Edited version of private advice

Authorisation Number: 1051607172131

Date of advice: 9 December 2019

Ruling

Subject: Employee Share Trust

Question 1

Will the irretrievable cash contributions made by the Company to the Trustee of Employee Share Trust (the Trust) to fund the acquisition of, or subscription for, the Company shares by the Trust be assessable income of the Trust under sections 6-5 or section 6-10 of the 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 when either CGT Event E5 or E7 happens in relation to the Company shares held by the Trustee be disregarded under section 130-90 of ITAA 1997 if the employees acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee?

Answer

Yes

Relevant facts and circumstances

Employee share plan

The Company implemented an Employee Share Option Plan (ESOP) under which Options were granted to eligible employees (Participants). The Company then adopted a new Plan (New Plan) under which Awards (Options, Rights and Shares) are awarded to Participants. There are a number of outstanding Options under the ESOP, however since the New Plan was adopted, all Awards are made under the New Plan. This ruling considers both ESOP and the New Plan (together referred to as the Plans).

ESOP

The ESOP broadly operates as follows in accordance with the ESOP Rules:

·        It is at the Board's discretion to extend an invitation to certain employees to apply for a number of Options specified on the invitation.

·        Invitations will be extended on such terms and conditions as the Board decides, from time to time, including:

-        the number of Options which may be applied for

-        the Grant Date

-        the Exercise Date

-        the Expiry Date

-        any Exercise Condition, and

-        any supplementary terms and conditions attaching to the Options.

·        The exercise price of the Options, if any, will be specified in the invitation and may reflect a discount to the weighted average sale price (WAP) of the Company's shares sold during the 10 days immediately prior to the grant date. It should be noted that at the discretion of the Executive Chairman, the discount may be waived if the Executive Chairman is not satisfied with the contribution made by the employee during the term of the option, in which case, the exercise price would be the WAP or a price between the discounted exercise price and the WAP.

·        The Options will become exercisable on the Exercise Date, specified in the invitation, subject to the participant remaining an employee of the Group as at the Exercise Date.

·        In certain circumstances, the Options will immediately lapse (for example, where the participant is lawfully terminated by a member of the Group, the participant resigns from employment with any member of the Group).

·        Options are not transferable without the permission of the Board.

New Plan

New Plan broadly operates as follows in accordance with the New Plan Rules:

·        Each offer to the Participant (Offer) must be documented in writing will outline the following terms of issue:

-        Name and address of the Participant

-        Type and total number of Awards being offered

-        Any payment required to be made for the grant of the Award

-        Date of Offer

-        Any exercise period (including vesting date and expiry date)

-        Any exercise price

-        Any vesting date

-        Any vesting conditions

-        Any disposal restrictions

-        Any other terms of the Awards.

·        The Board, may in its absolute discretion, permit a Participant to nominate a nominee (Nominee) to be granted and hold Awards on behalf of the Participant.

·        All shares allocated in the Trust to Participants under the New Plan will rank equally in all respects with other shares for the time on issue by the Company subject to the terms of the Trust.

·        A Participant issued Shares, unless otherwise provided in the Offer or determined by the Board, may not dispose of any interest in those relevant Shares granted in accordance with New Plan Rules until the earlier of:

-        A period of 3 years, commencing at the time of issue/transfer of the Shares to the Participant

-        The time when the Participant ceases to be employed by the Company, and

-        The end of any other period determined by the Board in accordance with relevant law.

·        The Awards (excluding the award of Shares) will vest on the relevant vesting date subject to the vesting conditions specified in the Offer.

·        Each Option granted, subject to the rules of the Offer, entitles the Participant to receive one Company share upon the exercise of the Option. A Participant's entitlement in relation to Options granted to be issued, transferred or allotted one Company share is subject to:

-        any acquisition of shares not breaching the relevant listing rules

-        vesting conditions being satisfied

-        exercise period

-        exercise price payable, and

-        other conditions required by the Board and specified in the Offer.

·        Each Right entitles the Participant to be issued, transferred or allocated, one share after the relevant vesting date in accordance with New Plan Rules.

·        A Participant has no dividends or voting rights in respect to Awards (excluding the award of Shares) until shares are issued, transferred or allocated by the Trustee (upon vest or exercise if applicable of an Award).

·        Unless the Board decides otherwise, Awards (excluding the award of Shares) held by the Participant will be treated as follows:

·        Awards will lapse immediately (unless specified otherwise) if on or before the vesting date (i.e. between grant and vesting date) the following occurs:

-        Lawful termination of employment

-        Resignation or vacation from the Board, employment or consultancy

-        Redundancy

-        Death or disability

-        Loss of control of permitted nominee

·        Vested Options held by a Participant will have the relevant expiry date adjusted to the date specified in the Offer or a later dated decided by the Board (unless specified otherwise) if the following occurs during the exercise period (i.e. between vest and exercise date):

-        Lawful termination of employment

-        Resignation or vacation from the Board, employment or consultancy

-        Redundancy

-        Death or disability (no adjustment, representative of Participant's estate may exercise before the expiry date)

-        Loss of control of permitted nominee (Options will lapse immediately).

·        Awards and Shares may not be transferred or encumbered unless otherwise permitted by the New Plan Rules.

·        A Participant must comply with any disposal restriction in relation to shares received (including under an Award on exercise of an Option or after vesting of a Right.

Employee share trust

To facilitate the operation of the Plans, the Company has established an Employee Share Trust (EST) for the sole purpose of subscribing for or acquiring, allocating, holding and delivering Company shares under the Plans.

The EST is funded by cash contributions from the Company for purchase of shares in accordance with the Trust Deed.

Pursuant to the Trust Deed, 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. In addition, it is not permitted to carry out activities which result in the Participants being provided with additional benefits other than the benefits that arise from the relevant Plan.

Pursuant to the Trust Deed, the Trustee is empowered to acquire shares in the Company either on-market or via a subscription for new shares in the Company based on written instructions from the Board.

Pursuant to the Trust Deed, the Company must provide the necessary funds to the Trustee for the purpose of enabling it to acquire Company A shares as specified in the notice in accordance with the Trust Deed.

The Trustee is required to establish and maintain a separate Trust Share Account for each Participant in accordance with the Trust Deed.

While shares in the Company are held in trust, the Participant will be entitled to dividend and voting rights. Participants can apply for legal title to the appropriate Company shares held in the EST to be transferred to them.

All funds received by the Trustee from the Company will constitute accretions to the corpus of the trust and no Participant will be entitled to receive such funds. The contributions will not be repaid to Company A unless they are used to subscribe for Company A shares.

Reasons for decision

Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.

Question 1

Section 95 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, irretrievable cash contributions made by the Company to the Trustee will not be assessable income under section 6-10.

The irretrievable cash contributions will only be included in the calculation of the net income of the Trust under section 95 if the amounts are assessable as income according to ordinary concepts under section 6-5.

The irretrievable cash contributions made by the Company to the Trustee of the Trust under the terms of the Plans and the Trust Deed are to be used for the sole purpose of obtaining shares in the Company for the benefit of Participants (including subscribing for or acquiring, allocating, holding and delivering shares under the Plans). Accordingly, the irretrievable cash contributions constitute capital receipts to the Trustee of the Trust.

In ATO Interpretative Decision ATOID 2002/965, Income Tax - Trustee not assessable on employer contributions made to it under the employee share scheme, the Commissioner has expressed a view that the funds provided to the trustee of the employee share scheme trust constitute capital receipts to the trustee, and not assessable under sections 6-5 or 6-10.

Therefore, the irretrievable cash contributions made by the Company to the Trustee to fund the acquisition of the shares in accordance with the Plans and the Trust Deed will not be assessable income of the Trustee pursuant to section 6-5 or 6-10.

Note that the Trust Deed provides that whilst the Trustee is not entitled to receive any fees, commissions or remuneration in respect of the performance of its obligations as Trustee of the Trust, Company may pay to the Trustee from the Company's own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as the Company and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement. Such receipts will be assessable income of the Trustee is contrast to the irretrievable cash contributions made to facilitate the acquisition of the Company shares.

Question 2

When a Participant becomes absolutely entitled to the Shares as against the Trustee, CGT event E5 will occur and therefore 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.

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 (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.

In determining whether subsection 130-90(1) applies to the EST, it is necessary to consider whether the EST is an 'employee share trust' as defined under subsection 130-85(4)

Employee Share Trust (EST)

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

Subsection 130-85(4) of the ITAA 1997 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).

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 their associates in relation to their employment.

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

Each of the Plans are employee share schemes for the purposes or Division 83A because each is a scheme under which ESS interests (rights to acquire shares in the company) are provided to employees in relation to the employee's employment.

The EST was established by the Company for the sole purpose to obtain and allocate Shares to satisfy the ESS interests (Awards) of Participants acquired under the Plans. Accordingly, paragraphs 130-85(4)(a) and (b) are satisfied because:

·        the EST acquires shares in the Company, and

·        the EST ensures that ESS interests are provided under an ESS to the employees in accordance with the ESP Rules and New Plan Rules and the Trust Deed.

There are some incidental activities undertaken by the Trustee to manage and administer the Trust, including opening and operating bank accounts, the receipt of dividends and the selling and transfer of Shares, as provided in clause 4.1 of the Trust Deed. Clauses 4.4 of the Trust Deed limits the powers given to the Trustee so as to ensure that the powers of the Trustee under the Trust Deed are exercised pursuant to Recital D "...sole purposes of obtaining shares for the benefit of Participants...".

Therefore, the EST is an employee share trust, as defined in subsection 995-1(1), as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and (b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c).

Options and Awards (excluding Shares) granted under the Plans

Paragraph 130-90(1)(a)

CGT event E5 is the CGT event that will apply under the terms of the Plans at the time the Participants becomes absolutely entitled to the shares in the Company 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 to mean a share in the capital of a company. A share in the Company held by the Trustee and to which a Participant is entitled upon vesting or exercise of an Award is a share in the capital of the Company. Accordingly, paragraph 130-90(1)(b) is satisfied.

Paragraph 130-90(1)(c)

Paragraph 130-90(1)(c) is satisfied as a Participants will have acquired a beneficial interest in a share in the Company upon exercise of Options or vesting of relevant Awards granted under the Plans.

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.

The term 'employee share scheme' is defined in subsection 83A-10(2) as follows:

An employee share scheme is 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)   in relation to the employees' employment

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

Scheme means:

(a)   any arrangement; or

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

As established above, the Plans are employee share schemes for the purposes of Division 83A as they are an arrangement under which an ESS interest (a beneficial interest in a right to acquire a beneficial interest in the Company Share), is provided to an employee in relation to their employment by the Company. The Awards (excluding Share) granted under the Plans have no acquisition price but Options have an exercise price.

Accordingly, prima facie Subdivision 83A-B will apply to Awards (excluding Shares) acquired under the Plans as pursuant to subsection 83A-20(1) the ESS interests will be acquired under an employee share scheme at a discount.

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, subparagraph 130-90(1)(d) will be satisfied.

Accordingly, all the conditions in subsection 130-90(1) have been satisfied.

Provided that the Participant does not acquire the beneficial interest in the Company share for more than its cost base in the hands of the Trustee at the time that CGT event E5 happens, subsection 130-90(2) will also have been satisfied.

Shares awarded under New Plan

Subsection 130-90(1A)

Subsections 130-90(1A) and 130-90(2) state:

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;

(j)     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 New Plan, Participants are invited to acquire shares in the Company, which will make contributions to the Trustee in order to allow it to either subscribe for shares from the Company or acquire them on-market to satisfy the offers made to the eligible employees under the Plan.

Subsection 130-90(1A) provides that any capital gain or loss made by an EST 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 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 Trust satisfies the definition of an EST 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 Trust.

CGT event E5 is the CGT event that will apply under the terms of the New Plan at the time the Participant becomes absolutely entitled to the Company shares as against the Trustee. Therefore paragraph 130-90(1A)(b) is satisfied.

The New Plan is an ESS 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 the Company in accordance with the Trust Deed.

Subdivision 83A-C will apply to the Company shares acquired under the New Plan (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 share for more than its cost base in the hands of the Trust at the time that CGT event E5 happens, subsection 130-90(1A) 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 share when a Participant becomes absolutely entitled to that share.

Note

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.

The Participant, on allocation of the Company shares by the Trustee, becomes absolutely entitled to those shares. In accordance with clause 3.1 of the Trust Deed each Participant is absolutely entitled to the trust shares allocated to a Participant and held by the Trustee on their behalf and is entitled to the same rights in respect of the shares as if the shares were registered directly in the name of the relevant Participant.

Once the Participants are absolutely entitled to shares held on their behalf by the EST, section 106-50 will deem the disposal of the shares by the Trustee to be done by the Participants.

Therefore, section 106-50 will apply, such that if the Trustee disposes of the shares under the relevant Plan (by way of transfer to a Participants), the Trustee will not make a capital gain or capital loss under CGT event E7.