Edited version of your written advice

Authorisation Number: 1012919416241

Date of advice: 7 December 2015

Ruling

Subject: Employee share schemes

Question 1

Will the Commissioner confirm that the Company's contributions to the Trustee, as trustee for the Trust to fund the company's employee share plan will not be assessable income of the Trust pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 ("ITAA 1997"), Division 6 of the Income Tax Assessment Act 1936 ("ITAA 1936") or any other provisions of the ITAA 1997 or ITAA 1936?

Answer

Yes

Question 2

Will the Commissioner confirm that the Trustee will not derive a capital gain when the employee becomes absolutely entitled to the shares on exercise of his/her rights to acquire shares, by reason that the Trust is an employee share scheme trust pursuant to the employee share scheme provisions and the capital gains tax provisions of the ITAA 1936 and the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

From 1 July 20XX to 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This description of facts is based on the following documents, which form part of and are to be read with this description:

• Your private ruling application (and appendices) lodged to the ATO.

• Plan Rules.

• Trust Deed.

Background

The Company is listed on the ASX.

The Company has established a Performance Rights and Options Plan ("Plan"), an employee share plan as part of its long-term strategy of creating shareholder wealth. The Company has established the Plan in accordance with governing rules ("Plan Rules").

The Company has also established an employee share scheme trust ("Trust") for the purpose of obtaining shares for the benefit of participating senior executives. The Company intends that the Trust will be available to facilitate the requirements of any future equity plans it implements.

Plan

Under the Plan, senior executives are provided with performance rights, being a right to acquire shares in the future at no cost, or options, being a right to acquire shares in the future on payment of an exercise price. Both performance rights and options are subject to the satisfaction of any vesting conditions.

The purpose of the plan is to assist in the reward, retention and motivation of eligible participants, and attract new employees. The Plan will facilitate the Company's long-term strategy of creating shareholder wealth by:

• Rewarding hard work of senior executives in a way that is competitive, market related and cost-effective for the business;

• Motivating and promoting long-term retention of senior executives in the Company;

• Reflecting importance of senior executives to the future success of the Company;

• Enabling the executives to benefit in the long term growth and ownership of the Company by participating in the Plan;

• Attracting new executive talent to achieve the Company's strategy.

Trust

The Company's reasons for utilising a Trust include:

• The Trust provides employees with knowledge that the shares, and any incidental dividend income or associated rights, are held independently of the Company. Further the trustee has a fiduciary obligation to act in the interests of the beneficiaries.

• The Trust enables shares to be acquired progressively over time either on-market or by subscription.

• The Company can manage its cost and share capital position.

• The Trust provides opportunity to improve cash flow planning, as it gives the Company flexibility to determine the most appropriate time to make contributions.

• The Trust is the most appropriate vehicle to be used to acquire shares and accumulate dividend income during the vesting period.

• The Trust enables easier administration of the Plan.

The relevant features of the Trust are:

• The sole purpose and activities of the Trust are limited to obtaining shares for the benefit of the participants in the Plan and other incidental activities (such as distributing dividends to employees and meeting the administrative costs of the Trust).

• The Trustee must use any funds contributed to the Trust to acquire shares to provide to the employees of the Company in satisfaction of any share or right grant.

• The contributions made to the Trust cannot be refunded, repaid or returned to the Company.

• The Trustee has all powers that are legally permissible for the Trustee to exercise, including the power to establish and/or support the employee share plan.

• The trustee has the power to acquire shares by an on-market purchase, by subscribing for shares in the Company, or through a combination of both.

• The Trustee has the power to sell, allocate or transfer shares in accordance with the plan rules.

• The Trustee does not have the power to do anything that may cause it to fail the definition of an employee share trust in section 130-85(4) of the ITAA 1997.

• The beneficiaries of the Trust are participants who participate in the Company's employee share plan, a trust established and maintained for the benefit of all employees of the tax consolidated group, or other employees participating in the long term incentive plan.

• The Company will not be a beneficiary under the Trust Deed. The Company has no legal or beneficial entitlement to any of its shares forming part of the Trust fund at any time, and may not acquire such an interest.

• The Trustee has the discretion to distribute any capital receipts, dividends, distributions or other entitlements received in respect of any shares to the beneficiaries of the Trust. No employee will have beneficial entitlement to the shares or income of the Trust unless the Trustee exercises its discretion to distribute same.

• To the extent the Trust derives interest or dividend income from holding shares that is in excess of the costs of the Trust, such income may be used to acquire more shares to deliver to employees or may be distributed to employees who have become beneficially entitled to the income.

• All the shares acquired by the Trust will be ordinary shares in the Company. The shares acquired by the Trustee will be registered in the name of the Trustee as the legal owner of the shares.

• At all times the Trustee's decision will be made in accordance with the Trust Deed and in fulfilment of the Trustee's fiduciary duty to the beneficiaries.

Under the Trust Deed, contributions to the Trust are made on the following basis:

• The Trust may acquire shares in the Company determined appropriate and necessary by management;

• The funds are transferred to the Trust to enable it to acquire shares in the Company;

• The amount of contributions made to the Trust will depend on the number of rights granted to employees, the estimated forecast of performance rights vesting and the number of shares held at that time by the Trustee.

• To ensure contributions to the Trust are timely, the CEO of the Company and any nominees of the CEO have the authority to approve contributions.

• Management will review forecasts and provide periodic recommendations to the Board;

• The Board will provide its instructions to the Trustee on how the Trustee should acquire the shares, i.e. whether by market purchase or subscription;

• Trustee will consider the Board's instructions, have regard to its broader obligations under the Trust Deed and trust law and act accordingly;

• If Trustee's course of action includes subscription, then the Company must issue to the Trustee the requisite number of shares on behalf of the participants.

The Company has already made a number of contributions to the Trust earlier this year. The Company proposes to make further contribution to the Trust prior to the vesting date in order to ensure the Trust will have appropriate shares having regard to potential vesting in 20XX and subsequent years.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

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 10-5

Income Tax Assessment Act 1997 Division 83A

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-10(2)

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 130-85

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

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

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

Reasons for decision

Summary

The contributions by the Company to the Trustee to fund the company's employee share plan will not be assessable income of the trust.

Detailed reasoning

Section 95 of the ITAA 1936 defines the 'net income of the trust estate' as the total assessable income of the trust, calculated as if the trust were a taxpayer in respect of that income, less all allowable deductions.

Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called ordinary income. Further, section 6-10 of the ITAA 1997 provides that assessable income also includes statutory income.

None of the provisions listed in section 10-5 of the ITAA 1997 are relevant in this situation and therefore irretrievable contributions will be net income of the trust only if they are income according to ordinary concepts.

Income according to ordinary concepts is not defined in the ITAA 1997. However, there is a substantial body of case law which discusses factors which indicate whether an amount has the character of income according to ordinary concepts.

In GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not acquired in carrying on a business.

Under the Plan, the Trustee must use any funds contributed to the Trust to acquire shares to provide to the employees of the Company in satisfaction of any share or right grant.

Consistent with ATO ID 2002/965, as contributions to the Trustee are used in accordance with the Trust Deed and Plan Rules for the sole purpose of providing shares under the company's employee share scheme, contributions will constitute capital receipts of the Trustee, and will not be assessable income.

Question 2

Summary

A capital gain or capital loss that arises for the Trustee at the time the employees become absolutely entitled to the shares will be disregarded under section 130-90 of the ITAA 1997, provided the employees acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee.

Detailed reasoning

Under section 130-90 of the ITAA 1997, any capital gain or capital loss made by an employee share trust will be disregarded to the extent that:

1. it results from a CGT event E5 or E7;

2. the CGT event happens in relation to a share;

3. the beneficiary had acquired a beneficial interest in the share by exercising a right;

4. the beneficiary's beneficial interest in the right was an ESS interest to which Subdivision 83A-B or 83A-C applied; and

5. the beneficiary did not acquire the beneficial interest in the share for more than its cost base in the hands of the Trust at the time the CGT event happens.

Employee share trust

The term 'employee share trust' is defined in subsection 995-1(1) of the ITAA 1997 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' (ESS) is a trust whose sole activities are:

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

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

(i) the company; or

(ii) a subsidiary of the company; and

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

An employee share scheme is defined in subsection 83A-10(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. Subsection 83A-10(1) defines an ESS interest to be a beneficial interest in a share in the company, or a right to acquire a beneficial interest in a share in the company.

Under the Plan, performance rights are granted to employees in relation to the employee's employment, providing the employees a right to acquire a beneficial interest in a share in the Company. The Plan is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which performance rights and ultimately shares are provided to eligible employees in relation to the employee's employment.

The Trust Deed provides that the Trust will be managed and administered so that it is an employee share trust. The sole activities of the Trust are receiving funds from the Company for the purpose of acquiring shares, holding those shares until they vest in the employee and then transferring them to the employee in accordance with the Trust Deed and relevant Plan Rules. The Trust also has the power to carry out other clerical and administrative functions, which are merely incidental to the operation of the Trust. ATO ID 2010/108 explains the activities which are considered to be merely incidental.

Therefore, the Trust is an employee share trust as the activities of the Trust involve acquiring shares and allocating beneficial interests in those shares to employees. The other activities of the Trust are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

CGT event E5 happens in relation to a share

Under section 104-75 of the ITAA 1997, CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust against the trustee.

The Trustee, at the direction of the Board, must transfer to any participant nominated by the Board the number of plan shares specified by the Board. Pursuant to the Trust Deed, the Trustee must do all things required by it to transfer legal title in the Trust Shares to a Participant on whose behalf Trust Shares are held.

Therefore, once the Trustee transfers shares from the Trust to the participant, the participant of the employee share plan becomes absolutely entitled to those shares and CGT event E5 occurs.

Acquisition of beneficial interest in share

Under the Plan, performance rights are granted to the participants, which provide the participants a right to acquire a beneficial interest in a share in the Company, being a fully paid ordinary share in the capital of the Company.

ESS interest to which Subdivision 83A-B or 83A-C applies

Pursuant to subsections 995-1(1) and 83A-10(1) of the ITAA 1997, an ESS interest in a company is a beneficial interest in either a share in the company or a right to acquire a beneficial interest in a share of the company. As discussed above, the performance rights are ESS interests.

Under the Plan, ESS interests are provided to participants in relation to their employment. The ESS interests will be acquired at a discount as the participants will acquire the rights for no consideration. Therefore, either subdivision 83A-B or 83A-C will apply to the rights acquired under the Plan.

Acquisition at less than cost base of Employee Share Trust

The participants do not acquire the beneficial interest in the shares for more than the cost base to the Trustee, as the participants pay nothing for converting the rights to shares. Although an exercise price is paid by the participants if an option is exercised to acquire shares, it is assumed that the exercise price will be less than or equal to the cost base to the trustee.

Therefore, section 130-90 of the ITAA 1997 will disregard any capital gain or capital loss made by the Trustee, if the participant does not acquire their beneficial interest in the share for more than its cost base in the hands of the Trust at the time the CGT event E5 happens.