Edited version of your written advice

Authorisation Number: 1012994082667

Date of advice: 7 April 2016

Ruling

Subject: Employee Share Scheme

This ruling applies to the beneficiaries of the trust and to the trustee and to any future trustees, for as long as the ruling remains current.

Question 1

Will the irretrievable cash contributions by Company A Limited (Company A) or any subsidiary member of the Company A tax consolidated group to Company B Pty Ltd (Trustee) as trustee for the Company A Limited Employee Share Trust (Company A Share Trust) to fund the acquisition of Company A shares by the Trustee for the purposes of the Share Rights Plans (SRP), the Former Share Rights Plans (the Former SRP) and the Employee Salary Sacrifice Share Plan (the Salary Sacrifice Plan) be assessable income of the Trust 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 of the Company A Share Trust at the time the Participants become absolutely entitled to Company A shares under the SRP, the Former SRP or the Salary Sacrifice Plan (CGT event E5) 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:

Income tax year ending 30 June 2016

Income tax year ending 30 June 2017

Income tax year ending 30 June 2018

Income tax year ending 30 June 2019

Income tax year ending 30 June 2020

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company A (Company A) is a resources company listed on the Australian Securities Exchange (ASX).

Company A's remuneration strategy seeks to build a performance orientated culture by attracting and retaining the best possible people to align with driving increased shareholder value. A key principle on which this strategy is based is providing employees with high levels of share ownership to support alignment to the long term goals of the organisation.

As part of its overall employee remuneration strategy, in addition to fixed remuneration, Company A offers certain employees and executives payments of both cash and shares upon satisfaction of certain performance conditions. This is implemented through the Share Rights Plans (the SRP) and the Former Share Rights Plans (the Former SRP).

Company A also allows eligible employees to participate in a salary sacrifice arrangement to obtain shares in Company A through the Company A Employee Salary Sacrifice Share Plan (the Salary Sacrifice Plan).

Share Rights Plans (the SRP)

Company A operates three Share Rights Plans. The Share Rights Plan Rules (SRP Rules) provide the terms and conditions under which each of the three Share Rights Plans is governed.

Broadly, the SRP Rules operate as follows:

Eligible employees are issued invitations by the Company A Board of Directors (the Board), to apply for a grant of Share Rights which vest according to performance criteria. The invitation will outline the number of Share Rights offered and the performance conditions (Rule A of the SRP Rules).

Once the eligible employee has received the invitation, they may accept the invitation in accordance with the instructions accompanying the invitation, unless the Board determines otherwise. The Board may also treat the conduct of an eligible employee in respect of an invitation as valid acceptance of that invitation (Rule B of the SRP Rules).

The Share Rights will be granted to eligible employees (who will then be Participants) for nil consideration (Rule C of the SRP Rules).

The satisfaction of the performance conditions shall determine the proportion of Share Rights which vest to the Participant. Satisfaction of the performance conditions will be determined by the Board at the end of the performance period (Rule D of the SRP Rules).

The Share Rights will vest at the end of the performance period, subject to the satisfaction of the performance conditions. If there is a Change of Control Event (Rule E of the SRP Rules), or upon retirement, retrenchment or death of the participant (Rule F of the SRP Rules) the Board has discretion as to how deal with the Participant's Share Rights, regardless of whether vesting and performance conditions have been met.

Share Rights can lapse in a number of ways. It can occur by lapsing of the Share Right in accordance with its terms, the receipt of a notice from the Participant to the effect that they have elected to surrender the Share Right or if the Board determines that the Participant has acted fraudulently, dishonestly or wilfully breached the Participant's duties. The Share Rights could also lapse according to another provision of the SRP Rules or in accordance with the terms of an invitation (Rule G of the SRP Rules).

Rule H of the SRP Rules ensures that all Company A shares issued on the exercise of a Share Right will rank equally with other Company A shares then on issue.

The Share Rights will vest at the end of the performance period, subject to the Participant satisfying the performance conditions. Once the Share Rights vest and are automatically exercised or following the exercise of a Vested Right, the participant will be entitled to shares in the company (one ordinary share for every right). The shares will be held in the Company A Share Trust on behalf of the Participant subject to conditions as specified in the SRP Rules. At the time these conditions are satisfied, the Participant will become eligible to withdraw the shares from the Company A Share Trust.

Participants are subject to transfer restrictions under the SRP Rules. A Participant may not deal with a Company A share acquired under the SRP until the end or any period specified by the Board in the invitation or the end of any other period determined by the Board in accordance with applicable law (Rule I of the SRP Rules).

The key provisions of the three Share Rights Plans are as follows:

Company A Executive Incentive Plan (the Executive Plan)

Participants in the Executive Plan are eligible executives and senior staff of Company A and its Employer Entities.

The key objectives of the Executive Plan are to:

• ensure the focus of executives on delivery of results that exceed performance expectations of the Board and shareholders;

• increase alignment of executive and shareholder interests through increased executive share ownership; and

• provide market competitive rewards if performance expectations are achieved.

The Executive Plan offer comprises 50 per cent cash and a minimum 50 per cent share rights (Share Rights) to ordinary Company A shares quoted on the ASX (Maximum Award). Participants may elect to increase the weighting applied to the Share Rights up to 100 per cent of their Maximum Award, which will proportionally decrease the cash component.

Upon acceptance of an Executive Plan offer, a Participant will be granted the number of Executive Plan Share Rights consistent with their elected weighting.

The Executive Plan performance period will commence on 1 July and will conclude on 30 June with the final determination of a Participant's Executive Plan award made in August. As soon as practicable following that determination, the Participant will be notified of the actual cash value and number of Executive Plan Share Rights that will vest.

On assessment of the performance measures, a Participant's Executive Plan Share Rights will become vested rights (Vested Rights) which can be exercised to acquire ordinary Company A shares quoted on the ASX at the Participant's discretion subject to the conditions set out in Company A's Securities Trading Policy. Any unvested Share Rights lapse where performance targets are not met.

The Executive Plan operates entirely at the discretion of the Board and may be terminated, suspended or amended at any time, in its entirety or in part, in relation to any or all Participants.

The Executive Plan offer and grant of Share Rights does not automatically entitle a Participant to an award. The actual cash value and number of Company A shares to which they may become entitled will depend on:

• the degree to which the Executive Plan performance measures are satisfied over the Executive Plan annual performance period (1 July to 30 June);

• satisfaction of the vesting conditions; and

• the operation of the SRP Rules.

Company A Long Term Incentive Plan (Current LTP)

Participants in the Current LTP are eligible executives and senior staff of Company A and its Employer Entities.

The key objectives are to:

• ensure alignment between executives and shareholders;

• reward performance and business decisions that drive long term growth and deliver shareholder value;

• provide appropriate long term measures that support a performance culture and stretch targets;

• be sustainable in the long term, withstanding the commodity cycle and volatility of a resources company; and

• provide a basis for the retention of executives; and

• be tax effective.

For the Current LTP, on assessment of the performance measures, a Participant's LTP Share Rights will become Vested Rights which can be exercised into ordinary Company A shares at their discretion, subject to the conditions set out in Company A's Securities Trading Policy. Any unvested Share Rights lapse where performance targets are not met.

The Current LTP performance period will commence on 1 July 2015 and will conclude on 30 June 2018 with the final determination of a Participant's Current LTP award made in August 2018. As soon as practicable following that determination, the Participant will be notified of the actual number of LTP Share Rights that will vest.

The Current LTP operates entirely at the discretion of the Board and may be terminated, suspended or amended at any time, in its entirety or in part, in relation to any or all Participants.

The Current LTP offer and grant of Share Rights does not automatically entitle a Participant to Company A shares. The actual number of Company A shares to which they may become entitled will depend on:

• the degree to which the Current LTP performance measures are satisfied over the Current LTP annual performance period (three years commencing 1 July 2015);

• satisfaction of the vesting conditions; and

• the operation of the SRP Rules.

Company A Staff Incentive Plan (the Staff Plan)

Participants in the Staff Plan are all permanent direct employees of Company A and its Employer Entities. The Staff Plan offer comprises of an offer of a combination of cash and / or Vested Rights to be provided to Participants of the Staff Plan.

Key objectives of the Staff Plan are to:

• focus employees on the delivery of Company A's annual objectives;

• drive a performance culture that delivers on stretch targets;

• provide competitive rewards if performance expectations are achieved; and

• enable employees to build a vested interest in Company A's longer term performance by providing an opportunity to acquire shares in Company A.

Participants must elect whether the Share Rights will be cash settled or Vested Right settled at the time the Staff Plan offer is accepted.

If a Participant elects to receive their vested Share Rights as Vested Rights, the value of their award will be increased by 50 per cent. Vested Rights are convertible to shares in Company A either at the time when the Vested Rights are awarded or at a later date within 15 years from the date of the award at the Participant's discretion. The Vested Rights or shares awarded in respect of the 50% uplift are subject to forfeiture if the Participant leaves Company A within 12 months of receiving them.

The Staff Plan performance period will commence on 1 July and will conclude on 30 June. The final determination of a Participant's Staff Plan award will be made in August. As soon as practicable following that determination, the Participant will be notified of the actual cash value or number of Staff Plan Vested Rights they will receive.

The Staff Plan operates entirely at the discretion of the Board and may be terminated, suspended or amended at any time in relation to any or all Participants.

The Staff Plan offer does not automatically entitle a Participant to an award. The actual cash value or Company A shares to which they may become entitled will depend on:

• the degree to which the Staff Plan performance measures are satisfied over the Staff Plan annual performance period (1 July to 30 June);

• satisfaction of the vesting conditions; and

• the operation of the SRP Rules.

Employee Salary Sacrifice Share Plan (the Salary Sacrifice Plan)

The Salary Sacrifice Plan aims to enable employees to build a vested interest in Company A's longer term performance by providing an opportunity to acquire shares in the company.

It allows employees to nominate an amount of their pre-tax salary to be sacrificed to acquire shares (Salary Sacrifice Shares) in Company A under the Salary Sacrifice Plan. Per annum, the minimum amount that can be nominated is $1,000 and the maximum amount is $5,000.

Participants in the Salary Sacrifice Plan are all permanent employees of the Employer Entities whose term of employment is greater than 12 months and who were employed at the commencement of the performance period.

The Salary Sacrifice Plan is governed by the Employee Salary Sacrifice Share Plan Rules (Salary Sacrifice Plan Rules). These are broadly as follows:

Eligible Participants are issued invitations by the Board, to participate in the Salary Sacrifice Plan as specified in the invitation. The invitation allows the employee to acquire shares in Company A on the terms and conditions the Board imposes (Rules A & B of the Salary Sacrifice Plan Rules).

Once an eligible Participant has received an invitation, they may accept in accordance with the instructions accompanying, unless otherwise determined by the Board (Rule C of the Salary Sacrifice Plan Rules).

Where an invitation is made, the number of shares to be issued, transferred or allocated to the Trustee to be held on behalf of a Participant will be the dollar amount of the salary sacrifice divided by the issue price per share outlined in the invitation. Such an invitation will be conditional on Company A and the Participant entering into an agreement setting out the terms and conditions of the salary sacrifice arrangement (Rule D of the Salary Sacrifice Plan Rules).

Each Participant must, in the discretion of the Board, elect to make their salary sacrifice contributions by way of regular deductions from the Participant's remuneration during the relevant year or a lump sum deduction from the Participant's remuneration in the first payroll period during the relevant year (Rule E of the Salary Sacrifice Plan Rules).

Subject to other applicable Salary Sacrifice Plan Rules, as soon as practicable after an application has been accepted and the relevant Participant's salary sacrifice contributions have been deducted from that Participant's remuneration, the Board will instruct the Trustee to subscribe for, acquire and/or allocate the number of shares applied for by the Participant pursuant to the application.

The Trustee will then hold those shares on behalf of that Participant in accordance with the terms of the Company A Employee Share Trust Deed (Company A Trust Deed) (Rule F of the Salary Sacrifice Plan Rules).

Subject to the Trustee receiving from Company A and its Employer Entities sufficient funds to subscribe for or acquire the shares, the Board may, in its absolute discretion instruct the Trustee to either subscribe for new shares or acquire shares on market to be held on a Participant's behalf, or instruct the Trustee to use a combination of both alternatives (Rule F of the Salary Sacrifice Plan Rules).

All shares issued will rank equally with other shares of the same class at the time on issue, except for any rights attaching to the shares by reference to a record date prior to the date of their allotment, transfer or allocation (Rule G of the Salary Sacrifice Plan Rules).

Participants are subject to transfer restrictions under the Salary Sacrifice Plan Rules. A Participant may not deal with an Company A share acquired under the Salary Sacrifice Plan until the end of a period of 7 years (or any other period specified determined by the Board) commencing on the date of the issue, transfer or allocation of that share (Rule H of the Salary Sacrifice Plan Rules).

A separate account or record will be opened and maintained by the Trustee in respect of the Salary Sacrifice Plan contributions, shares issued, shares transferred and any dividends, bonus shares, interest or other earnings (Rule I of the Salary Sacrifice Plan Rules).

The Former Share Rights Plans (the Former SRP)

The Share Rights issued under the Former Share Rights Plans are governed by the 2012 Share Rights Plans Rules (Former SRP Rules). The Former SRP Rules which apply to both the 2014 LTP and 2015 LTP Share Rights broadly operates as follows:

• Eligible Participants are issued invitations by the Board, to apply for a grant of Share Rights as specified in the invitation. The invitation will outline the number of Share Rights offered and the Performance Condition (Rule A of the Former SRP Rules);

• Once the Eligible Participant has received the invitation, they may apply to be issued with Share Rights by executing the Application attached to the invitation within the seven day time limit (Rule B of the Former SRP Rules).

• The Share Rights will be issued to Participants for nil consideration (Rule C of the Former SRP Rules).

• The satisfaction of the Performance Condition shall determine the proportion of Share Rights which vest to the Participant (Rule D of the Former SRP Rules). Satisfaction of the Performance Condition will be determined by the Board at the end of the Performance Period (Rule E of the Former SRP Rules).

• The Share Rights will vest at the end of the Performance Period, subject to the satisfaction of the Performance Condition. However, to the extent the Performance Condition has not been met, Share Rights will vest immediately if there is a Change of Control Event, or upon retirement / retrenchment of the Participant or death of the Participant (Rule F of the Former SRP Rules).

• Share Rights which do not vest at the end of the Performance Period or pursuant to Rule F above, will lapse (Rule G of the Former SRP Rules).

• Rule H of the Former SRP Rules ensures that all shares issued on the vesting of a Share Right will rank equally with other shares then on issue.

• At the time the Share Rights vest, Company A must direct the Trustee to subscribe for, acquire or allocate to the Participant one share for each Share Right vested and hold those shares in the Company A Share Trust on behalf of the Participant (clause 1 of the Company A Trust Deed).

• clause 2 of the Company A Trust Deed directs Company A to provide funds to the Trustee in order to allow the Trustee to subscribe for / and or acquire shares to be held on behalf of the Participants under the Former SRP.

• clause 3 of the Company A Trust Deed allows the Trustee to sell the shares on behalf of the Participant and provide the proceeds of sale less brokerage costs to the Participant when specified in a Withdrawal Notice.

• On assessment of the performance measures, a Participant's LTP Share Rights are automatically exercised into ordinary shares on vesting, rather than into Vested Rights.

The Company A Employee Share Trust (Company A Share Trust)

Company A established the Company A Share Trust for the sole purpose of obtaining Company A shares for the benefit of employees of Company A under employee equity plans such as the SRP, the Former SRP and the Salary Sacrifice Plan (clause 1 of Recitals of the Company A Trust Deed). The Trustee of the Company A Share Trust is Company B (the Trustee), an external trustee acting in an independent capacity on behalf of the beneficiaries of the Company A Share Trust.

Company A and the Trustee agree that the Company A Share Trust will be managed and administered so that it satisfies the definition of an 'employee share trust' (clause 4 of the Company A Trust Deed).

The Company A Share Trust operates as follows:

The Trustee has the full power to do all things a trustee is permitted to do by law in respect of the Trust, the Trust Shares and the Trust Assets (clause 5 of the Company A Trust Deed).

The Company A Share Trust will be funded by contributions from Company A and Employer Entities (i.e. for the purchase of Company A shares in accordance with the SRP, the Former SRP and the Salary Sacrifice Plan) as specified in clause 2 of the Company A Trust Deed.

Company A and the Employer Entities are likely to contribute funds to the Company A Share Trust when the Share Rights vest to the Participant and are exercised or when Share Rights vest and are converted into Vested Rights. In accordance with the intended operation of the Salary Sacrifice Plan, contributions are likely to be regular deductions from the Participant's remuneration during the relevant year.

These funds will be used by the Trustee of the Company A Share Trust to acquire the Company A shares either on-market or via a subscription for new shares in Company A (refer clause 6 and 7 of the Company A Trust Deed), based on written instructions from Company A (clause 1 of the Company A Trust Deed).

The Trustee will, in accordance with instructions received by Company A pursuant to the SRP Rules as soon as reasonably practicable, acquire, allocate and deliver Company A shares for the benefit of a Participant provided that the Trustee receives sufficient payment to subscribe for, or purchase Company A shares or has sufficient Unallocated Trust Shares available (clause 8 of the Company A Trust Deed).

Company A shares acquired by the Trustee will be immediately allocated to the relevant employees and held on their behalf as Trust Shares (clause 3 of the Company A Trust Deed).

Company A may direct the Trustee to allocate Unallocated Trust Shares to a Participant from time to time (clause 9 of the Company A Trust Deed).

If Company A makes a Bonus Issue in respect of Trust Shares held by the Trustee on behalf of a Participant, the Trustee must hold the bonus shares issued as Trust Shares for that Participant and are they deemed for the purposes of the Company A Trust Deed to have been credited to the Participant at the same time as the Trust Shares (clause 10 of the Company A Trust Deed).

The structure of the Trust and the SRP, the Former SRP and the Salary Sacrifice Plan are such that shares may be dealt with at any time after the Restrictive Period lapses, in the following manner:

• Trust Shares allocated to each Participant will generally be transferred into the name of the Participant (i.e. legal title) upon a Withdrawal Notice being lodged with and approved by the Board (clause 11 of the Company A Trust Deed); or

• the Trustee can sell shares on behalf of the Participant, where permitted to do so by the Participant, resulting in a cashless exercise for them. That is, the Participant receives proceeds on sale of shares by the Trustee less the exercise price (if any) and any brokerage costs (clause 3 of the Company A Trust Deed).

The Trustee is not entitled to receive from the Trust any fee, commission or remuneration in respect of its performance of its obligations as trustee of the Company A Share Trust (clause 12 of the Company A Trust Deed).

The Trustee will distribute any remaining Trust Assets in accordance with clause 13 of the Company A Trust Deed prior to the termination of the Company A Share Trust. The Trustee must not pay any balance under clause 14 to Company A (clause 15 of the Company A Trust Deed).

Clawback Policy

Company A operates a 'clawback policy' under the SRP. Clawback will be initiated where in the opinion of the Board, a Participant:

• has acted fraudulently or dishonestly;

• has engaged in gross misconduct;

• has done an act which has brought Company A, or any member of the Company A Group into disrepute;

• has breached his or her duties or obligations to the Company A Group or a member of that group; or

• is convicted of an offence or has a judgment entered against them in connection with the affairs of the Company A Group.

Clawback will also be initiated where in the opinion of the Board, there is a financial misstatement event.

In the event of clawback, the Board may determine that any Share Rights held by the Participant will lapse or be deemed to be forfeited (Rule J of the SRP Rules).

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

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 Assessment Act 1997 Division 83A

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

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

Income Tax Assessment Act 1997 section 104-75

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 subsection 130-90(1A)

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

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

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

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

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

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

Reasons for decision

These reasons for decision accompany the Notice of private ruling for COMPANY B PTY LIMITED.

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 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:

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 the present circumstances. Therefore non-refundable 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 Company A Share Trust under section 95 of the ITAA 1936 if they are assessable as income according to ordinary concepts under section 6-5.

Section 6-5 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. The classic definition in Australian law was given by Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215. Chief Justice Jordan considered that:

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts.

The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that:

The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description.

In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (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. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

The contributions provided by Company A to the Trustee of the Company A Share Trust are used in accordance with the terms of the Company A Trust Deed, the SRP, the Former SRP and the Salary Sacrifice Plan. Clause 15 of the Company A Trust Deed states that Trust Shares held by the Trustee on behalf of participants will at all times be held by the Trustee on trust for and on behalf of that Participant on the terms of this Deed and subject to the relevant Plan Rules and relevant Terms of Participation. Clause 2 of the Company A Share Trust Deed states that all funds received by the Trustee from Company A or a subsidiary of Company A will constitute accretions to the Company A Share Trust and will not be repaid to Company A and no Participant be entitled to receive such funds. The contributions constitute receipts of a capital nature to the Trustee and will not be assessable as ordinary income under section 6-5.

Question 2

When a Participant in the SRP, the Former SRP or the Salary Sacrifice Plan becomes absolutely entitled to the shares as against the Trustee, CGT Event E5 will occur and under section 104-75 the Trustee will make a capital gain or loss. However, section 130-90 may operate to disregard that gain or loss where specified conditions are satisfied.

Section 130-90

Subsection 130-90(1)

Subsections 130-90(1) and 130-90(2) state:

Shares held to satisfy the future exercise of rights acquired under employee share schemes

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 (1A) or (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

Subsection 130-85(4) states:

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

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

Paragraphs 130-85(4)(a) and (b)

The beneficial interest in a share received by a Participant when an ordinary share in Company A is granted to them under the terms of the Company A Trust Deed is an ESS interest within the meaning of subsection 83A-10(1).

Subsection 83A-10(2) defines an employee share scheme as being 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 Company A SRP and the Former SRP are employee share schemes within the meaning of subsection 83A-10(2) because they are schemes under which rights to acquire beneficial interests in ordinary shares in Company A are provided to employees in relation to the employee's employment.

Company A has established the Company A Share Trust to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests acquired by those employees under the SRP and the Former SRP. 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 Share Rights are provided to the Participant in relation to the Participant's employment, being an employee share scheme as defined in subsection 83A-10(2).

Clause 1 of the Company A Trust Deed states that where the terms of the relevant Plan Rules and relevant Terms of Participation for a Participant include that Shares are to be held by the Trustee on behalf of Participants, the Board must by notice in writing instruct the Trustee to subscribe for, purchase and/or allocate a number of Shares specified in the notice, to be held by the Trustee as Trust Shares in respect of an identified Participant or Participants.

These funds will be used by the Trustee of the Company A Share Trust to acquire the Company A shares either on-market or via a subscription for new shares in Company A (refer clause 6 and 7 of the Company A Trust Deed), based on written instructions from Company A (clause 1 of the Company A Trust Deed).

The Trustee will, in accordance with instructions received by Company A as soon as reasonably practicable, acquire, allocate and deliver Company A shares for the benefit of a Participant provided that the Trustee receives sufficient payment to subscribe for, or purchase Company A shares or has sufficient Unallocated Trust Shares available (clause 8 of the Company A Trust Deed).

Company A shares acquired by the Trustee will be immediately allocated to the relevant employees and held on their behalf as Trust Shares (clause 3 of the Company A Trust Deed).

Paragraphs 130-85(4)(a) and (b) are therefore satisfied because:

• the Company A Share Trust acquires shares in a company, namely Company A; and

• the Company A Share Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Company A Trust Deed and the SRP and the Former SRP.

Paragraph 130-85(4)(c)

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the SRP and the Former SRP.

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 sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c):

• 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; and

• 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 to be merely incidental.

Clause 5 of the Company A Trust Deed states some specific things that the Trustee has the power to do but they are subject to the terms of the Company A Share Trust Deed and all would be considered incidental for the purposes of paragraph 130-85(4)(c).

Clause 4 of the Company A Trust Deed states that Company A and the Trustee agree that the Company A Share Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purpose of section 130-85(4).

Paragraph 130-85(4)(c) is satisfied as any activities undertaken by the Trustee other than the acquisition of Company A shares and the allocation of those shares to the employees in accordance with the Company A Trust Deed and the SRP and the Former SRP Rules are merely incidental to operation of the SRP and the Former SRP.

The Company A Share Trust satisfies the definition of an employee share trust in subsection 130-85(4) as:

• the Company A Share Trust acquires shares in a company (being Company A);

• the Company A Share Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Company A Trust Deed and the SRP and the Former SRP; and

• the Company A Trust Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to a function of administering the Company A Share Trust.

Paragraph 130-90(1)(a)

CGT event E5 is the CGT event that will apply under the terms of the SRP and the Former SRP 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 a Share Right 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)

Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a share (in Company A) by exercising a right (Share Right) provided under the SRP and the Former SRP.

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.

Subsection 83A-10(2) defines an employee share scheme as being 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 SRP and the Former SRP are employee share schemes within the meaning of subsection 83A-10(2) because they are schemes under which rights to acquire beneficial interests in ordinary shares in Company A are provided to employees in relation to the employee's employment. Each Share Right is acquired for no cost.

Subdivision 83A-B will apply to Share Rights acquired under the SRP and the Former SRP as pursuant to subsection 83A-20(1) the ESS interests (i.e. Share Rights issued under the SRP and the Former SRP) will be acquired under an employee share scheme (for the reasons stated in the immediately 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 a Participant does not acquire the beneficial interest in the Company A share for more than its cost base in the hands of the Company A Share Trust at the time that CGT event E5 happens, subsection 130-90(1) will apply.

Subsection 130-90(1A)

Subsections 130-90(1A) and 130-90(2) state:

Shares held for future acquisition under employee share schemes

130-90(1A)

Disregard any capital gain or capital loss made by an employee share trust to the extent that it results from a CGT event, 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.

130-90(2)

Subsection (1A) or (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.

Under the Salary Sacrifice Plan, Participants are invited to acquire shares in Company A, which will make contributions to the Trustee in order to allow it to either subscribe for shares from Company A or acquire them on-market to satisfy the offers made to the eligible employees under the Salary Sacrifice Plan.

Subsection 130-90(1A) 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).

For the reasons discussed above the Company A Share Trust satisfies the definition of an employee share trust in subsection 130-85(4).

Paragraph 130-90(1A)(a) is satisfied as the Company A shares held by the Trustee are ESS interests which are CGT assets of the Company A Share Trust.

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

The Salary Sacrifice Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest is provided to a Participant in relation to their employment in Company A in accordance with the Company A Trust Deed.

Subdivision 83A-C will apply to Company A shares acquired under the Salary Sacrifice Plan (refer section 83A-105). Accordingly, paragraph 130-90(1A)(c) will be satisfied.

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

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

Conclusion

Under the circumstances of either subsection 130-90(1) or 130-90(1A) applying, 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.

A Participant, on allocation of the Company A shares by the Trustee, becomes absolutely entitled to those shares. In accordance with clause 13 of the Company A Trust Deed each Participant is absolutely entitled to any Company A shares held by the Trustee on their behalf, and is entitled to all other benefits and privileges attached to, or resulting from holding, those Trust Shares.

Once a Participant is absolutely entitled to the Company A share held on their behalf by the Company A Share Trust, section 106-50 will deem the disposal of the Company A share by the Trustee to be done by the Participant.

Therefore, section 106-50 will apply, such that if the Trustee disposes of the Company A shares under the SRP or the Former SRP or the Salary Sacrifice Plan (by way of transfer of legal title to a Participant), the Trustee will not make a capital gain or capital loss under CGT Event E7.