Edited version of private advice

Authorisation Number: 1051631152210

Date of advice: 7 February 2020

Ruling

Subject: Employee share scheme

Question 1

Will irretrievable cash contributions made by Company A to Company B (Trustee) of the Company A Group Ltd Employee Share Plan Trust (EST) in accordance with the Performance Rights Plan Rules, Share Award Scheme Rules, Share Award Scheme Rulesand the Company A Group Ltd Employee Share Trust Deed (Deed) to fund the subscription for or acquisition on-market of ordinary shares in Company A (Shares) be assessable income of the EST pursuant to section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) or Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Will any capital gain or capital loss that arises for the Trustee of the EST at the time the Participants become absolutely entitled to Shares under the Plan (CGT event E5 under section 104-75 of the ITAA 1997) or when the Trustee of the EST transfers legal ownership of Shares of the EST to Participants in accordance with the Deed (CGT event E7 under section 104-85 of the ITAA 1997) be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire 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:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

Company A is an Australian registered company.

The success of Company A depends on their ability to attract, retain and motivate quality employees. Company A's remuneration strategy aims to achieve this by providing fair remuneration and appraisal schemes for its employees. Company A operates long term incentive plans for the purpose of providing incentives and rewards to eligible employees (Participants) who contribute to the success of the Company.

Company A operated the Company A Group Pty Ltd Performance Rights Plan (Performance Rights Plan).

Company A also operates the following long term incentive plans for eligible participants:

·         Share Award Scheme (Share Award Scheme Plan) adopted on 23 October 2018; and

·         Share Option Scheme (Option Plan) adopted on 18 April 2018.

These plans together are referred to as 'the Plans'. The Plans are administered in accordance with their terms as summarised below.

Performance Rights Plan

The Performance Rights Plan is governed by the Terms and Conditions of the Company A Group Pty Ltd Performance Rights Plan Rules (Performance Rights Plan Rules).

As specified in the Performance Rights Plan Rules, the purpose of this plan is as follows:

The Plan creates a long-term incentive framework aimed at creating a stronger link between the Company and the Eligible Persons, whilst increasing shareholder value.

The Performance Rights Plan rules broadly operate to provide eligible persons or their affiliate with the opportunity to receive Performance Rights (Performance Rights) which can either be settled in shares in Company A or a cash amount equal to the market value of the share on the relevant exercise date at the discretion of the Company. In order for rights offered to vest and be exercisable, the Participant must satisfy vesting conditions or a vesting event must occur as outlined in the offer letter to the Participant.

The Performance Rights Plan operates as follows:

·         Offers to apply for Performance Rights may be made on such terms and conditions as the Board decides from time to time, including:

o   The number of Performance Rights which may be subject of the Offer;

o   Approve or not approve any affiliate;

o   The exercise price (if any); and

o   The vesting conditions, disposal and forfeiture restrictions attached to the Performance Rights.

·         Performance Rights are granted for nil consideration.

·         The exercise of Performance Rights may be subject to vesting conditions or a vesting event as set out in the offer letter. These vesting conditions or the vesting event must be satisfied (or otherwise waived by the Board) before the Performance Rights vest and can be exercised by the Participant.

·         The Board may decide, in its absolute discretion, to satisfy the exercise of Performance Rights in accordance with the Performance Rights Plan Rules, by payment of a cash amount calculated in accordance with the formula set out in the Performance Rights Plan Rules.

·         Unless otherwise determined by the Board in its absolute discretion, unvested Performance Rights will automatically lapse where a Participant ceases to be employed or contracted by Company A in accordance with the Performance Rights Plan Rules.

·         Subject to this Performance Rights Plan rules, Corporations Act or any other relevant laws, each Performance Right provides the holder with the right to acquire an ordinary share of Company A unless the Board exercises its discretion to settle the Performance Rights in cash in lieu of a share.

·         The Performance Rights Plan Rules ensures that shares issued upon exercise of vested Performance Rights will rank equally in all aspects with the ordinary shares on issue in the Company.

Share Option Scheme

The Share Option Plan is governed by the Terms and Conditions of the Share Option Scheme Company A Group Pty Ltd Rules (Share Option Scheme Rules).

The Share Option Plan took effect conditionally on the approval of Company A by the Listing Committee of the Stock Exchange to list on and deal with shares on the main board of the Stock Exchange. The Share Option Plan will be valid and effective until the termination date after which no options will be issued. The Share Option Plan will remain in force to the extent necessary to give effect to any outstanding options granted or exercised in accordance with the Share Option Scheme Rules.

As specified in the Share Option Scheme Rules, the purpose of the plan is to:

...enable the Group to grant Options to selected Participants as incentives or rewards for their contribution to the Group.

Pursuant to the Share Option Scheme Rules, classes of eligible participants may be granted options to subscribe for shares (Options) at the board of directors' (Directors) discretion.

The Share Option Plan broadly operates as follows:

·         It is at the Directors' discretion to make an offer to eligible participants to apply such number of shares at the exercise price determined by the Directors subject to the Trust Deed.

·         Offer letters will address matters including:

o   The number of shares in respect of which the Offer is made and the exercise price for such shares;

o   The option period, being a period no later than 10 years from the date of offer; and

o   The conditions that must be met in order for Options to vest.

·         The Directors may, at their absolute discretion, fix any minimum period for which an Option must be held, any performance targets and/or other conditions that must be fulfilled before the Option can be exercised.

·         In accordance with the Share Option Scheme Rules, the Option shall be exercisable in whole or in part in the circumstances and manner set out in the Share Option Scheme Rules by giving a notice in writing to the Company stating the Option is thereby exercised and the number of shares in respect of which is exercised. Such notice must be accompanied by a payment for the full amount of the exercise price of which the notice is given.

·         The exercise price of the Option is generally the closing price of the shares on the date of grant of the Options.

·         The Options may become exercisable at any time during the option period in accordance with the Share Option Scheme Rules.

·         Options are held personally and are not transferrable.

·         In certain circumstances, the Options will automatically lapse and that Option (to the extent not already exercised) shall lapse on the earliest of:

o   The expiry of the option period;

o   The expiry of any the periods referred to in the Share Option Scheme Rules (such as cessation of employment);

o   Subject to the Share Option Scheme Rules, the date of the commencement of the winding-up of the Company; and

o   The date on which the Directors cancel the Option by breach of the Share Option Scheme Rules (i.e. transfer, assign interest in breach of Option Plan rules).

Share Award Scheme

The Share Award Scheme is governed by the Terms and Conditions of the Rules Relating to Company A Share Award Scheme (Share Award Scheme Rules).

The Share Award Scheme shall be effective for 10 years from the date it is adopted by the Company unless terminated earlier by a resolution of the Board.

As specified in the Share Award Scheme Rules, the purpose of the scheme is as follows:

.....

(i)            to recognise the contributions by certain Employees and to provide them with incentives in order to retain them for the continual operation and development of the Company; and

(ii)           to attract suitable personnel for further development of the Company.

The Share Award Scheme broadly operates as follows:

·         Subject to the provisions of the Scheme, the Board may, from time to time, select an eligible employee to participate in the Scheme.

·         Participants are granted rights to ordinary shares of the Company (Awarded Shares) at no consideration and on and subject to such terms and conditions as the Board may in its absolute discretion determine.

·         The Share Award Scheme Rules specify that the Share Award Scheme is a scheme to which Subdivision 83A-C of the ITAA 1997 applies (subject to the conditions in that Act). The Board in its absolute discretion is entitled to impose any conditions (including a service condition) with respect to the vesting of Awarded Shares (and may waive any vesting conditions referred attaching to the grant of Awarded Shares).

·         After determining to make a grant of Awarded Shares to a Participant, the Company shall send a notice to the Participant, setting out the number of Awarded Shares and the conditions (if any) upon which those Awarded Shares are granted (Grant Notice).

·         The Awarded Shares will vest on the date on which the Participant fulfils all vesting conditions of the Awarded Shares as set out in the Share Award Scheme and the Grant Notice.

·         The Share Award Scheme sets out other circumstances in which Awarded Shares will automatically lapse and not vest as outlined below:

o   In the event that prior to or on the vesting date, a Participant is found to be an excluded employee or deemed to cease being an employee, including the following pursuant to the Share Award Scheme Rules:

Where the Participant commits any act of fraud, dishonesty or serious misconduct whether or not in connection with their employment;

If the Participant has been convicted of any criminal offence;

If the Participant becomes bankrupt;

Where the Participant has been convicted of or being held liable for any offence under the Listing Rules, the SFO or other securities laws or regulations or any other applicable laws or regulations in force from time to time;

o   Unless otherwise waived by the Board, where applicable vesting conditions specified in the Grant Notice are not fully satisfied prior to or on the relevant Vesting date.

·         Awarded Shares are held personally by Participants and are not assignable.

Employee Share Trust

The EST was established in accordance with the Company A Group Ltd Employee Share Trust Deed (Trust Deed). The EST was established as a sole purpose trust for the purpose of acquiring, holding and transferring shares in connection with equity incentive plans established by the Company for the benefits of Participants of those Plans.

The EST provides capital management flexibility for Company A, in that it has the ability to use the contributions made by Company A either to acquire shares in Company A on-market, or alternatively to subscribe for new shares in Company A.

Similarly, it provides an arm's-length vehicle through which shares in Company A can be acquired and held in Company A on behalf of employees. In effect, this aspect allows Company A to satisfy Corporation Law requirements relating to companies dealing in their own shares.

The Trustee is an independent third party. Broadly, the EST operates as follows:

·         Company A must provide the Trustee with the funds required for the purchase of shares in accordance with the Plans.

·         Irretrievable cash contributions are made to the EST when proper and necessary in accordance with the rules of the Plans and the Trust Deed.

·         These funds are used by the Trustee to acquire shares in Company A either on-market or via a subscription for new shares in Company A based on written instructions from Company A.

·         Where the rules of the Plans stipulate that the shares are to be held by the Trustee on behalf of Participants, the Trustee will hold Company A shares as shares in respect of a Participant(s) (i.e. on an allocated basis).

·         Where the rules of the Plans include that the shares may be held by the Trustee on behalf of Participants or employees, the Trustee will hold Company A shares as unallocated shares for Participants generally.

·         The EST is precluded from exercising voting rights in relation to the unallocated shares.

·         After a disposal restriction period lapses, the Trustee must transfer the relevant number of shares into the name of the relevant employee or any third party as directed by the relevant employee (i.e. legal title) upon a withdrawal notice being submitted to the Trustee.

Contributions to the Trust

Company A may pay cash contributions to the EST prior to the grant of Awarded Shares, Options or Performance Rights (collectively referred to as the Awards) under the Plans to Participants.

Where appropriate, Company A will wait until the Awards vest, and to receive the exercise notice and exercise price (if applicable) from Participants where relevant, before providing the EST with the cash necessary to acquire shares to satisfy the acquisition or subscription of shares related to those Awards.

However, where it makes commercial sense to do so, Company A may make cash contributions to the EST prior to the Awards vesting and where relevant Awards being exercised by Participants. In this case, Company A will contribute to the EST enough funding to enable purchase of shares up to 6 months in advance of when Awards are likely to be exercised. This allows the Trustee to have enough shares in the EST ahead of when they need to be allocated to Participants, and avoids delays in times such as blackout trading periods.

Foreign employees

Under the Plans, offers may be made to foreign tax resident employees of Company A.

Employees in these foreign jurisdictions predominantly act in a sale and promotional role for Company A, with their key objective to promote Company A's brand oversea. Company A may also make offers to employees in management type roles. The purpose is to increase income in Australia and expand market share.

It is intended that if offers are made to employees located overseas in roles as described above, Company A will make irretrievable cash contributions to the Trust to satisfy Awards made under the Plans to those employees. Consideration of the Australian tax treatment of cash contributions made by Company A to the EST to satisfy Awards made to these foreign based employees forms part of this ruling request and is considered relevant to the questions contained in this ruling.

Relevant legislative provisions

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 Division 83A

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Section 104-85

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 130-90

Income Tax Assessment Act 1997 Section 130-85

Income Tax Assessment Act 1936 Section 95

Reasons for Decision

These reasons for decision accompany the Notice of private ruling for the Trustee of the EST.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

All legislative references are to the Income Tax Assessment Act 1997, unless specified otherwise.

Question 1

Section 6-5 provides that the assessable income of an Australian resident includes income according to ordinary concepts (called 'ordinary income' in subsection 6-5(1)) derived directly or indirectly from all sources, whether in or out of Australia (subsection 6-5(2)).

The irretrievable cash contributions received by the Trustee will not be included in the Trustee's assessable income under section 6-5 as ordinary income because the contributions are of a capital nature.

Section 6-10 provides that a taxpayer's assessable income also includes some amounts that are not ordinary income. These amounts, which are included in a taxpayer's assessable income by specific provisions of both the ITAA 1997 and ITAA 1936, are called 'statutory income'. Section 10-5 contains a list of these provisions.

None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, the irretrievable cash contributions received by the Trustee will not be included in the Trustee's assessable income under section 6-10 as statutory income.

Under Division 6 of Part III of the ITAA 1936, generally the beneficiaries of a trust who are presently entitled to a share of the income of the trust include that share of the 'net income' of the trust in their assessable income. The trustee is generally taxed on the balance of the net income which is not included in the assessable income of a beneficiary.

Subsection 95(1) of the ITAA 1936 defines 'net income' 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, except...

Given that the irretrievable cash contributions made 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

CGT event E5

When a Participant in the Plan, 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.

Section 130-90

Rights- Performance Rights and Share Options: 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.

Employee share trust

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 Reasons for decision Case number:

(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

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

In respect of Rights, the right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997. Equally, Awarded Shares are also ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997 as they each represent a beneficial interest in a share in a company (Company A).

An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 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.

Each of the Plans is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which Rights (rights to acquire shares in the company) and Share Awards (shares in a company) are provided to employees in relation to the employee's employment.

Under the Plans, the employer has established the EST to acquire shares in the company and to allocate those shares to employees to satisfy Rights and Awarded Shares acquired under the Plans. In respect of Rights the beneficial interest in the share is itself also provided under an employee share scheme because it is provided under the same scheme under which the rights to acquire the shares are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997.

Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

·         the EST acquires shares in a company (being Company A); and

·         the EST ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the governing documents of the scheme (i.e. each of the Plans).

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require a trustee to undertake 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) of the ITAA 1997, activities which are merely incidental, as set out in TD 2019/19, include:

·         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

·         receiving and immediately distributing shares under a demerger.

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental.

For the purposes of the EST, the powers of the Trustee are set out in the Trust Deed. The Trust Deed limits the powers given to the Trustee under the Trust Deed so as to ensure that the powers of the Trustee under the Trust Deed are exercised in accordance with subsection 130-85(4) of the ITAA 1997. These provisions collectively make it clear that the Trustee can only use the contributions received exclusively for the acquisition of shares for eligible employees in accordance with the Plans. To this end, all other duties/general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the shares for the sole benefit of Participants in accordance with the Plans.

Therefore, the EST is an employee share trust as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 as concluded above, and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Paragraph 130-90(1)(a)

CGT event E5 is the CGT event that will apply in respect of Rights granted under the Plans at the time the Participant becomes absolutely entitled to the 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 exercise of a Right 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 provided 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.

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.

Each of the Plans are 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 a starting point subdivision 83A-B will apply to Rights acquired under the Plans as pursuant to subsection 83A-20(1) the ESS interests (i.e. Rights issued under the Plans) 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.

Therefore pursuant to subsection 130-90(2), 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.

Share Award Scheme - Awarded Shares: 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 Share Award Scheme Plan, employees may also be granted Awarded Shares i.e. shares in Company A (which will make contributions to the Trustee in order to allow the Trustee to either subscribe for shares from Company A or acquire them on-market to satisfy the offers made to the eligible employees pursuant to the Share Award Scheme Plan).

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 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 Awarded 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 Share Award Scheme Plan at the time the Participant becomes absolutely entitled to the EST shares as against the Trustee. Therefore paragraph 130-90(1A)(b) is satisfied.

The Share Award Scheme Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest (Awarded Share) is provided to a Participant in relation to their employment in Company A in accordance with the Trust Deed.

As stated above either 83A-B or 83A-C will apply to the ESS interest, being the Awarded Share. Accordingly, paragraph 130-90(1A)(c) will be satisfied.

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

Therefore pursuant to subsection 130-90(2), 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.

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.

CGT events E7 and A1

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.

CGT event A1 in section 104-10 happens when there is disposal of a CGT asset.

Pursuant to section 106-50, from just after the time a beneficiary becomes absolutely entitled to a CGT asset as against the trustee of a trust, the asset is treated as being the beneficiary's asset (instead of being an asset of the trust). This means an act done in relation to the asset by the trustee is treated (for CGT purposes) as if the act had been done by the beneficiary (instead of by the trustee).

The Participants become absolutely entitled to Shares allocated to them pursuant to the Plans when the relevant conditions are met (causing CGT event E5 to happen). When the Trustee transfers the legal ownership of the Shares to a Participant following allocation of Shares, section 106-50 will deem the Shares to be an asset of the Participant. This means there would be no change in the Share ownership when the Trustee transfers the Shares to the Participant. Hence, no CGT event E7 or A1 happens and there can be no capital gain or loss when the legal title in the Shares to which a Participant is absolutely entitled as against the Trustee is transferred to the Beneficiary, being a Participant (Paragraph 144 of TR 2004/D25).