercise Period

• Vesting Conditions

• Performance Conditions (if any)

• the Restriction Period

• and any right or restriction attaching to the Options or Company A shares in respect of which the Options are exercisable being offered to the Eligible Employee

An Eligible Employee will be able to take up all (or a portion) of their entitlement. The number of Options not taken up will be forfeited irrevocably.

Options are not listed for official quotation on the Australian Securities Exchange (ASX) and are granted for nil consideration.

Where an Eligible Employee ceases to be an Eligible Employee by reason of the cessation of his or her employment with Company A for whatever reason, including redundancy, resignation or retirement (unless otherwise determined by the Board in its absolute discretion) all unexercised Options held will immediately lapse.

Where the Trustee holds shares on behalf of an Eligible Employee as a Shareholder (as defined in the AESOP Rules) pursuant to the AESOP:

• the dividends payable on those shares will be paid by Company A to the Trustee, and the Trustee will then pay any such dividend to the Shareholder as soon as practically reasonable after those dividends are paid by Company A to the Trustee

• each Shareholder may direct the Trustee by notice in writing as to how to exercise the voting rights attaching to Company A shares held on their behalf by the Trustee, either generally or in respect of a particular resolution, by way of proxy

Options may be exercised during pre-defined Window Periods in accordance with the AESOP Rules provided that, if applicable, certain pre-determined vesting hurdles and or/conditions have been satisfied.

An Eligible Employee to whom Options have been granted is referred to as a Participant in the singular, or as Participants in the plural.

Employee Share Trust

The EST was established for the sole purpose of acquiring shares for Australian employees of Company A pursuant to any employee equity plan established on behalf of Company A. It is operated in accordance with the Trust Deed.

The EST is funded by cash contributions from Company A for the acquisition of Company A shares in accordance with the Trust Deed and the AESOP Rules.

The structure of the EST and the AESOP Rules are such that Company A shares allocated to each employee will generally be transferred into the name of the relevant employee following receipt by the Trustee of a Notice of Withdrawal.

The Trustee is able to sell Company A shares on behalf of an employee where permitted to do so.

Pursuant to the Trust Deed 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 is not permitted to carry out activities which result in the Participants in the AESOP being provided with additional benefits other than the benefits that arise from any relevant plan rules.

Pursuant to the Trust Deed the Trustee of the EST is empowered to acquire Company A shares either on-market or via subscription for new shares in Company A.

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

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

Company A shares acquired by the Trustee are allocated to the relevant employees upon exercise of Options and the employees will become absolutely entitled to such shares from that point in time.

The Trustee will, in accordance with instructions received pursuant to the AESOP Rules, acquire, deliver and allocate Company A shares for the benefit of Participants provided that the Trustee receives, when required and necessary, sufficient payment from a Participant to subscribe for or purchase such shares and/or has sufficient unallocated trust shares available.

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 Company A shares are held in trust, the Participant will be entitled to dividend and voting rights. These shares may be subject to a sale restriction under an ASX administered holding lock. By written notice, Participants can apply for legal title to the appropriate Company A shares held in the EST to be transferred to them.

All funds received by the Trustee from Company A will constitute accretions to the corpus of the trust and no Participant will be entitled to receive such funds. The contributions will not be repaid to Company A unless they are used to subscribe for Company A shares.

Where an amount paid by Company A to the Trustee in respect of the acquisition of Company A shares for the benefit of a Participant is in excess of the amount required by the Trustee to acquire those shares, Company A may require the Trustee to apply such amount to acquire, deliver or allocate the shares in accordance with the Trust Deed, the relevant plan rules or the relevant Terms of Participation (as defined in the Trust Deed) or deposit the funds into any account opened and operated by the Trustee.

The Trustee of the EST holds all Company A shares pursuant to the AESOP on capital account.

The total period from the date the funds are contributed by Company A to the EST to the date that Company A shares are allocated to the employees by the Trustee upon vesting and exercise of the Options held under the AESOP will be less than 7 years.

The Trustee of the EST is an independent party and a member of the Computershare group of companies.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1936 Section 95

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 104-25

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Section 104-85

Income Tax Assessment Act 1997 Section 104-155

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 130-85

Income Tax Assessment Act 1997 Section 130-90

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

These reasons for decision accompany the Notice of private ruling for The Trustee for Company A Employee Share Trust. While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) defines net income in relation to a trust as follows, insofar as it is relevant:

net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions …

Subsection 6-5(1) states that your assessable income includes:

income according to ordinary concepts, which is called ordinary income

Further, subsection 6-10(1) states:

Your assessable income also includes some amounts that are not ordinary income.

Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5.

None of the provisions listed in section 10-5 are relevant in this situation. Therefore irretrievable contributions made by Company A to the Trustee will not be assessable income under section 6-10. They will only be included in the calculation of the net income of the EST under section 95 of the ITAA 1936 if they are assessable as income according to ordinary concepts under section 6-5.

The Recitals of the Trust Deed confirm that Company A established the EST for the purpose of holding Company A shares for the benefit of Participants who are, or will become, the beneficial owners of such shares pursuant to the AESOP and any other employee equity plans established in the future. The Trust Deed confirms that all contributions by Company A to the Trustee for the purpose of acquiring Company A shares, constitute accretions to the corpus of the EST. Further, pursuant to the Trust Deed the Trustee must, when directed by the Board, acquire shares for the purpose of enabling Company A to satisfy its obligations to allocate Company A shares to Participants. All the documentation provided demonstrates that the contributions received from Company A must only be used to acquire Company A shares in accordance with the terms of the Trust Deed and AESOP.

Accordingly, the irretrievable contributions made by Company A to the Trustee to acquire Company A shares will not be assessable income under section 6-5, but will constitute capital receipts of the Trustee, and not be assessable income of the EST pursuant to sections 6-5 or 6-10. This accords with the view expressed in ATO ID 2002/965.

Note that 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 as Trustee, Company A must pay to the Trustee such fees and reimburse such expenses incurred by the Trustee as Company A and the Trustee agree. Such receipts will be assessable income of the Trustee in contrast to the irretrievable contributions made to facilitate the acquisition of Company A shares.

Note also that income derived by the employment of the property that is the fund or corpus of the EST, and which the Trustee holds on trust will be income according to ordinary concepts (See Federal Commissioner of v. Everett (1980) 143 CLR 440; (1980) 10 ATR 608; 80 ATC 4076 for a discussion of the distinction between the trust income and corpus).

Question 2

Subsection 104-75(1) provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies), as against the trustee. Subsection 104-75(3) provides that the trustee will make a capital gain if the market value of the asset (at the time of the event) is more than its cost base, but will make a capital loss if that market value is less than the asset's reduced cost base.

Accordingly, where a Participant becomes absolutely entitled to Company A shares as against the Trustee, CGT event E5 will occur, and pursuant to subsection 104-75(3), the Trustee will make a capital gain or loss. However, section 130-90 operates to disregard that gain or loss where specified conditions are satisfied. It states:

130-90(1)

Disregard any *capital gain or *capital loss made by an *employee share trust, or a beneficiary of the trust, to the extent that it results from a *CGT event, if:

(a) the CGT event is CGT event E5 or E7; and

(b) the CGT event happens in relation to a *share; and

(c) the beneficiary had acquired a beneficial interest in the share by exercising a right; and

(d) the beneficiary's beneficial interest in the right was an *ESS interest to which Subdivision 83A-B or 83A-C (about employee share schemes) applied.

130-90(2)

Subsection (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) is defined in subsection 995-1 as having the meaning given by subsection 130-85(4).

Subsection 130-85(4) provides that an employee share trust for an employee share scheme (having the meaning given by subsection 83A-10(2)) 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).

An employee share scheme is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment.

The AESOP is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which rights to acquire shares in Company A (Options) are provided to employees in relation to their employment (see further discussion of the term 'employee share scheme' under the heading 'Paragraph 130-90(1)(d)' below).

Company A established the EST to facilitate the AESOP by acquiring Company A shares and allocating those shares to Participants, in order to satisfy the Options acquired under the employee share scheme. The beneficial interest in the Company A share is itself provided under an employee share scheme because it is provided under the same scheme under which the Options to acquire the Company A shares are provided to the Participant in relation to the Participant's employment, being an employee share scheme as defined in subsection 83A-10(2).

Therefore, paragraphs 130-85(4)(a) and (b) are satisfied because:

• the Trustee acquires Company A shares, and

• the Trustee 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 Participants in accordance with the governing documents of the scheme.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) 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), activities which are merely incidental, as set out in ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities, 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.

The Trust Deed provides that Company A and the Trustee: agree that the Trust will be managed and administered so that it satisfies the sole activities test for the purposes of subsection 139C(5) of the ITAA 1936 and be an 'employee share trust' as defined in subsection 995-1(1) of the ITAA 1997, as interpreted in ATO ID 2007/179.

For the avoidance of doubt, this statement is supported by the Recitals of the Trust Deed which provide that the Trust was established by Company A to facilitate the AESOP and for the purposes of holding Company A shares for the benefit of Participants who are, or will become, the beneficial owners of Company A shares pursuant to the AESOP.

The Trust Deed makes it clear that the Trustee can only use the contributions received from Company A for the acquisition of Company A shares for Participants in accordance with the AESOP. To this end, all other duties/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 Company A shares to be acquired for Participants of the AESOP.

Accordingly, paragraph 130-85(4)(c) is also satisfied because the EST satisfies the definition of an employee share trust in subsection 130-85(4), as the Trust Deed does not provide for the Trustee to participate in any activities which are not considered merely incidental to a function of managing the employee share scheme and administering the trust.

Therefore, the EST is an employee share trust, as defined in subsection 995-1(1), 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) and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c).

Paragraph 130-90(1)(a)

CGT event E5 is the CGT event that will apply under the terms of the AESOP at the time the Participant becomes absolutely entitled to the Company A shares as against the Trustee. Therefore paragraph 130-90(1)(a) will be satisfied.

Paragraph 130-90(1)(b)

Subsection 995-1(1) defines a share in a company to mean a share in the capital of a company. An ordinary share in Company A held by the Trustee and to which a Participant is entitled upon exercise of an Option is a share in the capital of a company i.e. Company A. Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph.

Paragraph 130-90(1)(c)

Paragraph130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a share (in Company A) by exercising a right (Option) granted under the AESOP.

Paragraph 130-90(1)(d)

Subsection 83A-20(1) of Subdivision 83A-B 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). 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), subsection 995-1(1) 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 AESOP is an employee share scheme for the purposes of Division 83A 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 Company A share, is provided to a Participant in relation to their employment by Company A as an Eligible Employee pursuant to the AESOP rules. The Options are acquired at no cost, however to exercise the Option a Participant may be required to pay an exercise price which, if paid will be less than the market value of a Company A share.

Accordingly, prima facie Subdivision 83A-B will apply to Options acquired under the AESOP as pursuant to subsection 83A-20(1) the ESS interest (i.e. Options issued under the AESOP) will be acquired under an employee share scheme (for the reasons stated immediately in the preceding paragraph) 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) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C), will depend on which of the additional requirements in Subdivision 83A-B or Subdivision 83A-C have been satisfied. Under either circumstance paragraph 130-90(1)(d) will be satisfied.

Accordingly, all the conditions in subsection 130-90(1) have been satisfied.

Provided then, that the Participant does not acquire the beneficial interest in the Company A share for more than its cost base in the hands of the EST at the time that CGT event E5 happens, subsection 130-90(1) will apply.

Under these circumstances, section 130-90 operates to disregard any capital gain or loss made by the Trustee on any Company A share when a Participant becomes absolutely entitled to that share.

CGT Event E7

Subsection 104-85(1) provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 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 provides:

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

The Participant, on allocation of the Company A shares by the Trustee, becomes absolutely entitled to those shares. In accordance with clause 3.1 of the Trust Deed each Participant is absolutely entitled to any Company A shares held by the Trustee on their behalf, and is entitled to the same rights in respect of those shares as if he or she was the legal owner of the shares (subject to the AESOP and terms of participation).

Once the Participants are absolutely entitled to the Company A shares held on their behalf by the EST, section 106-50 will deem the disposal of them by the Trustee to be done by the Participants.

Therefore, section 106-50 will apply, such that if the Trustee disposes of the Company A shares under the AESOP (by way of transfer to Participants), the Trustee will not make a capital gain or capital loss under CGT Event E7.