Edited version of private advice

Authorisation Number: 1051601189218

Date of advice: 30 October 2019

Ruling

Subject: Employee Share Trust

Question 1

Will the irretrievable payments by Company G or any subsidiary of Company G to the Trust to fund the acquisition of Company G shares by the Trust be assessable income of the Trust under sections 6-5 or 6-10 of Income Tax Assessment Act 1997 (ITAA 1997) or Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Will the Trust meet the definition of an 'employee share trust' under subsection 130-85(4) of the ITAA 1997?

Answer

Yes

Question 3

Will dividends received by the Trustee on Company G shares - which are allocated to a Participant and where legal title to the shares is held by the Trustee - be included in calculating the 'net income' of the EST as defined in section 95 of the ITAA 1936

Answer

Yes

Question 4

Will dividends and other income received by the Trustee in respect of unallocated Company G shares be included in calculating the 'net income' of the EST as defined under section 95 of the ITAA 1936?

Answer

Yes

Question 5

Will the 'net income' of the EST as defined under section 95 of the ITAA 1936 be assessed to the Trustee under section 99A of the ITAA 1936?

Answer

Yes

Question 6

Will the Trustee be entitled under Subdivision 207-A of the ITAA 1997 to the benefit of franking credits attached to franked distributions on unallocated shares?

Answer

Yes

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

Company G is an Australian resident company which operates employee incentive plans (the Plans) as part of its remuneration strategy for employees of Company G and of any subsidiaries of Company G. The Plan is governed by the Plan Rules.

Employees who are eligible to participate in the Plans (participants) will be granted with options and/or rights to acquire shares in Company G.

Company G established the Trust administered by the Trustee to facilitate the acquisition, holding of and allocation of Company G shares to participants.

The Plans operates as follows:

·                 Rights entitle the participant to acquire a share for nil consideration at the end of the performance period.

·                 On granting options an exercise price is paid to be allocated a share.

·                 Upon satisfactory completion of the vesting conditions, Participants are eligible to exercise their vested options/rights to be issued with shares in Company G

·                 Company G or the subsidiaries will make irretrievable cash contributions to the Trust to enable the Trustee to acquire shares in Company G, to satisfy the exercise of options/rights by participants

·                 Company G shares are allocated by the Trust to participants, and

·                 Participants are entitled to hold or dispose of their shares in accordance with the Plan rules.

The rights are subject to performance hurdles and will be provided at a discount and the granting of options are subject to the requirement to remain employed with Company G and will only vest once the required period of employment has elapsed.

All dealings between the participants, Company G, its subsidiaries and the Trustee which are conducted in accordance with the rules set out in the Plan and Deed are at arms-length.

Company G and its subsidiaries are not beneficiaries of the Trust and have no interest in the shares held by the Trustee.

The Trust will operate as follows:

·                 The Trust will be managed and administered so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997).

·                 The funds contributed will be used by the Trustee to acquire Company G shares either on-market, off-market or via a subscription for new shares in Company G, based on written instructions from Company G. Any off-market transaction will occur at market value

·                 When the Trustee allocates shares to a participants' share account, the shares are held as allocated shares. At this point, the Participant becomes a beneficial owner of the shares and is entitled to receive cash dividends in respect of the shares held by the Trustee on behalf of the participant.

·                 Any dividend income received by the Trustee on unallocated shares will be treated as assessable income and taxed in the hands of the Trustee.

·                 The Trustee may use the after tax proceeds from dividends received on unallocated shares to purchase additional shares.

·                 A dividend on unallocated Shares cannot be paid to Company G.

·                 The Trustee cannot pay dividends on unallocated shares to participants on the basis there is no present entitlement.

Company G (or any subsidiary of Company G) will not make an upfront contribution that is intended to provide for the Trust's operations for several years in the future.

Company G will make irretrievable cash contributions to the Trust as and when required.

Contributions will be made after the relevant rights or options are granted. These contributions may occur before or after vesting.

The amount of each cash contribution made by Company G to the Trust is equal to the market value of shares to be acquired by the Trust.

The Trustee of the Trust holds all Company G shares pursuant to the Plans on capital account.

The Trust will only be used to provide shares to participants in satisfaction of awards granted under the Plans. The Trust will not provide awards in cash or in an alternative form.

Any ESS granted pursuant to waived or reduced conditions, including due to special circumstances, will nevertheless satisfy the 'genuine restrictions on immediate disposal requirement'.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Subsection 97(1)

Income Tax Assessment Act 1936 Section 98

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Subsection 99A(2)

Income Tax Assessment Act 1936 Subsection 99A(4)

Income Tax Assessment Act 1936 Former Division 1A of Part III

Income Tax Assessment Act 1936 Former Section 160APHO

Income Tax Assessment Act 1936 Former Subsection 160APHO(3)

Income Tax Assessment Act 1936 Former Subsection 160APHM(2)

Income Tax Assessment Act 1936 Division 6

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 67

Income Tax Assessment Act 1997 Subsection 67-25(1)

Income Tax Assessment Act 1997 Subsection 67-25(1B)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-10

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

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

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 Subsection 130-90(1)

Income Tax Assessment Act 1997 Division 207

Income Tax Assessment Act 1997 Subsection 207-5(3)

Income Tax Assessment Act 1997 Subdivision 207-A

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

All references below are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Summary

The irretrievable payments made by Company G or any subsidiary to the Trust to fund the acquisition of Company G shares by the Trust will not be assessable income of the Trust under Division 6 of the ITAA 1936 or under section 6-5 or section 6-10.

Detailed reasoning

Sections 6-5 and 6-10 relevantly state the following:

Section 6-5 Income according to ordinary concepts (ordinary income)

6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

6-5(2) If you are an Australian resident, your assessable income includes the ^*ordinary income you ^*derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

...

Section 6-10 Other assessable income (ordinary income)

6-10(1) 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.

...

Assessable income pursuant to subsection 6-5(1) includes amounts that are income according to ordinary concepts.

The expression 'income according to ordinary concepts' is not defined by the income tax legislation, however the courts have considered a number of factors which indicate whether a receipt has the character of income according to ordinary concepts.

Whether a particular receipt has the character of income or capital depends upon its quality in the hands of the recipient: Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 14 ATD 286; (1966) 10 AITR 367, GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 21 ATR 1; 90 ATC 4413.

Under the Plans and in accordance with the Trust Deed, Company G and any subsidiaries will make contributions to the Trust which will enable the Trust to acquire shares to satisfy awards made to employees of Company G and any subsidiaries under the Plan.

Whether assessable income of the Trustee

The ATO-view on whether the irretrievable payments made by Company G and any subsidiary to the Trustee are characterised as income or capital receipts is set out in ATO Interpretative Decision ATO ID 2002/965 which states:

The Trustee of the employee share scheme Trust will not be assessed under sections 6-5 or 6-10 of the ITAA 1997 on contributions made to it by an employer for the purpose of and under the employer's employee share scheme.

...

The funds provided to the Trustee are used in accordance with the Trust Deed and Plan Rules ... The contributions constitute capital receipts to the Trustee, ...

As the irretrievable payments made by Company G (or by any subsidiary of Company G) will constitute a capital receipt to the Trustee, the payments will not be included in assessable income under sections 6-5 or 6-10.

Given that the irretrievable cash contributions made by the Company to the Trustee are neither ordinary income nor statutory income, they will not be included in the net income of the Trust, and hence cannot be assessed to the Trustee pursuant to Division 6 of Part III of the ITAA 1936.

Question 2

Summary

The Trust meets the definition of an 'employee share trust' under subsection 130-85(4).

Detailed reasoning

The term 'employee share trust' referred to in subsection 130-90(1) is defined in subsection 995-1 as having the meaning given by subsection 130-85(4).

Subsection 130-85(4) provides that an employee share trust for an employee share scheme (having the meaning given by subsection 83A-10(2)) 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:

(c)             (i) the company; or

(d)             (ii) a subsidiary of the company; and

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

The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of a right are both ESS interests within the meaning of subsection 83A-10(1).

An employee share scheme is defined in subsection 83A-10(2) as 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 Plans are employee share schemes within the meaning of subsection 83A-10(2) because they are schemes under which rights to acquire shares are provided to employees in relation to their employment.

Company G established the Trust to facilitate the Plans by acquiring shares and allocating those shares to participants, in order to satisfy the options or rights acquired under the employee share scheme. The beneficial interest in the shares is provided under an employee share scheme as defined in subsection 83A-10(2).

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

·                 the Trustee acquires shares, and

·                 the Trustee ensures that ESS interests as defined in subsection 83A-10(1), being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2), by allocating those Shares to the participants in accordance with the governing documents of the scheme.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) limits a trustee to undertaking incidental activities that are a function of managing the employee share scheme and administering the trust. For the purposes of paragraph 130-85(4)(c), activities which are merely incidental, are set out in Draft Taxation Determination TD 2019/D8: Income tax: what is an 'employee share trust'?

Question 3

Summary

The dividends received by the Trustee on Company G shares - which are allocated to a participant and where legal title to the shares is held by the Trustee - will be included in calculating the 'net income' of the EST as defined in section 95 of the ITAA 1936.

Detailed reasoning

The Trustee holds the legal title to, and is the registered shareholder of, shares which are allocated to a participant.

Subsection 95(1) of the ITAA 1936 defines 'net income', in relation to a trust estate, to mean

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, except...

Pursuant to subsection 44(1) of the ITAA 1936, the assessable income of a resident shareholder in a company includes dividends that are paid to the shareholder by the company out of profits derived by it from any source.

Therefore, dividends received by the Trustee on shares which are allocated to a participant under clause 3.7(a) of the Trust Deed, where the Trustee holds legal title to the shares, will be included in the calculation of the net income of the Trust under subsection 95(1) of the ITAA 1936

Question 4

Summary

The dividends and other income received by the Trustee in respect of unallocated Company G shares will be included in calculating the 'net income' of the EST as defined under section 95 of the ITAA 1936.

Detailed reasoning

The Trust Deed, the Trustee holds the legal title to, and is the registered shareholder of, shares which are unallocated.

As discussed in the Detailed reasoning for Question 3, section 95 of the ITAA 1936 provides that the net income in relation to a trust estate means the total assessable income of the trust estate.

Accordingly, dividends and other income received by the Trustee in respect of unallocated Company G shares are required to be included in calculating the net income of the Trust as defined under section 95(1) of the ITAA 1936.

Question 5

Summary

The 'net income' of the EST as defined under section 95 of the ITAA 1936 will be assessed to the Trustee under section 99A of the ITAA 1936.

Detailed reasoning

Subsection 97(1) determines the assessable, exempt and non-assessable non-exempt income of a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of the trust estate.

Where no beneficiary is presently entitled to the income of a trust estate, the net income of the estate will be taxed in the hands of the trustee under either section 99 or 99A. Section 99A will apply unless excluded in accordance with subsection 99A(2).

Where no part of the net income of a resident trust estate is included in the assessable income of a beneficiary of the estate, the trustee is assessed and liable to pay tax on the net income (as defined in subsection 95(1) of the ITAA 1936 and pursuant to subsection 99A(4).

Accordingly, the Trustee will be assessed under section 99A on that part of the net income of the trust estate which relates to unallocated shares to the extent the net income is not included in the assessable income of a participant.

Question 6

Summary

The Trustee will be entitled under Subdivision 207-A to the benefit of franking credits attached to franked distributions on unallocated shares.

Detailed reasoning

Division 207 deals with the effect of receiving franked distributions.

Amounts to be included in assessable income

Subsection 207-5(3) sets out that if a franked distribution is made to a member (shareholder) of a company that is a trustee of a trust, an amount equal to the franking credit on the distribution is also included in the member's assessable income.

The general rule which is set out in subsection 207-5(1) is the member (shareholder) of a company includes the amount of the franking credit in its assessable income and is also entitled to a tax offset equal to the amount of the franking credit.

The Trustee is a 'corporate tax entity' as it is a company (section 960-115). Therefore, Subdivision 207-A applies to the Trustee as the legal owner of the unallocated shares, and not Subdivision 207-B.

Therefore, the Trustee is obliged to include in the assessable income of the Trust the amount of the franking credit attached to dividends received on unallocated shares, and, subject to satisfying the 'qualified person rule', the Trust is entitled to the benefit of a tax offset equal to the amount of the franking credits.