Edited version of your written advice

Authorisation Number: 1013044603493

Date of advice: 1 July 2016

Ruling

Subject: Employee share scheme

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

Question 1

Will an independent arm's length trustee company (Trustee) of the Company A Employee Share/Option Plan Trust (EST) be assessed under sections 6-5 or 6-10 on the irretrievable contributions of money it receives from Company A Limited for the provision of shares to participating Company A employees (Participants)?

Answer

No.

Question 2

Will the Trustee of the EST derive any assessable income under section 6-5 or 6-10 in respect of shares allocated or transferred to Participants?

Answer

No.

Question 3

In respect of shares acquired by the Trustee of the EST under the terms of the Company A Limited Employee Share/Option Plan (ESOP), will any capital gain or capital loss made by the Trustee under CGT Event E5 (section 104-75) or E7 (section 104-85) be disregarded?

Answer

Yes.

This ruling applies for the following period(s)

Income tax year ending 30 June 2015

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

The scheme commences on

1 July 20XX

Relevant facts and circumstances

Company A is a public company, which listed on the ASX in July 20YY.

Company A was incorporated in July 20XX to provide information technology applications (IT Applications).

Company A will licence its IT Applications to corporate customers in return for a monthly subscription fee. The fee charged to clients depends on which IT Applications they use.

In the IT sector, a large part of Company A's success will be determined by its ability to motivate its staff and maintain longevity of employment, particularly amongst senior management.

Company A needs to be able to provide incentives to ensure they attract the right people, especially at the senior management level, and retain high calibre staff to ensure the future success of the group.

Company A's remuneration policy is designed to align the economic interests of senior management and other employees with those of Company A's shareholders. This is done by providing an opportunity for employees to earn significant rewards by potentially acquiring an equity interest in Company A, thus motivating the creation of shareholder value. Company A has designed its policy with the intention it will be competitive and equitable.

Company A has implemented the ESOP to provide an equity based compensation plan to its key employees.

The ESOP will utilise an EST to administer and manage the activities identified in the ESOP Rules (Rules). The Trustee will act in accordance with the Trust Deed establishing the EST (Deed), which will facilitate the provision of shares in Company A under the ESOP to certain Australian employees of Company A (Participants) via the EST.

It is proposed that current ESOP Participants and new employees will be eligible to participate in the equity plan administered by the EST.

The establishment of the EST provides Company A with greater flexibility to accommodate its long term incentive arrangements whilst the business continues to expand in terms of operations and employee numbers in future years. The EST will also accommodate capital management flexibility for Company A in that the EST can use the contributions from Company A to either acquire shares in Company A from existing shareholders, or, alternatively, subscribe for new shares in Company A. It also allows for a streamlined approach to the administration of the ESOP.

At any time there is a grant of rights pursuant to the ESOP, the grant will be subject to the Rules.

Background to the ESOP

Rights which have already been issued under the ESOP do not have vesting conditions exceeding two years and it is not expected that any vesting conditions attached to new rights issued under the ESOP will exceed five years.

The Company A Employee Share / Option Plan

As stated in the ESOP documentation, it is intended to provide Participants with an opportunity to acquire shares and/or options (Securities) in Company A so that they can share in the growth in value of Company A and to encourage them to improve the longer-term performance of Company A and its returns to shareholders. The ESOP is also intended to assist Company A to attract and retain skilled and experienced senior employees, providing them with an incentive to have a greater involvement with, and focus on, the longer term goals of Company A.

Various terms used below are defined within the ESOP documentation.

The ESOP broadly operates as follows:

• The Board may at any time decide that the plan should be operated in respect of any Financial Year and at its discretion, the total number of Securities to be offered to each Eligible Employee and the Issue Price at which the Securities are offered.

• The Board may in its absolute discretion determine that an employee who otherwise would be an Eligible Employee to acquire Securities is not eligible.

• It is at the Board's discretion to extend the invitation of offer to Eligible Employees to apply for a number of Securities (either options or shares).

• The offer of shares is to be provided in writing and will specify, amongst other things, the number of shares offered, the Issue Price and the Performance Hurdles applying to the offer.

• The offer of options is to be provided in writing and will specify, amongst other things, the number of options, Option Period, Exercise Price and any Performance Hurdles applying to the offer.

• Any conditions, such as Performance Hurdles, applicable to the vesting of Securities in a Participant will be of such a nature that they will be objectively considered as being both achievable and realistic in relation to the Participants likelihood of acquiring absolute entitlement to the underlying share or option.

• The total number of Securities which may be offered under the ESOP will not at any time exceed 10% of Company A's total issued shares.

• When exercisable, each option is convertible into one ordinary share.

• To exercise an option, an employee must sign and return an exercise notice in a form prepared by Company A. Options which have not been exercised by the expiry of the Option Period will lapse.

• Option holders do not have any right to participate in new issues of Securities in Company A made to shareholders generally.

• The option holder does not participate in any dividends unless the options are exercised and the resultant shares of Company A are issued.

• If there is a bonus issue to the holders of shares in Company A, the Board may make adjustments to the number of shares to be issued or the exercise price of the options.

• The Board at its absolute discretion may offer and issue shares and options upon the terms and conditions it sees fit.

• At the relevant time, the Trustee of the EST will be directed by Company A to acquire shares on behalf of each Participant, either through acquisition from existing shareholders, or via a new share issue or allocate any pre-acquired shares. Such shares will rank equally with all other shares in Company A.

• While such shares are held on trust in the EST, the Participants will be entitled to dividend and voting rights and to participate in any rights issue.

• Employees are absolutely entitled to the shares as against the Trustee from when the shares are allocated to them. By written notice, employees can apply for legal title to the shares held in the EST to be transferred to them.

• Administration of the ESOP is vested in the Board.

• There are currently x,xxx,xxx options on issue with exercise prices varying from $x.xx to $x.xx. These options typically vest over a 12 month period and have a 3 year expiry period.

Operation of the EST

The EST will operate in accordance with the Deed as follows:

• The EST will be established for the sole purpose of acquiring and holding Securities for the benefit of Participants in the ESOP (refer to Clause 2.4 of the Deed).

• The Securities acquired or issued by the EST will be held on trust for the Participants.

• The EST will be managed and administered so that it satisfies the definition of an 'employee share trust' in subsection 130-85(4).

• The EST will be funded by contributions from Company A for the purchase of shares under the ESOP.

• Upon receipt of notice from the Board, the Trustee will purchase the requisite number of shares, in accordance with the ESOP, either from existing shareholders, via subscription from Company A, or through allocation of shares that are trust assets not being held on behalf of any other Participant. A combination of these acts can also be undertaken to give effect to the purchase.

• The shares acquired by the Trustee will be allocated to the relevant Participants.

• The structure of the EST and the ESOP Rules, are such that shares allocated to each employee will generally be transferred into the name of the relevant Participant.

• The Trustee is a third party acting at arm's length whose role is to administer the facilitation of the ESOP through the EST in accordance with the Deed.

• The Trustee will after any relevant restrictions lift, be permitted to sell shares on behalf of an employee where the relevant ESOP Rules permit (subject to any restrictions on transfer that are imposed upon Participants in the ESOP).

• The Trustee may not exercise any voting rights, participate in rights issues or hold any bonus shares in relation to unallocated trust shares. The Trustee may, however, apply any capital receipts, dividends or other distributions received in relation to the unallocated shares to purchase further shares to be held on trust.

• The Trustee is not permitted to carry out activities which result in the Participants in the ESOP being provided with additional benefits other than the benefits that arise from the relevant Rules.

• The Trustee is not permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the EST.

• The Trustee's power to subscribe for, purchase or otherwise acquire and to sell, dispose or otherwise deal with any property, rights or privileges which the Trustee is authorised to acquire or dispose is confined to the Deed and is for the benefit of the Participants.

Commercial Benefits of the EST

The use of an EST for Company A has a range of commercial benefits. In particular, the EST will:

• Provide an arm's length vehicle for acquiring and holding shares in Company A, either by way of subscription or acquisition from existing shareholders.

• Assist Company A with meeting its Corporations Law requirements in relation to dealing in its own shares. The Corporations Act generally prohibits a company from acquiring its own shares. The use of the EST provides a mechanism to allow for the acquisition of Company A's shares through the EST and the EST is not prohibited from doing so as a result of Company A having no beneficial interest in any shares held by the EST.

• Assist Company A in managing any insider trading issues as the Trustee, a party acting independently and with a fiduciary duty to its beneficiaries, is acquiring shares in accordance with a set policy.

• Provide Company A with capital management flexibility. That is, shares allocated to employees can be either acquired from other shareholders or through subscription. This is important for Company A's shareholders as, in deciding the appropriate acquisition method, the most effective manner to utilise cash for shareholder benefit, and any concerns that existing shareholders have in relation to dilution of their existing shareholdings, can be considered.

• Provide greater flexibility to accommodate its long term incentive arrangements whilst Company A continues to expand in terms of operations and employee numbers in future years.

• Provide Company A with better visibility on management's share transactions in respect of shares acquired under the ESOP. The mechanism implemented through the facilitation of the ESOP through the EST assists Company A to better assess which of its employees are fully committed to aligning their interests with those of shareholders.

• Provides an efficient structure for giving effect to disposal restrictions/vesting conditions. As the Trustee is the legal owner of the shares, employees as beneficial owners have no ability to deal in the shares, until the shares are released from the Trust.

• Provides a single vehicle for the administration of the ESOP and any new plans, resulting in reduced administrative costs.

• Allows for easy recycling of shares, without increasing the percentage of ownership of other shareholders. When, for example, options have been issued to a particular Participant, shares have been acquired by the Trustee in advance but have not yet been allocated to be held on behalf of that Participant, and the options do not subsequently vest, Company A can allocate those shares to other future offers to other Participants under the ESOP.

• Provides Company A with an efficient mechanism for the administration and operation of any new employee equity plan which it introduces in the future.

Costs incurred by Company A in respect to the implementation and administration of the EST

Company A will incur various costs in relation to the implementation of the EST, including but not limited to:

• taxation and legal advice in respect of the Australian tax and legal implications which may arise for both Company A and the Participants of the ESOP in respect of the EST structure.

• legal drafting fees in respect of the various legal documents required in respect of the EST and the ESOP.

• professional fees associated with the establishment of the EST including such costs associated with the creation and registration of the EST with various authorities.

• taxation fees associated with the drafting and lodgement of the Application with the ATO.

Company A will also incur costs associated with the services provided by the Trustee of the EST in respect of the on-going administration and management of the EST, including but not limited to:

• Participants plan record keeping.

• production and dispatch of holding statements to Participants.

• provision of annual income tax return information.

• acquisition of shares and allocation to Participants.

• management of Participant termination.

• costs associated with the acquisition of shares (e.g. brokerage and other fees in allocation of shares to Participants).

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 subsection 95(1)

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 subsection 6-10(2)

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 Division 83A

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

Income Tax Assessment Act 1997 section 83A-20

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

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 subsection 104-85(1)

Income Tax Assessment Act 1997 subsection 104-85(2)

Income Tax Assessment Act 1997 subsection 104-85(3)

Income Tax Assessment Act 1997 section 130-85

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

Income Tax Assessment Act 1997 section 130-90

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

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

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

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

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

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

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 995-1

Corporations Act 2001

Reasons for decision

Question 1

Detailed reasoning

The basic trust income assessing provisions are contained in Division 6 in Part III of the Income Tax Assessment Act 1936 (ITAA 1936). Section 95 of the ITAA 1936 defines net income in relation to a trust (insofar as it is relevant) as follows:

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.

Subsection 6-10(2) states:

Amounts that are not *ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.

Note 1: Although an amount is statutory income because it has been included in assessable income under a provision of this Act, it may be made exempt income or non-assessable non-exempt income under another provision: see sections 6-20 and 6-23.

Note 2: Many provisions in the summary list in section 10-5 contain rules about ordinary income. These rules do not change its character as ordinary income.

None of the provisions listed in section 10-5 are relevant to the facts and circumstances of this private ruling. Therefore irretrievable non-refundable contributions made by Company A to the Trustee for the EST to fund the subscription for, or acquisition on-market and/or off-market of, Company A shares under the ESOP will not be assessable income under section 6-10. Such contributions 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, which is considered in the following section of these reasons for decision.

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 EST is established solely to manage and administer the ESOP so that it satisfies the definition of an 'employee share trust' in subsection 130-85(4). The general power granted to the Trustee of the EST must be exercised only for the purposes of the EST and only to give effect to the Plan, as defined in the Deed.

The Deed provides that all funds received from Company A for the purposes of the Plan (as defined in the Deed) will constitute accretions to the corpus of the EST. Furthermore, under the terms of the Deed the Trustee must use the contributions from Company A to acquire Company A shares, when directed by Company A to do so.

The decision in ATO Interpretative Decision ATO ID 2002/965 provides that the Trustee of an employee share trust will not be assessed under section 6-5 or section 6-10 on contributions made to the trust by an employer for the purpose of, and under, the employer's employee share scheme. ATO ID 2002/965 determines that the contributions constitute capital receipts to the trustee.

Accordingly, the irretrievable cash contributions made by Company A to the Trustee in accordance with the Deed and Rules for the sole purpose of, and under the ESOP, are contributions of capital to the Trust. These contributions are not assessable under section 6-5 (ordinary income) or section 6-10 (statutory income).

Question 2

Detailed reasoning

As discussed in Question 1 above, subsection 6-5(1) provides that your assessable income includes income according to ordinary concepts, which is also called ordinary income.

Subsection 95(1) of the ITAA 1936 defines net income of a trust as the total assessable income of the trust calculated as if the trustee were a resident taxpayer in respect of that income, less all allowable deductions.

Draft Taxation Ruling TR 2014/D1 explains the consequences for a trustee who participates in an employee remuneration trust (ERT) at paragraph 30 as follows:

30. Gains made by a trustee of an ERT on the realisation of trust assets are included in the trust's section 95 net income as ordinary income if after a wide survey and exact scrutiny of all of the relevant factors, it is determined that the gain or loss was made:

• in the ordinary course of carrying on a business of investment;

• outside of the ordinary course of that business but from an arrangement entered into with the intention of making a profit or gain; or

• from a one-off or isolated transaction where the investment was acquired in a business operation or commercial transaction for the purpose of profit-making.

In the present case, the activities carried out by the Trustee in facilitating the Company A Plan (as defined in the Deed) do not meet the above criteria. The Trustee is not carrying on a business of investment (there is no systematic course of buying and selling shares with the intent of profit-making). Furthermore, the role of the Trustee is not to enter into investments for the purposes of making a profit or a gain.

The Trustee is bound to the operation of the Deed which constrains the means by which the Trustee can dispose of shares.

Various clauses in the Deed indicate that the allocation, transfer, discharge or sale of shares may only occur in specified circumstances. Further it is evident that such actions are carried out in the course of performing the Trustee's fiduciary duty to preserve for the Participants the trust assets until such time as the Participants are entitled to those assets or alternatively, where the Trustee is instructed to release or discharge those assets.

At no point is the Trustee engaged in any activities to derive profits. Rather the Trustee is acquiring shares (upon instruction from Company A) with the intention of preserving any capital growth for the benefit of the Participants. Therefore, the Trustee should not be considered to derive any ordinary income under section 6-5 as a result of performing its function as Trustee of the EST by acquiring, holding and transferring shares under the terms of the Deed and the Plan (as defined in the Deed).

Furthermore, acquiring, holding and transferring shares under the terms of the Deed and the Plan (as defined in the Deed) should not give rise to particular kinds of assessable income contained in the list of provisions in section 10-5.

Accordingly, the Trustee of the EST will not derive any assessable income under section 6-5 or section 6-10 in respect of shares allocated or transferred to Participants.

Question 3

Detailed reasoning

CGT Event E5

When a Participant in the ESOP 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.

So far as relevant, section 130-90 provides for the disregarding of a capital gain or capital loss made by an employee share trust where:

(1) Shares [are] held for future acquisition under employee share schemes: subsection 130-90(1A), and

(2) Shares [are] held to satisfy the future exercise of rights acquired under employee share schemes: subsection 130-90(1)

Before analysing whether there is any entitlement to the relief offered under either (or both subsections, it is necessary to establish that the EST used by Company A satisfies the relevant definition of an employee share trust under subsection 995-1(1), which directs you to subsection 130-85(4).

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 a share is granted to them under the terms of the Deed and the Rules 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 ESOP is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which rights to acquire beneficial interests in ordinary shares in Company A are provided to employees (Participants) in relation to the employee's employment.

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

The Deed allows the Board to give the Trustee a notice in writing instructing it to acquire (by either subscription or purchase, or both) the number of shares specified in the notice, and those shares are to be held by the Trustee as Trust Shares.

Further, the Deed also enables Company A to offer to provide the Trustee with sufficient funds to either purchase or subscribe for those Trust Shares, or request the Trustee to apply some of the capital of the Trust to either subscribe for or purchase those Trust Shares, or a combination of both.

The Deed requires that, subject to having sufficient funds, the Trustee must either purchase or subscribe for, or effect a combination of both to acquire the requisite number of Trust Shares.

The Deed requires that Company A must provide the Trustee with (or cause the provision of) funds to enable it to comply with its obligations.

The Deed then details how the Trustee is to acquire those shares (depending upon whether the Participant is required to make a payment to the Trustee), and provides that the Trustee will hold the legal title to those shares.

Company A shares acquired by the Trustee will, subject to the terms of the Plan (as defined in the Deed), be allocated to the relevant Participant.

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 shares to the employees in accordance with the Deed and the ESOP.

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 ESOP.

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 Participants (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.

The Deed specifies some specific things that the Trustee has the power to do, including doing all things that are incidental to the particular activity. However, the powers and activities are subject to the terms of the Deed and would be considered to be incidental for the purposes of paragraph 130-85(4)(c).

The 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 purpose of subsection 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 Participants in accordance with the Deed and the Rules are merely incidental to operation of the ESOP.

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 shares to the Participants in accordance with the Deed and the ESOP; and

• the 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 Trust.

Shares held to satisfy the future acquisition: 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 ESOP, 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 Participants (the eligible employees) under the ESOP.

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 when 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 EST satisfies the definition of an employee share trust in subsection 130-85(4).

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

CGT event E5 is the CGT event that will apply under the terms of the ESOP 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 ESOP 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 Deed.

Subdivision 83A-C will apply to Company A shares acquired under the ESOP (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 EST at the time that CGT event E5 happens, subsection 130-90(1A) will apply.

Shares held to satisfy the future exercise of rights: 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.

Paragraph 130-90(1)(a)

CGT event E5 is the CGT event that will apply under the Rules of the ESOP 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 the exercise of an option is a share in the capital of a company (i.e. Company A). Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph.

Paragraph 130-90(1)(c)

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 (the option) provided under the ESOP.

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 ESOP is an employee share schemes within the meaning of subsection 83A-10(2) because the scheme is one under which rights to acquire beneficial interests in ordinary shares in Company A are provided to Participants (employees) in relation to their employment. Each option is acquired at a discount.

Subdivision 83A-B will apply to options acquired under the ESOP, as pursuant to subsection 83A-20(1) the ESS interests (i.e. options) 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 EST at the time that CGT event E5 happens, subsection 130-90(1) 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.

The terms of the Deed provide that absolute entitlement to those shares arises when the share or option has been allocated to a Participant, and they have satisfied all the relevant Vesting Conditions that may apply.

Under the Rules, the Participant, Company A and the Trustee are all bound. Further a Participant is also bound by the Application Form, Offer Letter, Rules, Company A's Constitution and Trust Deed (Deed).

Accordingly, shares or options which have:

(a) been allocated to a Participant, and where

(b) that Participant has otherwise satisfied all of the relevant Vesting Conditions, such that the ESOP Security is considered a Vested ESOP Security,

they will be absolutely entitled to that share or option.

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 and satisfaction of all Vesting Conditions, becomes absolutely entitled to those shares. In accordance with the 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.

Upon a Participant becoming absolutely entitled to the Company A share held on their behalf by the EST, CGT Event E5 will happen. However, section 106-50 will then operate to deem any act done by the Trustee in relation to the share to have been done by the Participant.

Where CGT Event E5 happens in relation to the share or option due to the Participant becoming absolutely entitled, it is not necessary to consider whether or not CGT Event E7 happens in relation to that same share or option at that same time.