Edited version of your written advice

Authorisation Number: 1013038592365

Date of advice: 29 June 2016

Ruling

Subject: Employee Share Scheme

Question 1

Will the irretrievable contributions made to Company B (Trustee), as trustee of the trust (Trust) established by the Company A Share Trust Deed (Trust Deed), to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee to satisfy ESS interests issued pursuant to the Incentive Right Plan (IRP) be assessable income of the Trust under section 6-5 or 6-10 of 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 Trust at the time the Eligible Employees become absolutely entitled to Company A shares under the IRP, or when the Trustee disposes of the shares to the employees, be disregarded under section 130-90 of ITAA 1997 if the Eligible Employees acquire the Company A shares for the same or less than the cost base of the Company A shares in the hands of the Trustee?

Answer

Yes.

This ruling applies for the following periods:

Income tax year ended 30 June 2016

Income tax year ended 30 June 2017

Income tax year ended 30 June 2018

Income tax year ended 30 June 2019

Income tax year ended 30 June 2020

Relevant facts and circumstances

Background

Company A is an Australian listed company which provides services to the mining, energy and related sectors. Company A specialises in sustaining capital works and the provision of shutdown, construction and maintenance services.

As part of its overall remuneration strategy, in addition to fixed remuneration, Company A offers certain employees and Directors' payments of shares upon satisfaction of certain performance conditions through the Incentive Right Plan.

Incentive Right Plan

The Incentive Right Plan (IRP) is governed by rules contained in the Company A Incentive Right Plan which was issued by the board of Company A (IRP Rules).

Rule 20 of the IRP Rules defines the following relevant terms:

Acceptance Form means a form to accept Incentive Rights Offered under the Plan substantially in the form annexed to these Rules as Annexure A with any amendment or modification determined from time to time by the Board;

Board means all or some of the Directors acting as a board of the Company;

Cashless Exercise Facility has the meaning given in Rule 5.7(a)

Company means Company A;

Cash Settled has the meaning given to that term in Rule 6.1(c)(ii)(G)(II)

Certificate means a certificate in respect of Incentive Rights issued under the Plan in such form as the Board may approve from time to time

Change of Control Event means any of the following:

(a) if a person acquires voting power (within the meaning of section 610 of the Corporations Act) in more than 50% of the Shares in the Company as a result of a takeover bid;

(b) if a person acquires voting power (within the meaning of section 610 of the Corporations Act) in more than 50% of the Shares in the Company through a scheme of arrangement; or

(c) any event (including a merger of the Company with another company) whether specified above or not and whether at a different percentage to that specified above or not, which the Board determines, in its absolute discretion, to be a Change of Control Event;

Eligible Employee means a person who:

(a) has an Offer to take up Incentive Rights under the Plan within that employee's Contract; or

(b) is at the time of the Offer, and has been for a period of at least 12 months, a full or part-time employee or an executive or non-executive Director of the Group

Equity Settled has the meaning given to that term in Rule 6.1(c)(ii)(G)(II)

Exercise Price means the price determined by or the mechanism by which the price will be determined by the Board under Rule 5.2

Expiry Date means, subject to the Rules, the expiry date of Incentive Rights, being the earlier of:

(a) the date as set out in an Offer to an Eligible Employee (if any); or

(b) 15 years from the date of the Offer to an Eligible Employee;

Group means the Company and each of its Subsidiaries from time to time

Incentive Right means an Option or Performance Right;

Incentive Right Holder means the holder of an Incentive Right issued under the Plan

Listed means the Shares of the Company are officially quoted by the ASX;

Listing Rules means the official listing rules of the ASX

Market Price means, in relation to a particular date, the weighted average market price per Share (weighted by reference to volume) during five consecutive trading days on the ASX ending on the day before the particular date

Offer means an offer in writing made by the Board to an Eligible Employee to take up

Incentive Rights under the Plan made in accordance with Rule 6;

Option means, subject to adjustment in accordance with Rule 11, an option to subscribe for one Share in accordance with the Rules;

Performance Right means a right granted to an Eligible Employee, subject to the terms and conditions of these Rules, to:

(a) receive a Share by transfer, allocation or allotment; or

(b) be paid a cash amount determined under these Rules,

with the method of settlement to be determined by the Board in its absolute discretion;

Vesting Conditions means one or more conditions (if any) as determined by the Board to

apply to an Incentive Right as set out under the Offer which are conditions of the Incentive

Right becoming Vested and Vested means that all such conditions have been satisfied.

Rule 5.1 of the IRP Rules states that Incentive Rights:

• Incentive Rights are issued for nil consideration.

• Incentive Rights lapse on their Expiry Date.

• Incentive Rights may not be sold, transferred, mortgaged, charged or otherwise dealt with or encumbered.

• Incentive Right Holders have no rights or entitlements to participate in dividends declared by Company A or rights to vote at meetings of Company A in respect of an Incentive Right that they hold.

Rule 5.3 of the IRP Rules states that the issue of an Incentive Right does not confer any right or interest in any Share until the Vesting Conditions in respect of the Incentive Right have been satisfied or waived by the Board at its discretion or the Incentive Right has otherwise become exercisable in accordance with the IRP Rules.

Rules 5.4 of the IRP Rules states that:

• If an Offer provides for the deemed automatic exercise of an Incentive Right then no further action is required by the Eligible Employee upon the vesting of that Incentive Right in order to exercise the Incentive Right.

• If an Offer provides for the manual exercise of an Incentive Right then once it has Vested an Incentive Right Holder may exercise it by lodging:

• A written notice to Company A which specifies the number of shares in respect of which the Incentive Rights are being exercised;

• A cheque for the Exercise Price or confirmation that the Eligible Employee will use the Cashless Exercise Facility; and

• The Certificate for the Incentive Rights being exercised.

• If an Offer provides that the Board will determine the method of settlement following exercise or does not otherwise specify the method of settlement then the Board, as soon as reasonably practicable, must determine whether the relevant Incentive Right will be Cash Settled, Equity Settled or a combination of Cash Settled and Equity Settled.

Rule 5.5 of the IRP Rules states that where the Board has determined that an Incentive Right will be Equity Settled then, on exercise of the Incentive Right, Company A must issue or procure the transfer to the Incentive Right Holder, or instruct the Trustee to either subscribe for, acquire and/or allocate for the benefit of the Incentive Right Holder, the numbers of shares in respect of the exercised Incentive Right.

Rule 5.6 of the IRP Rules states that where the Board has determined that an Incentive Right will be Cash Settled then, on exercise of the Incentive Right, Company A must make a cash payment to the Incentive Right Holder equal to the sum of the Market Price of an ordinary share in Company A at the date of exercise multiplied by the number of validly exercised Incentive Rights that will be Cash Settled (less any taxes and superannuation required to be withheld under applicable law).

Rule 5.7 of the IRP Rules states that an Offer to an Eligible Employee may specify that the Incentive Rights that are subject of that Offer have a Cashless Exercise Facility. The Cashless Exercise Facility allows the Eligible Employee to, on exercise of the relevant Incentive Rights, elect to pay the Exercise Price per Incentive Right by setting off the total Exercise Price against the number of shares they are entitled to receive upon exercise of the Incentive Rights (calculated by reference to a formula).

Rule 5.10 of the IRP Rules states that the Board may in its absolute discretion make offers of Incentive Rights to Eligible Employees.

Rule 5.12 of the IRP Rules states that Incentive Rights must be issued in compliance with the terms of the IRP Rules, Corporations Act 2001, Listing Rules, ITAA 1997 and any additional terms as considered appropriate by the Board.

Rule 6.1 of the IRP Rules states that:

• The Board may make Offers in writing to Eligible Employees inviting them to take up Options under the Plan.

• Each Offer made by the Board must specify the number of Incentive Rights for which the Eligible Employee may apply and the terms and conditions, including: Exercise Price (if any), Expiry Date, Vesting Conditions, Acceptance Period and manner of Settlement of the Incentive Rights. Each offer must also specify whether a manual exercise of the Incentive Rights is permitted in accordance with rule 5.4 of the IRP Rules.

Rule 6.2 of the IRP Rules states that to accept an Offer made by the Board the Eligible Employee must send a completed Acceptance Form to Company A.

Rule 6.4 of the IRP Rules states that upon receipt of a completed and signed Acceptance Form which is accepted by the Board, Company A will issue to the Eligible Employee:

• The number of Incentive Rights applied for by the Eligible Employee to the Eligible Employee on terms of issue specified in the Offer.

• A Certificate for the Incentive Rights

Rule 7 of the IRP Rules states that the Board shall not Offer or issue Incentive Rights to any Eligible Employee in accordance with the IRP Rules if it would cause Company A to exceed any thresholds set out in ASIC Class Order 14/1000 (or any class order or law which supersedes it) or the Listing Rules if Company A is Listed.

Rule 8.1 of the IRP Rules states that an Incentive Right will lapse and be forfeited if:

• The Eligible Employee voluntarily resigns from employment with Company A other than to take up employment with another member of the Group;

• The Eligible Employee is dismissed from employment with the Group for any one or more of the following reasons:

• Wilful misconduct bringing disrepute to the Group;

• Repeated disobedience after prior written warning;

• Incompetence in the performance of any duties for which they were employed after written warning;

• Fraud or any other dishonesty in respect of the property or affairs of the Group; or

• Any other reason based on which the Board believes it is fair and reasonable to warrant that the Incentive Rights lapse and are forfeited.

Certain exceptions to rule 8.1 are specified in rule 8.2.

Rule 10 of the IRP Rules states that in the event of inconsistency between the terms and conditions of the IRP Rules and the Listing Rules then the Listing Rules will prevail.

Rule 12 of the IRP Rules states that where there is a Change of Control Event the Vesting Conditions of the Incentive Rights are deemed to have been satisfied or waived by the Board and the Incentive Rights may be exercised immediately.

Company A Share Trust (the Trust)

Company A has established a trust (Trust) under the Company A Employee Share Trust Deed (Trust Deed) which will be used to administer the IRP. Company B has been appointed under the Trust Deed as the Initial Trustee (Trustee). Company A will incur various costs in relation to the implementation and on-going administration of the Trust including, but not limited to:

• employee plan record keeping;

• production and dispatch of holding statements to employees;

• provision of annual income tax return information to employees;

• management of employee termination; and

• costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to Eligible Employees);

• other Trustee expenses, including the annual audit of the financial statements and annual income tax return of the Trust..

Clause 1 of the Trust Deed defines the following relevant terms:

Allocated Share means, at a given time, a Trust Share that is credited to the Trust Share Account of a Participant at that time.

Board means the board of directors of the Company, a committee appointed by the board of directors of the Company as constituted from time to time, or, in respect of a matter, any person (including, where applicable the Board) who is provided with delegated authority by the board of directors of the Company from time to time in respect of that matter.

Group means the Company and each of its Subsidiaries from time to time.

Group Company means any member of the Group.

Participant means a participant under a Plan who has one or more Trust Shares credited to their Trust Share Account.

Rights Issue means an issue by the Company of rights (not being by way of a Bonus Issue) to acquire Shares or other securities.

Share means a fully paid ordinary share in the capital of the Company.

Terms of Participation means, in respect of a Participant, the specific terms upon which the Shares or other equity awards (whichever applicable) are granted to the Participant (whether set out in the terms of invitation or offer or otherwise).

Trust Share means a Share held by the Trustee subject to this Deed and includes any bonus shares issued in respect of the Share under any Bonus Issue and any Share issued as part of a Rights Issue in respect of the Share.

Unallocated Share means, at a given time, a Trust Share that is not credited to the Trust Share Account of a Participant at that time.

Withdrawal Notice means a written notice given or deemed to be given by a Participant to the Board requesting that some or all of the Participant's Allocated Shares be sold or transferred to the Participant or to a person nominated by the Participant, which notice must:

(a) be signed by or on behalf of the Participant;

(b) specify the number of Allocated Shares to be sold or transferred; and

(c) be in the form approved by the Board.

Clause A of the Recitals of the Trust Deed states that the Trust was established for the purpose of acquiring, holding and transferring Shares in connection with equity incentive plans established by Company A for the benefit of participants in those plans.

Clause 3.1 of the Trust Deed states that the Trustee must hold a Participant's Allocated Shares, the proceeds arising from any sale by the Trustee of rights under a Rights Issue relating to a Participant's Allocated Shares and all other benefits and privileges related to or arising from a Participant's Allocated Shares on trust for and on behalf of the Participant under the terms of the Trust Deed.

Clause 4.3 of the Trust Deed states that the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration for operating or administering the Trust. However, clause 4.3 of the Trust Deed recognises that Company A must pay to the Trustee from Company A's own resources any such fees, commission or other remuneration and may reimburse such expenses incurred by the Trustee as agreed from time to time by Company A and the Trustee. Clause 4.3 of the Trust Deed recognises that the Trustee is entitled to retain for its own benefit any such fees, commission, remuneration or reimbursement.

Clause 4.9 of the Trust Deed states that Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4) of the ITAA 1997.

Clause 5.1 of the Trust Deed states that the Board:

• May by notice in writing (Dealing Notice) instruct the Trustee from time to time to:

• Subscribe for, purchase or allocate a number of Shares specified in the Dealing Notice to be held by the Trustee as Allocated Shares in respect of an identified Participant or Participants.

• Subscribe for, purchase or allocate a number of Shares specified in the Dealing Notice to be held by the Trustee as Unallocated Shares;

• Participate in any Rights Issue in respect of a Trust Share; or

• Dispose of any rights issued under any Rights Issue in respect of a Trust Share.

• Must in a Dealing Notice requiring the Trustee to incur costs in connection with the relevant dealing:

• Offer to have one or more members of the Group provide funding (whether by capital contribution, loan or otherwise) to the Trust for the purpose of meeting such costs;

• Require the Trustee to apply some of the available capital of the Trust for the purpose of meeting such costs;

• Effect a combination of the above.

Clause 5.2 of the Trust Deed states that if the Trustee on receiving a Dealing Notice has received sufficient funds or has sufficient capital then it must:

• Purchase the requisite number of Shares on behalf of the relevant Participant or Participants or beneficiaries of the Trust generally;

• Subscribe for the requisite number of Shares on behalf of the relevant Participant or Participants or beneficiaries of the Trust generally;

• Allocate any Unallocated Shares to one or more Participants; or

• Participate in any Rights Issues in respect of a Trust Share; or

• Dispose of any rights issued under any Rights Issue in respect of a Trust Share; or

• Effect a combination of the above.

Clause 5.3 of the Trust Deed states that:

• Company A must provide the Trustee, or cause the Trustee to be provided with, any funds required by the Trustee to comply with its obligations under Clause 5.2 of the Trust Deed.

• All funds provided to the Trustee by Company A:

• Will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee unless funds are provided by way of loan; and

• May be paid to Company A as consideration for the subscription for Shares provided such Shares are held under the terms of the Trust Deed.

• If the Trustee acting reasonably and in good faith considers the terms of any funding would materially prejudice the ability of the Trustee (in its capacity as trustee of the Trust) to meet its debts as and when they fall due, the Trustee is entitled to refuse such funding and the relevant Dealing Notice will be invalid to the extent that the requisite dealings in Shares cannot be satisfactorily funded.

Clause 7.4 of the Trust Deed states that if the Trustee subscribes for Shares, on behalf of a Participant, the Trustee must hold those Shares as Allocated Shares for that Participant.

Clause 9.3 of the Trust Deed states that the Trustee must do all things required by it to transfer some or all of a Participant's Allocated Shares to the relevant recipient and pay to the Participant any other monies held on the account for the Participant:

• On receipt of a valid Withdrawal Notice that has been approved by the Board;

• Where required to do so by the IRP Rules and Terms of Participation;

• If the Trust is terminated; or

• If the Trustee so determines following a written instruction from the Board.

Clause 10 of the Trust Deed states that upon the sale of any Allocated Shares the Trustee must apply the proceeds of sale:

• First, in payment of any brokerage and other third party costs and expenses of the sale incurred or to be incurred by the Trustee; and

• Second, the balance (if any) in payment to the relevant Participant.

Clause 13 of the Trust Deed states that Company A indemnifies the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in the execution or purported execution of powers, authorities or discretions vested in the Trustee under the Trust Deed. Clause 13 of the Trust Deed also states that if the Trustee does not have sufficient available funds then Company A indemnifies the Trustee in respect of any tax payables in respect of Unallocated Shares.

Clause 15.2 of the Trust Deed states that, amongst other things, in the event that the Trust is terminated then any surplus assets of the Trust must be applied in whole or in part for the benefit of either one or both of the following beneficiaries as the Trustee thinks fit:

• Any employee incentive trust established and maintained for the benefit of employees; and

• Any charity with deductible gift recipient status.

Clause 15.3 of the Trust Deed states that the Trustee must not pay any of the surplus assets under clause 15.2 to any Group Company.

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 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

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 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. Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 gave the classic definition of "income" in Australian law. 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). The decision states 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 Trust are used in accordance with the terms of the Trust Deed and the IRP Rules. Clause 3.1 of the Trust Deed states that the Trustee will hold on Trust all Allocated Shares and all other benefits and privileges arising from Allocated Shares for the benefit of Eligible Employees on the terms and conditions set out in the Trust Deed. Clause 5.3 of the Trust Deed states that all funds received by the Trustee from Company A or a subsidiary of Company A will constitute accretions to the Trust and will not be repaid to Company A or a subsidiary of Company A nor will any Eligible Employee be entitled to receive such funds. The contributions received from Company A or a subsidiary by the Trustee will constitute receipts of a capital nature and will not be assessable as ordinary income under section 6-5.

Question 2

When an Eligible Employee in the IRP 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.

Preliminary - application of Division 83A

Division 83A will apply to ESS Interests issued on or after 1 July 2009 and also, in certain circumstances, to ESS Interests that were provided under an employee share scheme prior to 1 July 2009.

Division 83A will apply to rights provided when an offer is made under the IRP on or after 1 July 2009 as they will have been acquired on or after 1 July 2009 thereby satisfying subsection 83A-5(1) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997).

Section 130-90

Section 130-90 relevantly states:

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)

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

Under the IRP, each right provided to an Eligible Employee when an offer is made under the IRP Rules is an ESS interests as it is (or may later become) a right to acquire a beneficial interest in a share in a company (Company A).

Subsection 83A-10(2) of the ITAA 1997 defines 'employee share scheme' as:

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; or

(b) subsidiaries of the company;

in relation to the employees' employment.

For the purposes of subsection 83A-10(2) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 defines the term 'scheme' as follows:

(a) any arrangement; or

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The IRP is an employee share scheme for the purposes of subsection 83A-10(2) of the ITAA 1997 as it is an arrangement which provides an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a share) to an Eligible Employee in relation to their employment in Company A in accordance with the Trust Deed

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

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

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

• the 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 Company A shares to the employees in accordance with the Trust Deed and the IRP Rules.

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 IRP Rules.

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 considered to be 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.

Clause 4.9 of the Trust Deed states that Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4) of the ITAA 1997.

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 Trust Deed and IRP Rules are merely incidental to operation of the IRP.

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

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

• the 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 Company A shares to the employees in accordance with the Trust Deed and the IRP Rules.

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

Paragraph 130-90(1)(a)

CGT event E5 is the CGT event that will apply under the terms of the IRP at the time the Eligible Employee 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 an Eligible Employee is entitled upon vesting or exercise of an Incentive 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 an Eligible Employee will have acquired a beneficial interest in a share (in Company A) by vesting or exercising of an Incentive Right provided under the IRP Rules.

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 IRP is an employee share scheme for the purposes of subsection 83A-10(2) of the ITAA 1997 as it is an arrangement which provides an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a share) to an Eligible Employee in relation to their employment in Company A in accordance with the Trust Deed. Under Rule 5.1 of the IRP Rules Eligible Employees acquire rights for no cost.

Subdivision 83A-B will apply to the Incentive Rights provided under the IRP as pursuant to subsection 83A-20(1) the ESS interests (i.e. Incentive Rights issued under the IRP Rules) 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 an Eligible Employee 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 an Eligible Employee does not acquire the beneficial interest in the Company A share for more than its cost base in the hands of the Trustee at the time that CGT event E5 happens, subsection 130-90(1) will apply.

Under these circumstances, section 130-90 will operate to disregard any capital gain or loss made by the Trustee on any Company A share when an Eligible Employee 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 that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), Part 3-1 and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

An Eligible Employee, 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 Eligible Employee is absolutely entitled to any Company A shares held by the Trustee on their behalf once allocated, 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 IRP Rules).

Once an Eligible Employee is absolutely entitled to the Company A shares held on their behalf by the Trust, section 106-50 will deem the disposal of the Company A shares by the Trustee to be done by the Eligible Employee.

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