Edited version of private advice

Authorisation Number: 1051578898955

Date of advice: 30 April 2020

Ruling

Subject: Employee Share Scheme

Question 1a

Will any capital gain or loss that arises for the Trustee at the time a Participant becomes absolutely entitled to Company A shares under the Plan under CGT event E5 in section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997) be disregarded under section 130-90 of the ITAA 1997 if the Participant acquires the shares for the same or less than the cost base of the shares in the hands of the Trustee?

Answer

Yes.

Question 1b

Will any capital gain or loss that arises for the Trustee when the Trustee transfers legal ownership of the Shares to a Participant following allocation due to CGT event E7 in section 104-85 of the ITAA 1997 be disregarded under section 130-90 of the ITAA 1997 if the Participant acquires 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 ended 30 June 2020

Income tax year ended 30 June 2021

Income tax year ended 30 June 2022

Income tax year ended 30 June 2023

Income tax year ended 30 June 2024

Relevant facts and circumstances

Company A rewards staff performance by enabling staff to participate in the growth and profitability of the company, through a long term incentive structure. Eligible directors and employees (Participants) receive Performance Rights through the Plan.

The Plan

The Plan was approved by shareholders.

The Board may grant Rights subject to the length of service with the Group, potential contribution to the Group, and any other matters the Board considers relevant.

The Plan will be administered by the Board and Trustee in accordance with the Plan and the Trust Deed.

Grant of Rights

An offer of Rights is made to an Eligible Person and will specify the following:

(a)             the date of the offer

(b)             the number of Rights the subject of the offer

(c)             the Offer Closing Date

(d)             the Performance Criteria and Performance Period

(e)             the time at which the applicable Performance Criteria will be tested in respect of the Performance Period

(f)              the Exercise Period

(g)             the manner of exercise of Vested Rights

(h)             the Exercise Price

(i)               applicable Exercise Restrictions and Restriction Period, and

(j)               other terms and conditions relating to the offer of the Rights as the Board may determine.

To accept an offer, Participants must submit an acceptance form on or prior to the Offer Closing Date. The form must include a notification they accept the offer and the terms and conditions of the offer, confirmation they agree to be bound by the terms of the Plan and the Trust Deed, and agree to the placing of a Holding Lock on any Shares provided on the exercise of the Rights.

Each Right is a right to be issued with, or transferred a Company A Share. A Participant is not entitled to participate in or receive any dividends or other Shareholder benefits until the Right has Vested and been exercised and a Share has been allocated or transferred to the Participant as a result of the Vesting and exercise of the Right.

Restrictions on grant of Rights

Generally Rights that are offered under the Plan can only be issued for a maximum three year period from the date that Shareholders approve the issue of Rights.

Vesting and exercise of Rights

Rights will only Vest once the Board, in its discretion, determines that any relevant Performance Criteria have been satisfied.

The Plan provides details of when a Right will lapse, broadly they are as follows:

(i)               failure to satisfy the Performance Criteria by the end of the Performance Period

(ii)             expiry of the Exercise Period

(iii)            cessation of the Participants employment

(iv)            transfer or purported transfer of the Right without the Board's prior written consent

(v)             a determination by the Board that the Participant has acted fraudulently, dishonestly or in breach of the Participants obligations

(vi)            the 15^th anniversary of the date of grant of the Rights, and

(vii)          the participant notifying they wish the Right to lapse and the Board agreeing to that request.

A Vested Right may be exercised by a Participant lodging a notice and payment of the applicable Exercise Price (if any); or be automatically exercised at a specific time or event, in accordance with the terms of the Offer.

Shares provided on exercise

Each Right entitles the Participant to be allocated a Company A Share on Vesting. Shares provided to a Participant following the exercise of Vested Rights will be registered in the name of the Trustee and are to be held by the Trustee on behalf of the Participant on the terms of the Plan and the Trust Deed.

Restrictions on dealing in Shares

Shares will be held on trust for the Participant by the Trustee for the duration of the Restriction Period in accordance with the Plan and the Trust Deed. A Participant may deal with a Share following the end of the Restriction Period.

The Board may prescribe such other mechanisms as it considers necessary to give effect to the restrictions, including the placing of a Holding Lock on Shares provided on the exercise of Vested Rights.

Forfeiture of Shares

A Share will be forfeited where a Participant perpetrates fraud, acts dishonestly or commits a breach of the Participant's obligations to Company A or any other member of the group which would justify the Participants termination as an Eligible Persons without notice.

Withdrawal Notice

Shares are held in the Trust on behalf of the Participant until such time as the Participant submits a Withdrawal Notice to Company A in respect of some or all of the Shares credited to the Account of the Participant under the Plan.

The Trust

The Trust has not and will not be used to administer Rights to non-employees, including contractors.

Company A incurs on-going administration costs of the Trust for which it claims a deduction pursuant to section 8-1 of the ITAA 1997.

The sole activities of the Trustee will be acquiring Company A Shares for the purpose of providing them to Participants at a discount and the administration of the Trust. The Trustee will acquire Company A Shares at market value and will have the discretion to acquire them on market or by subscription for new shares. The Trust is managed and administered so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997.

The Trust was established for the purpose of subscribing for or purchasing, allocating and holding Shares under the Performance Rights Plan for the benefit of Participants.

Declaration of trusts

For each Participant, Shares will be held by the Trustee on behalf of that Participant, the proceeds of sale arising from the sale by the Trustee of rights under a Rights Issue and all Trust Assets related to or arising from Shares on the terms of the Deed and subject to the Plan and any applicable Terms of Participation.

Each Participant is beneficially entitled to those Shares held by the Trustee on his or her behalf, all Trust Assets in respect of those Shares, and all other benefits and privileges attached to, resulting from holding, those Shares. The Trustee will only deal with Shares and any Trust Assets in respect of Shares in accordance with a valid direction of the relevant Participant, the terms of the Plan and any applicable Terms of Participation.

Unallocated Shares will be held on trust until they are allocated to a Participant in accordance with the Trust Deed.

Trustee

The Trustee has the power to administer, maintain and preserve the Trust in the performance of its obligations under the Trust Deed. These powers include entering into and executing all contracts, deeds and documents and do all acts or things necessary for the purpose of giving effect to and carrying out the trusts, powers and discretions conferred on the Trustee by the Trust Deed.

The Trustee is not entitled to receive from the Trust any fees, commission or other remuneration in respect of its office, but Company A may pay to the Trustee from Company A's own resources such fees as Company A and the Trustee agree from time to time.

Rights attaching to Shares

Participants are entitled to receive all Cash Dividends paid on Shares held by the Trustee on behalf of a Participant, subject to the terms of the Trust Deed.

Participants are entitled to any Bonus Shares which accrue to Shares held by the Trustee on behalf of Participants. Bonus Shares must be registered in the name of the Trustee and held in Trust for the Participant who is the beneficial owner.

Participants are entitled to Rights which accrue on Shares held by the Trustee on their behalf. Where the Trustee sells the Rights, the Trustee must distribute the proceeds of sale (after costs) to the Participant.

Where the Trustee acquires Shares pursuant a Rights issue, the Trustee must transfer those Shares to the Participant (after costs).

A Participant may give the Trustee written notice directing the Trustee how to vote in respect of Shares held by the Trustee on their behalf. If no written notice is received the Trustee cannot exercise the voting rights attached to Shares.

Method of acquisition of Shares under the Plan

Company A may provide funds to the Trustee for the purpose of acquiring the Company A Shares, by purchase or subscription. The Trustee may apply some of the capital of the Trust for the purpose of acquiring Company A, by purchase or subscription. The Trustee may apply Unallocated Shares or Forfeited Shares to a Participant. All funds are irretrievable contributions and will constitute an increase to corpus of the Trust and are not repayable to Company A. No Participant is entitled to receive funds from the Trust.

Shares must be registered in the name of the Trustee on issue or purchase, and must be held on the terms of the Trust Deed and the Plan and any applicable Terms of Participation by the Trustee on behalf of the Participant who is the beneficial owner of the Shares.

Trustee's action following Withdrawal Notice

Where a Withdrawal Notice has been given (or deemed to be) by a Participant, Company A will notify the Trustee that they may deal with the Shares by transferring the Shares to the Participant, or by selling those Shares and paying the proceeds (after deducting costs of sale) to the Participant.

Transfer or sale of Shares

Where the Plan or Terms of Participation permit, the Trustee must, at the direction of the Participant, sell the Shares to which the Participant is entitled and pay the proceeds to the Participant.

Where the Plan or Terms of Participation require, or if the Trust is Terminated, or the Board exercises its discretion, the Trustee must do all things necessary to transfer legal title in any Shares that the Participant is entitled to the Participant.

Income and capital distributions

Subject to any applicable Terms of Participation, a Participant is presently entitled to so much of the Net Income of the Trust for a Year of Income which is attributable to the Shares held by the Trustee on behalf of the Participant.

The balance of any Net Income of the Trust for a year of income to which no Participant is presently entitled, may be accumulated by the Trustee as an addition to the Trust.

Termination of the Trust

The Trust will terminate and be wound up when an order being made, or resolution passed for the winding up of Company A, the Board determines the Trust be wound up, or the day before the 80^th anniversary of the Trust Deed.

If the Trust is terminated, the Trustee must transfer to the Participant Shares standing to the credit of the Account of the Participant. The balance of the capital or income of the Trust to which no Participant is entitled may be applied by the Trustee to another employee equity plan or trust established and maintained for the benefit Employees or Directors or a charity.

Reasons for Decision

All legislative references in this Ruling are to provisions of the ITAA 1997.

Summary

A capital gain or capital loss that arises for the Trustee at the time when the Participants become absolutely entitled to Company A shares (CGT event E5), or when the Trustee disposes of the shares to the Participants (CGT event E7) will be disregarded under section 130-90 if the Participants acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee.

Detailed reasoning

Generally, CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee, subject to some exceptions (section 104-75).

If CGT event E5 happens, the trustee makes a capital gain or capital loss if the market value of the asset (at the time of the event) is more than its cost base or less than the asset's reduced cost base, respectively (subsection 104-75(3)). However, any capital gain or capital loss the trustee makes is disregarded for employee share trusts (Note in subsection 104-75(4)).

The meaning of an employee share trust is defined in subsection 130-85(4), which examines the activities of the trustee. The present Trust is an employee share trust because:

·                 the Trust acquires shares in a company, namely Company A

·                 the Trust ensures that ESS interests as defined in subsection 83A-10(1) (being Rights in the Plan) 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 Trust Deed and the Plan, and

·                 the objects of the Trust are for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under subsection 130-85(4) (clause 4 of the Trust Deed). The powers and activities allowed to be undertaken by the Trustee according to the Trust Deed are in line with the types of activities that are merely incidental as set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'?

Section 130-90 operates to disregard any capital gain or capital loss if the conditions in that section are satisfied, subsection 130-90(1) applies in respect of shares held to satisfy the future exercise of rights acquired under employee share schemes (as in the Plan).

Subsection 130-90(1)

Subsection 130-90(1) applies to disregard any capital gain or loss made by an employee share trust if:

(a)             the CGT event is CGT event E5 or E7

(b)             the CGT event happens in relation to a share

(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.

Paragraph 130-90(1)(a)

CGT event E5 is the CGT event that will apply under the terms of the Trust and Plan at the time the Participant becomes absolutely entitled to the Company A Shares as against the Trustee when Exercise Conditions are met and the Right is exercised.

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 Right is a share in the capital of a company (i.e. Company A). Accordingly, CGT event E5 happens in relation to a share.

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 provided under the Plan.

Paragraph 130-90(1)(d)

Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states:

This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

The Right in the Plan is an 'ESS interest' under paragraph 83A-10(1)(b) because it is a beneficial interest in a right to acquire a Share in Company A.

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 Plan 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 in relation to the employee's employment. Each Right is acquired for no cost.

As the Participant acquires the Right for no cost, the ESS interest is acquired by the Participant at a discount. Therefore, Subdivision 83A-B or 83A-C applies to the Right under the Plan.

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 Trust at the time that CGT event E5 happens, subsection 130-90(1) will apply. Any capital gain or capital loss that the Trustee makes from CGT event E5 for the Plan is disregarded.

CGT Event E7

CGT event E7 happens if the trustee of a trust disposes of a CGT asset of a trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital (section 104-85).

CGT event E7 may happen in relation to a Share when the Trustee disposes of the Share in satisfaction of a Participant's beneficial interest in the Share. However, section 106-50 affects the operation of section 104-85 such that CGT event E7 may not happen in these circumstances. 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 the 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 shares.

Once a Participant is absolutely entitled to a Company A Share held on their behalf by the Trust, section 106-50 will deem the disposal of the Company A Share by the Trustee to be done by the Participant. This means there would be no change in the share's ownership.

Therefore, section 106-50 will apply such that if the Trustee disposes of Company A Shares under the 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.