Edited version of private advice

Authorisation Number: 1051643769770

Date of advice: 05 March 2020

Ruling

Subject: Employee share trust

Question 1

Will the irretrievable cash contributions by the Company to the Trustee of 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 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 of the Trust 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:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Company is an Australian publicly listed company and the head company of the income tax consolidated group.

The Company operates employee share plans (collectively referred to as the Plans).

1.    Apart from resident employees, it is intended that offers will be made under the Plans to foreign employees.

Plan A

2.    Plan A has been designed to allow the Company to issue both short term and long term incentive awards to employees.

3.    The purpose of Plan A is to assist with attracting, motivating and retaining employees; delivering rewards to employees for individual and Company performance, and; aligning the interests of employees with those of shareholders.

4.    Eligible employees may receive a grant of awards, which may be a short term incentive or a long term incentive or both.

Operation of Plan A

5.    The Rules for Plan A outline the operation of Plan A.

6.    Both long term incentives and short term incentives may be subject to vesting conditions.

7.    The Rules for Plan A provide for the shareholder entitlements on Unvested Awards.

8.    Plan A allows equity awards to be settled in cash at the discretion of the Board, where such ability has been provided for in the invitation letter to the relevant employee.

9.    The short term incentive offered under Plan A may be in the form of restricted shares or cash bonuses. Cash payment to the employee and do not form part of the Trust.

10.  The Rules for Plan A provide for the vesting of Short Term Incentives.

11.  Long term incentives may be in the form of performance rights or options which represent rights to acquire shares in the Company.

12.  The Rules for Plan A provide for the vesting of Long Term Incentives.

13.  The Rules for Plan A provide for the allocation of, and shareholder entitlements to, Shares and Restricted Shares.

14.  The Rules for Plan A provide for the use of an Employee Share Trust to facilitate the allocation of shares to a participant.

Plan B

15.  Plan B was designed to provide participants with shares that are eligible for either tax deferral or tax exemption.

16.  The purpose of Plan B is to increase employee incentive and motivation by providing employees with the opportunity to participate in the growth of the Company through tax effective means.

17.  Plan B is a share scheme that enables an eligible employee to purchase shares in the Company by salary sacrificing a portion of their salary.

18.  The Board will issue an offer to participate in Plan B on behalf of the Company to eligible employees, being a full-time or permanent part-time employee of the Company.

19.  The plans offered under Plan B are the Tax Deferred Plan and the Tax Exempt Plan.

Tax Deferred Plan

20.  The Rules for Plan B set out rules under which shares in the Company can be acquired by employees in a manner that qualifies for income tax deferral under Australian income tax laws.

21.  The shares offered under the Tax Deferred Plan to eligible employees are Deferred Shares.

22.  The Deferred Shares to be acquired by a participant are to be registered in the name of the participant and are held subject to the Rules for Plan B.

23.  Subject to the Rules for Plan B all rights in respect of the Deferred Shares held by a participant (including, without limitation, voting rights and rights to receive dividends and bonus shares and to participate in rights issues) vest with the participant from the date the Deferred Shares are registered in the participant's name.

24.  The Deferred Shares are subject to disposal restrictions set out in the Rules for Plan B. These restrictions include that a participant may not dispose of or grant any security interest over the Deferred Shares until the date specified in the relevant offer.

Tax Exempt Plan

25.  The Rules for Plan B set out rules under which shares in the Company can be acquired by employees in a manner that qualifies for income tax exemption under Australian income tax laws.

26.  The shares offered under the Tax Exempt Plan to eligible employees are Exempt Shares.

27.  The Exempt Shares to be acquired by a participant are to be registered in the name of the participant and are held subject to the Rules for Plan B.

28.  Shares that are eligible for tax exemption must not have any conditions that could result in the participant forfeiting or losing ownership of those shares.

29.  Subject to the Rules for Plan B, all rights in respect of the Exempt Shares held by a participant (including, without limitation, voting rights and rights to receive dividends and bonus shares and to participate in rights issues) vest with the participant from the date the Exempt Shares are registered in the participant's name.

30.  The Exempt Shares are subject to disposal restrictions set out in the Rules for Plan B. These restrictions include that a participant is not able to dispose of or grant any security interest over the Exempt Shares until the earlier of:

31.  the end of the one, two, or three year period commencing on the date the Exempt Share is acquired by the participant, or

32.  the date on which the participant ceases to be employed by the Company.

Employee Share Trust

33.  The Trust 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 benefit of participants in those plans.

34.  An independent third party is the Trustee of the Trust, and will operate the Trust in accordance with the Trust Deed (Trust Deed).

35.  The Company must provide the Trustee with the funds required for the purchase of shares in accordance with the Plans. These funds are used by the Trustee to acquire shares in the Company either on-market or via a subscription for new shares.

36.  Broadly, the Trust operates as follows:

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

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

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

·         Where the Plan Rules include that the shares may be held by the Trustee on behalf of Participants or employees, the Trustee will hold the Company shares as unallocated shares for Participants generally, also the proceeds from a sale by the Trustee of rights under a rights issue relating to the allocated shares, and; all other benefits and privileges related to the Participant's allocated shares.

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

·         Irretrievable cash contributions are made regularly and progressively to the Trust in accordance with the rules of the Plans and the Trust Deed.

·         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.

·         The Trustee can sell shares on behalf of a Participant where permitted to do so by the Participant.

37.  The Company incurs various costs in the ongoing administration of the Trust. For example, The Company incurs costs associated with the services provided by the Trustee of the Trust, including but not limited to:

·         Employee plan record keeping.

·         Production and dispatch of holding statements to employees.

·         Costs incurred in the acquisition of shares on-market, such as brokerage costs and the allocation of such shares to Participants.

·         Other trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust.

Trustee's Powers and Management of The Trust

38.  The general powers of the Trustee are provided in the Trust Deed.

39.  The powers of the Trustee are limited as outlined in the Trust Deed.

40.  The Trust Deed outlines the fees, commission and remuneration of the Trustee.

41.  The Trust Deed provides for the sole activities test, that the Company and the Trustee agree that 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.

42.  The Trust Deed provides for Dealing Notices.

43.  The Trust Deed outlines the requirements of the Trustee upon receiving a Dealing Notice.

Contributions to the Trust

44.  Funding of the Trust is provided for in the Trust Deed.

45.  The Company does not and will not pay cash contributions to the Trust prior to the issue of Rights under the Plans to participants.

46.  Where possible, The Company will wait until the Rights vest, and to receive the exercise notice from Participants where relevant, before providing the Trust with the cash necessary to acquire shares to satisfy the acquisition or subscription of shares related to those Awards.

47.  Where it makes commercial sense to do so, The Company may make cash contributions to the Trust prior to the Awards vesting and, where relevant, Rights being exercised by the Participants:

·         The Company will contribute to the Trust enough funding to enable the purchase of shares up to 6 months in advance of when rights are likely to be exercised.

·         This allows the Trustee to have enough shares in the Trust ahead of the time they need to be allocated to Participants. This also avoids delays in times such as blackout trading periods.

48.  The Company may make cash contributions to the Trust prior to the issue or grant of shares under the Plans to Participants, where it makes commercial sense to do so to ensure that there are enough shares in the Trust when the Shares need to be granted to Participants:

·         The Company will contribute to the Trust enough funding to enable the purchase of shares up to 6 months in advance of the grant date of the Shares.

49.  The arrangement was not established with a large upfront payment intended to provide for the Trust's operation for several years into the future (such as in relation to Awards which have not yet been issued).

50.  The Company is not a beneficiary of the Trust and its contributions cannot be returned to it in any form except where the Trustee acquires shares from The Company by subscribing for newly issued shares at market value.

51.  The amount of the contributions will be equal to the fair market value of shares that will be acquired for employees (i.e. the contributions are arm's length in amount).

Trust Assets

52.  The allocated shares and trust assets are provided for in the Trust Deed.

53.  The Trust Deed does not confer on the Company any legal right or beneficial interest in the Trust Assets.

54.  Unallocated shares are provided for in the Trust Deed.

55.  Distributions of the Trust are provided for in the Trust Deed.

56.  The income entitlement of participants and capital distributions are provided for the Trust Deed.

57.  The Trust Deed provides for the transfer of allocated shares.

58.  Under the Trust Deed, the Trustee is required to establish and maintain a separate Trust Share Account for each participant.

59.  The Company has provided commercial reasons for using an employee share trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 130-85

Income Tax Assessment Act 1997 section 130-90

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1936 section 95

Reasons for decision

Question 1

Will the irretrievable cash contributions by the Company to the Trustee of 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 6-10 of the ITAA 1997?

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 ...

Under subsection 6-5(1) of the ITAA 1997, assessable income includes income according to ordinary concepts, which is called ordinary income.

Under subsection 6-10(1) of the ITAA 1997, assessable income also includes some amounts that are not ordinary income. These are included by provisions about assessable income listed under section 10-5 of the ITAA 1997.

The irretrievable cash contributions made by the Company to the Trustee of the Trust under the terms of the Trust Deed and rules of the Plans 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.

Therefore, the irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the acquisition of the Company shares in accordance with the Trust Deed will not be assessable income of the Trustee of the Trust pursuant to sections 6-5 or 6-10 of the ITAA 1997.

Note that the Trust Deed provides that the Company must pay to the Trustee of the Trust from the Company's own resources such fees, commission or other remuneration and may reimburse such expenses incurred by the Trustee as the Company and the Trustee 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 in contrast to the irretrievable cash contributions made to facilitate the acquisition of the Company shares.

For completeness, income derived by the employment of the property that forms part of the corpus of the trust and which the Trustee holds on trust will be income according to ordinary concepts (see Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440; (1980) 10 ATR 608; 80 ATC 4076 for a discussion of the distinction between the trust income and corpus).

Conclusion

The irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the acquisition of, or subscription for, the Company shares by the Trust in accordance with the Trust Deed will not be assessable income of the Trust under sections 6-5 or 6-10 of the ITAA 1997.

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 of the Trust 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?

Detailed reasoning

Where a participant becomes absolutely entitled to the Company shares as against the Trustee, CGT event E5 will occur and therefore under section 104-75 of the ITAA 1997, the Trustee will make a capital gain or loss. However, section 130-90 of the ITAA 1997 operates to disregard that gain or loss where specified conditions are satisfied.

Shares held to satisfy the future exercise of rights acquired under ESS

Subsection 130-90(1) of the ITAA 1997 applies to 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.

Subsection 130-90(2) of the ITAA 1997 states that subsection 130-90(1) of the ITAA 1997 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) of the ITAA 1997 applies to the Trust, it is necessary to consider whether the Trust is an 'employee share trust' as defined under subsection 130-85(4) of the ITAA 1997.

Meaning of employee share trust

The term 'employee share trust' referred to in section 130-90 of the ITAA 1997 is defined in subsection 995-1(1) of the ITAA 1997 as having the same meaning given by subsection 130-85(4) of the ITAA 1997.

Under subsection 130-85(4) of the ITAA 1997, an employee share trust, for an employee share scheme (having the meaning given by subsection 83A-10(2) of the ITAA 1997), 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

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

Paragraphs 130-85(4)(a) and (b) of the ITAA 1997

An 'ESS interest' in a company is defined in subsection 83A-10(1) of the ITAA 1997 as a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company.

An 'employee share scheme' (ESS) 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) of the company or a subsidiary of the company, in relation to the employees' employment.

The Plans are an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because they are schemes under which shares or rights to acquire shares in the Company are provided to participants in relation to their employment with the Company.

Under the terms of the Trust Deed, the Trust was established by the Company for the sole purpose of obtaining the Company shares to satisfy the granting of shares or rights to acquire shares for the benefit of participants, including subscribing for or acquiring, holding and transferring the Company shares under the Plans for the benefit of the participants. All participants are employees of the Company. Therefore, both shares and rights to acquire shares in the Company are 'ESS interests' within the meaning of subsection 83A-10(1) of the ITAA 1997.

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

-       the Trust acquires shares in the Company, and

-       the Trust 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 participants in accordance with the Trust Deed and the relevant Plan rules.

Paragraph 130-85(4)(c) of the ITAA 1997

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) of the ITAA 1997 will require the Trustee to undertake incidental activities that are a function of managing the Plans and administering the Trust. 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.

In this case, pursuant to the Trust Deed, the Trustee of the Trust has the power to do all other activities which the Trustee considers necessary or expedient to administer and maintain the Trust and the Trust Assets. These other activities include, for example: to open and operate a bank account; to receive dividends or distributions in relation to the Trust Shares, and; to do all acts, matters or things necessary or expedient to administer and maintain the Trust and the Trust Assets or for the purpose of giving effect to, and carrying out, the trusts, authorities, rights, powers and discretions conferred on the Trustee by the Trust Deed or the law.

Under the Trust Deed, the Trustee is not permitted to carry out activities that are not matters which are necessary or expedient to administer and maintain the Trust and the Trust Assets or activities which will result in the participants being provided with additional benefits other than the benefits that arise from the Trust Deed and the relevant Plan Rules.

On this basis, the Trust is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the Trust in acquiring, holding and transferring the Company shares meet the requirements of paragraphs 130-85(4)(a) and (b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

The CGT event is CGT event E5 or CGT event E7

CGT event E5

CGT event E5 happens where a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee, the trustee will make a capital gain or capital loss under subsection 104-75 (3) of the ITAA 1997.

Under the Plans, following the granting of shares or rights to acquire shares, the Company will direct the Trustee to subscribe for, acquire and/or allocate, and hold those shares on behalf of the relevant participant. Where the rules of the Plans stipulate that the shares are to be held by the Trustee on behalf of the participants, the Trustee will hold the Company shares in respect of a participant (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 the Company shares as unallocated shares for participants generally. The Trustee will also hold the proceeds from a sale by the Trustee of rights under a rights issue relating to the allocated shares, and all other benefits and privileges related to the participants allocated shares. The Trust is precluded from exercising voting rights in relation to the unallocated plan shares.

Accordingly, CGT event E5 will apply under the terms of the Plans and the Trust Deed at the time shares in the Company are allocated to participants and they become absolutely entitled to those shares as against the Trustee of the Trust. Therefore, paragraph 130-90(1)(a) of the ITAA 1997 is satisfied.

CGT event E7

CGT event E7 happens where the trustee of the trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest in the trust capital, the trustee will make a capital gain or capital loss under subsection 104-85(3) of the ITAA 1997.

However, subsection 106-50(1) of the ITAA 1997 provides:

For the purposes of this Part and Part 3-3 (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a * CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust).

Under the terms of the Plans and the Trust Deed, the Trustee will hold the shares in the Company on behalf of the participants from the time that the shares are allocated. It is at this point that the participants become absolutely entitled to those shares against the Trustee of the Trust.

CGT event E7 is in relation to the disposal of a CGT asset of a trust to a beneficiary in satisfaction of a beneficiary's interest. In the present case, the Company shares are treated as being an asset of the participant instead of being an asset of the Trust. Therefore, CGT event E7 will not apply to the Trustee of the Trust when the shares are transferred from the Trustee to the participant.

The CGT event happens in relation to a share

Subsection 995-1(1) of the ITAA 1997 defines a 'share' in a company to mean a share in the capital of a company.

An ordinary share in the Company held by the Trustee of the Trust and to which a participant is entitled upon being granted shares or the right to shares under the Plans, is a share in the capital of the Company. Therefore, paragraph 130-90(1)(b) of the ITAA 1997 is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph.

The beneficiary had acquired a beneficial interest in the share by exercising a right

Paragraph 130-90(1)(c) of the ITAA 1997 is satisfied as a participant will have acquired a beneficial interest in a share in the Company by being granted shares or the right to shares under the Plans.

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

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.

Note 1: This Subdivision does not apply if Subdivision 83A-C applies: see section 83A-105.

ESS interest

Shares and rights to acquire shares granted to participants under the Plans will be an ESS interest, within the meaning of subsection 83A-10(1) of the ITAA 1997, as they are rights to acquire the Company shares under the Plans for participants in relation to their employment.

Employee share scheme

The Plans are an employee share scheme, within the meaning of subsection 83A-10(2) of the ITAA 1997 for the purposes of Division 83A of the ITAA 1997, under which shares or rights to acquire shares are granted to participants (including foreign resident employees) in relation to their employment with the Company or its subsidiaries. Under the Plans, shares or rights to acquire shares are granted by the Company to participants upon their acceptance of an invitation to participate in the Plans.

Accordingly, prima facie, Subdivision 83A-B of the ITAA 1997 will apply to shares or rights to acquire shares acquired under the Plans because, pursuant to subsection 83A-20(1) of the ITAA 1997, the shares or rights to acquire shares issued under the Plans, will be acquired under an employee scheme at a discount.

However, it should be noted that whether a participant is ultimately taxed upfront on some or all of any discount received (under Subdivision 83A-B of the ITAA 1997) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C of the ITAA 1997), will depend on which of the additional requirements in Subdivision 83A-B of the ITAA 1997 or Subdivision 83A-C of the ITAA 1997 have been satisfied. Under this circumstance, subparagraph 130-90(1)(d) of the ITAA 1997 will be satisfied.

Accordingly, all the conditions in subsection 130-90(1) of the ITAA 1997 have been satisfied.

Provided that the participant does not acquire the beneficial interest in the share of the Company for more than its cost base in the hands of the Trustee of the Trust at the time that CGT event E5 happens, subsection 130-90(2) of the ITAA 1997 will also have been satisfied.

Conclusion

Under these circumstances, section 130-90 of the ITAA 1997 operates to disregard any capital gain or capital loss made by the Trustee on any share of the Company when a participant becomes absolutely entitled to that share.

Therefore, a capital gain or a capital loss that arises in relation to the Company shares held by the Trustee of the Trust will be disregarded under section 130-90 of the ITAA 1997.