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Edited version of your written advice
Authorisation Number: 1051213627990
Date of advice: 3 October 2017
Ruling
Subject: Employee Share Trust.
Question 1
Will the irretrievable cash contributions made by Company A to the trustee for A Trust (the ‘Trustee’) to fund the subscription for, or acquisition on-market of, the Company A’s ordinary shares (Shares) be assessable income of the Trustee pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) or Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
No.
Question 2
a) Will the Trustee make a capital gain or capital loss from CGT event E5 (in section 104-75 of the ITAA 1997) happening when a Participant satisfies the Vesting Conditions for an Award and the Trustee allocates a Share to the Participant?
Answer
No.
b) Will the Trustee make a capital gain or capital loss from CGT event E7 (in section 104-85 of the ITAA 1997) or CGT event A1 (in section 104-10 of the ITAA 1997) happening when the Trustee transfers legal ownership of the Shares to a Participant following allocation?
Answer
No.
Question 3
Will dividends received by the Trustee on Shares which have been allocated to a Participant, where legal title to the Shares is held by the Trustee, be included in the calculation of the net income of the Trust under subsection 95(1) of the ITAA 1936?
Answer
Yes.
Question 4
Will dividends and other income received by the Trustee in respect of Unallocated Shares be included in the calculation of the net income of the Trust under subsection 95(1) of the ITAA 1936?
Answer
Yes.
Question 5
Will the Trustee be assessed and liable to pay tax on any part of the net income of the Trust under section 99A of the ITAA 1936?
Answer
Yes, in respect of any part of the net income of the Trust that is not included in the assessable income of a beneficiary of the Trust under section 97 of the ITAA 1936, in respect of which the Trustee is not assessed and is not liable to pay tax under section 98 of the ITAA 1936, and that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia.
Question 6
Will the Trustee
(a) have to include an amount in its assessable income pursuant to subsections 207-35(5) and (6) of the ITAA 1997; and
(b) be entitled to a tax offset pursuant to section 207-45 of the ITAA 1997 equal to the franking credits on franked distributions made to the Trustee
in respect of Unallocated Shares?
Answer
Yes.
Ruling period
DDMMYY to 30 June 202X
The scheme commenced in:
The income year ended on 30 June 2017
Relevant facts and circumstances
1. Company A is an Australian resident company. It operates an employee share plan (the Plan) as part of its remuneration strategy. The Plan is currently operating according to a number of governance documents.
2. Under the Plan, eligible employees (Participants) are granted Awards to acquire Company A shares subject to certain conditions being met.
3. The Plan operates as follows:
● Company A established an A Trust to facilitate the acquisition, holding and allocation of shares to Participants.
● Company A makes irretrievable cash contributions to the Trustee to enable the Trustee to acquire Company A shares to satisfy the Awards. The contributions will be determined in accordance with certain protocols.
● The Awards are offered by Company A to Participants subject to certain requirements are satisfied. When the Awards vest to a Participant, Shares are released by the Trustee and allocated to the Participants in accordance with the relevant Plan rules.
● Once Awards vest and Shares are transferred to the Participants, the Participants are entitled to dispose of their shares (subject to complying with Company A’s share trading policy) according to their own wishes.
4. Company A is not a beneficiary of A Trust. It does not have any legal or beneficial entitlement to any of the Shares forming part of the Trust fund at any time, and may not acquire such an interest.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 95
Income Tax Assessment Act 1936 section 99A
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 6-10
Income Tax Assessment Act 1997 section 10-5
Income Tax Assessment Act 1997 section 104-75
Income Tax Assessment Act 1997 section 130-90
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 104-75
Income Tax Assessment Act 1997 section 130-90
Income Tax Assessment Act 1997 section 106-50
Income Tax Assessment Act 1997 Subdivision 207-B
Income Tax Assessment Act 1997 section 207-150
Reasons for decision
Question 1
The irretrievable cash contributions received by the Trustee will not be assessable to the Trustee under either section 6-5 or 6-10 of the ITAA 1997 or Division 6 of Part III of the ITAA 1936, because they are not ordinary income to the Trustee, and they do not fall within any of the provisions listed in section 10-5 of the ITAA 1997.
Question 2
a) A capital gain or capital loss from CGT event E5 (in section 104-75 of the ITAA 1997) will be disregarded under section 130-90 of the ITAA 1997 when a Participant satisfies the Vesting Conditions for an Award and the Trustee allocates a Share to the Participant.
b) The Trustee will not make a capital gain or capital loss from CGT event E7 (in section 104-85 of the ITAA 1997) or CGT event A1 (in section 104-10 of the ITAA 1997) happening when the Trustee transfers legal ownership of the Shares to a Participant following allocation.
Questions 3 and 4
Dividends received by the Trustee on Shares which have been allocated to a Participant will be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936.
Dividends and other income received by the Trustee on Unallocated Shares will be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936.
Question 5
The Trustee will be assessed and liable to pay tax on a part of the net income of A Trust under section 99A of the ITAA 1936, in respect of the part of the net income that is not included in the assessable income of a beneficiary of the Trust under section 97 of the ITAA 1936, in respect of which the Trustee is not assessed and is not liable to pay tax under section 98 of the ITAA 1936, and that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia.
Question 6
The Trustee will have to include an amount in its assessable income pursuant to subsections 207-35(5) and (6) of the ITAA 1997, and will be entitled to a tax offset pursuant to section 207-45 of the ITAA 1997 equal to its share of the franking credits on franked distributions made to the Trustee in respect of Unallocated Shares.