Edited version of private advice

Authorisation Number: 1051643222929

Date of advice: 04 March 2020

Ruling

Subject: Employee share scheme

Question 1

Will the irretrievable cash contributions by Company A to the Trustee for Share Trust B to fund the acquisition of, or subscription for, Company A shares be assessable income of Share Trust B under section 6-5 or 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 at the time when either CGT Event E5 or E7 happens in relation to Company A 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.

This ruling applies for the following periods:

·         Income tax year ended 30 June 2019

·         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

Relevant facts and circumstances

Background

·         Company A is an ASX listed company and head of a tax consolidated group ("ACG").

·         Company A has implemented the Incentive Plan and the Employee Share Plan (together, "the Plans") to encourage loyalty and prolonged employee excellence.

·         The awards are offered to at least 75% of permanent Australian employees of Company A with at least three years of service. Company A has not and does not intend to offer any awards to non-resident employees.

·         Each employee holds 10% or less of the Shares in Company A.

·         Share Trust B was established with the sole purpose of acquiring, allocating, holding and transferring Shares in connection with incentive plans and established by Company A for the benefit of Participants in those plans.

Incentive Plan

·         The board of directors of Company A (the 'Board') in its absolute discretion may offer the following Incentives to Eligible Employees:

-  Rights (including Share Appreciation Rights)

-  Options

-  Restricted Shares

·         The term 'Eligible Employees' means 'a director, employee, contractor or consultant of the Group or an associate of those who is invited to participate in the Plan by the Company.

·         Offers are made by Invitation Letter to Eligible Employees.

·         Acceptance of an offer must be made by the Eligible Employee in accordance with the instructions that accompany the offer, or any other way the Board determines.

·         An Eligible Employee who has been allocated an Incentive or Share becomes a Participant.

·         Shares issued under the Incentive Plan rank equally in all respects with existing Company A Shares.

·         In the event of a change of control, the board may in its absolute discretion deal with all vested and unvested awards in any manner, including determining that all or a specified number of a Participant's Incentives Vest or cease to be subject to restrictions.

Indeterminate Rights

·         The Board may determine that vesting and exercise of the Rights or Options will be met by Company A making cash payment instead of allocating Shares. Such Rights or Options are referred to as Indeterminate Rights, which are offered under the Incentive Plan for nil consideration.

·         In order to receive Shares, the Participant must satisfy the Vesting Conditions specified in their Invitation Letter.

·         On exercise of the vested Rights or Options (nil exercise price), the Shares may be acquired and held in Share Trust B on behalf of the Participant. The Participant can then apply to have the Shares sold or withdraw the Shares from Share Trust B.

Employees Share Plan

·         The purpose of the Employee Share Plan is to facilitate the grant of equity by Company A to Eligible Persons through either a Deferred Grant or an Exempt Grant.

·         An 'Eligible Person' is defined to mean 'a director, employee, contractor or consultant of the Group or an associate of those who is invited to participate in the Plan by the Company'.

·         The Board has unfettered discretion to determine the Participants who are eligible to participate in the Employee Share Plan, make an invitation to an eligible person to acquire Restricted Shares; and grant Restricted Shares to an Eligible Person.

·         Restricted Shares rank equally with all existing Shares on and from the Date of Registration in respect of all Shareholder entitlements.

·         Unless the Board determines otherwise, a Participant must not assign or transfer to any other person any of their legal or equitable rights to Restricted Shares.

·         Participants must not Dispose of any Restricted Share until the removal of any Disposal Restrictions.

·         If there is a transaction or event that the Board determines is likely to result in a change of control of the Company, the Board may in its discretion determine that the Restricted Shares are no longer subject to restriction.

Restricted Shares

·         If the Company declares a dividend, participants are entitled to receive dividends on their Shares.

·         Participants are entitled to vote at any Company A shareholder meeting.

·         If the Participant ceases to work at Company A after the Shares have been allocated, the holding lock on the Shares will be lifted.

Deferred grant

·         Deferred Grant is a grant to which Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies to allow deferral of income tax and includes a Salary Sacrifice Grant.

·         The Employee Share Plan allows Participants to acquire Company A Shares to a predetermined limit on a deferred tax salary sacrifice basis. These Shares have the same rights and entitlements as other Company A Shares.

·         At the time of election to participate, Participants are asked to elect a restriction period and the holding lock will be applied for the period - the periods that may be elected are 1, 3, 5 or 7 years. The Participant cannot sell, transfer or deal in the Shares during this time.

Exempt Grant

·         Exempt Grant means a grant to which Subdivision 83A-B of the ITAA 1997 applies.

·         Eligible employees are invited to apply for up to a predetermined limit of Shares in Company A. These Shares have the same rights as other Company A Shares.

·         Eligible employees are Australian permanent full-time or permanent part-time employees who are not eligible to participate in the Incentive Plan.

·         Eligible employees are invited to accept at no initial monetary cost.

·         The Shares will be subject to a holding lock for three years from the allocation date if the Participant remains employed with Company A. The Participant cannot sell, transfer or deal in the Shares during this time.

Share Trust B

·         Share Trust B is administered by the terms of the Trust Deed.

·         Share Trust B is funded by contributions from Company A or a subsidiary member of the ACG.

·         The funds contributed did not and will not relate to Company A (as head company of the ACG) gaining or producing exempt income or non-assessable non-exempt income.

·         The 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 Employee Share Plan Rules ("ESP Rules") or the Incentive Plan Rules ("IP Rules") stipulate that the Shares are to be held by the Trustee on behalf of Participants, the Trustee will hold the Company A Shares as Shares in respect of an identified Participant(s) on an allocated basis.

·         Where the ESP Rules or the IP Rules include that the Shares may be held by the Trustee on behalf of Participants or employees, the Trustee will hold the Company A Shares on an unallocated basis on trust for Participants generally.

·         'Participant' is defined to mean an Eligible Participant to whom Company A makes an award under an Employee Share Plan or an Incentive Plan and determines will have Shares allocated to them.

·         'Eligible Participant' is defined to mean 'a person who is a:

a)    Full-time or part-time employee of the Group;

b)    Director of the Company;

c)    Consultant or contractor to the Company; or

d)    An associate of those persons in paragraphs (a), (b), or (c) who is invited to participate in the Plan by the Company.'

·         The Trustee may not, at its own discretion, exercise any voting rights in relation to the unallocated Plan Shares.

·         The Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4) of the ITAA 1997.

·         The Trustee may apply any capital receipts, dividends or other distributions received in respect of the unallocated Share to purchase further Shares to be held on trust for the purposes of Share Trust B.

·         Neither the Trustee nor Company A may use the Company A Shares held by the Trustee on behalf of a Participant as security.

·         Company A and subsidiary members of the ACG do not have any beneficial interest in any Company A Shares subscribed or acquired by the Trustee.

·         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.

·         The Trustee can sell Shares on behalf of an employee where permitted to do so by the Participant.

·         The Trustee will not levy any fees or charges for administering the Trust that are payable directly by any Eligible Participant or out of the assets of Share Trust B, other than reasonable disbursements, including brokerage and tax levied or incurred in connection with Share Trust B.

·         The Trust Deed sets out that the balance of Net Income is to be used to meet any reasonable costs and expenses properly incurred by the Trustee in relation to the establishment, administration or termination of Share Trust B (including, but not limited to, administration, trust, financial and audit expenses).

·         The Trust Deed provides the Capital of Share Trust B may be applied to the following beneficiaries if Share Trust B was terminated, as the Trustee thinks fit:

(a)  All or any employees of the Group;

(b)  A Participant; or

A provident, benefit, superannuation or retirement fund established and maintained by Company A for employees or past employees of the Group.

Reasons for decision

Question 1

Detailed reasoning

Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) 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) provides that a taxpayer's assessable income also includes 'statutory income'. It 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, non-refundable contributions made by Company A to Share Trust B will not be assessable income under section 6-10. They will only be included in the calculation of the net income of Share Trust B under section 95 of the ITAA 1936 if they are assessable as income according to ordinary concepts under section 6-5.

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

The contributions made by Company A are irretrievable and non-refundable to Company A in accordance with the Trust Deed as Company A and subsidiary members of the ACG do not have any beneficial interest in any Company A Shares subscribed or acquired by the Trustee.

The Trust Deed states that the balance of net income for a year to which no Participant is entitled may be used for the purposes of expenses incurred in establishment, administration or termination of Share Trust B. The Trust Deed states that any balance of net income to which no Participant is entitled may be accumulated by the Trustee as an accretion to Share Trust B. The Trust Deed also provides that on termination of Share Trust B, Company A and subsidiary members of the ACG do not have any entitlement to any part of the capital of Share Trust B.

Therefore, there is no clause that allows such funds to be returned to the ACG Group.

The contributions constitute receipts of a capital nature to the Trustee and will not be assessable as ordinary income under section 6-5.

Given that the irretrievable cash contributions made by Company A to the Trustee are neither ordinary nor statutory income, they will not be included in the net income of Share Trust B, and hence cannot be assessed to the Trustee pursuant to section 95 of the ITAA 1936.

Question 2

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 (subsection 104-75(1)). The time of CGT event E5 is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)).

As no exceptions apply in this case, 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.

In this case, when a Participant meets the Vesting Conditions and exercises their Right or Option, that Right or Option to receive a Share in the Incentive Plan becomes unconditional. At this point, the Participant becomes absolutely entitled to the Share (a CGT asset of the Trust) as against the Trustee, and CGT event E5 happens (Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997).

Similarly, when a Participant becomes absolutely entitled against the Trustee to a Company A Share after the restriction period or holding lock period in the Employee Share Plan, CGT event E5 happens.

However, section 130-90 provides that any capital gain or loss made by an employee share trust is disregarded where it results from a CGT event under certain circumstances.

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:

·         Share Trust B acquires Shares in a company, namely Company A;

·         Share Trust B ensures that ESS interests as defined in subsection 83A-10(1) (being Options or Rights in the Incentive Plan and Shares in the Employee Share 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 Plans; and

·         the objects of Share Trust B 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). 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'?

Subsection 130-90(1A) applies to shares held for future acquisition under employee share schemes (as in the Employee Share Plan) while subsection 130-90(1) applies in respect of shares held to satisfy the future exercise of rights or options acquired under employee share schemes (as in the Incentive Plan).

Subsection 130-90(1)

Subsections 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; 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.

Paragraph 130-90(1)(a)

CGT event E5 is the CGT event that will apply under the terms of Share Trust B and the Incentive Plan at the time the Participant becomes absolutely entitled to Company A Shares as against the Trustee when Vesting Conditions are met and the Right or Option 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 or Option 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 or Option provided under the Incentive 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 or Option in the Incentive 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 Incentive Plan is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which Rights or Options to acquire beneficial interests in ordinary Shares in Company A are provided to employees in relation to the employee's employment. Each Right or Option is acquired for no cost.

As the Participant acquires the Right or Option 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 or Option under the Incentive 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 Share Trust B 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 Incentive Plan is disregarded.

Subsection 130-90(1A)

Subsections 130-90(1A) applies to disregard any capital gain or loss made by an employee share trust 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.

Paragraph 130-90(1A)(a)

Paragraph 130-90(1A)(a) is satisfied as the shares held by the Trustee are ESS interests which are CGT assets of Share Trust B.

Paragraph 130-90(1A)(b)

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

Paragraph 130-90(1A)(c)

The Employee Share Plan is an employee share scheme 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 Company A in accordance with the Trust Deed. The Deferred Grant and the Exempt Grant in the Employee Share Plan offer Company A Shares to the Participants at discount (salary sacrifice for the Deferred Grant and no cost for the Exempt Grant).

Therefore, Subdivision 83A-B or 83A-C can apply to Company A Shares acquired under the Employee Share Plan and 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 A Share for more than its cost base in the hands of Share Trust B at the time that CGT event E5 happens, subsection 130-90(1A) will apply to disregard the capital gain or loss made by the Trustee on any Company A Share when a Participant becomes absolutely entitled to that Share.

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.

A Participant, on allocation of the Company A Shares by the Trustee, becomes absolutely entitled to those Shares. In accordance with clause 4.5 of 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 Share Trust B, 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 the Company A Shares under one of the Plans (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.