Edited version of private advice

Authorisation Number: 1051678028722

Date of advice: 9 October 2020

Ruling

Subject: Employee share scheme

Question 1

Did the execution of the Deed of Retirement and Appointment of Trustee & Amendment result in a resettlement of the Employee Share Trust (EST) and cause CGT event E1 pursuant to section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) or CGT event E2 pursuant to section 104-60 of the ITAA 1997 to happen?

Answer

No

Question 2

Will the irretrievable cash contributions made by the Company to the Trustee, of the Trust, in accordance with the Plan's and the Trust Deed to fund the acquisition on-market of, or subscription for, shares be assessable income of the Trust, under section 6-5 of the ITAA 1997 or 6-10 of the ITAA 1997?

Answer

No

Question 3

Will a capital gain or capital loss that arises for the Trustee for the Trust at the time when either CGT Event E5 or E7 happens in relation to Company shares be disregarded under section 130-90 of the 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

The rulings apply for the following periods:

Income tax year ended 30 June 20XX

Income tax year ended 30 June 20XX

Income tax year ended 30 June 20XX

Income tax year ended 30 June 20XX

Income tax year ended 30 June 20XX

Relevant facts and circumstances

The Company develops, manufactures and markets products.

It has two Plans which are currently in use. Plan A and Plan B.

Plan A

The Plan provides all Eligible Participants with the opportunity to subscribe for Shares at a discount to the applicable market price.

A Participant can withdraw from the Plan at any time before the end of the Offering Period. All Contributions not yet used to subscribe for Shares will be refunded to the Participant if they withdraw.

An Offer Document may include terms or conditions that may be determined by the Board in respect of the rights or obligations of the Participants under the Plan including whether and how the arrangements under the Trust Deed will apply to the Shares issued or acquired pursuant to the Offer Document.

The Board may approve an Application Form for the purposes of the Plan. An Application Form must contain an authorisation for Contributions to be deducted from the Applicant's Remuneration.

Contributions must be made by the Participant.

All Contributions made by a Participant will be held by the Company on trust for that Participant.

Where the arrangements under the Trust Deed apply to Shares to be issued, purchased or allocated for the benefit of a Participant:

·         the Board will instruct the Trustee, in accordance with the terms of the Trust, to either subscribe for or purchase the Shares for the benefit of the Participant, or allocate Shares to the Participant

·         the amount to be paid to the Trustee out of a Participant's Contributions will equal the Share Acquisition Price multiplied by the number of Shares to be issued or acquired on behalf of the Participant

·         if the contribution is less than the costs and expenses of acquiring those Shares on behalf of that Participant the Company must pay to the Trustee the Shortfall.

Shares will be either issued by the Company to each Participant or to the Trustee for the benefit of the relevant Participant or purchased or allocated by the Trustee for the benefit of the relevant Participant under the Plan.

The Board may prescribe a minimum number of Shares which may be issued to a Participant or issued to or purchased or allocated by the Trustee for the benefit of a Participant. If a Participant's Contribution Balance on an Offering Period End Date is not sufficient to pay the aggregate Share Acquisition Price for the minimum number of Shares, no Shares will be issued to or purchased or allocated by the Trustee for the benefit of that Participant and the entire Contribution Balance will continue to be held on trust for that Participant subject to the Plan.

Unless otherwise determined by the Board, Participants may only acquire Shares under the Plan by way of either:

(i)    the allotment and issue of new Shares by the Company to the Participants or to the Trustee for the benefit of the Participants

(ii)   the purchase or allocation by the Trustee of Shares for the benefit of the Participants

(iii)  a combination of paragraphs (i) and (ii).

The Board may by prior notice to the Participant and the Trustee, prevent dealings with some or all of the shares.

While subject to a restriction, Shares acquired and held under the Plan by or for the benefit of a Participant cannot be transferred by the Participant or by the Trustee other than to the Participant, and the Participant and the Trustee must not grant any Security Interest in or over or otherwise dispose of or deal with any such Shares acquired under the Plan or any interest in any such Shares acquired under the Plan held by or for the benefit of the Participant.

A Participant is entitled to receive any dividend or other distributions paid or made in respect of Shares acquired by or for the benefit of that Participant.

A Participant may exercise any voting rights attaching to the Shares acquired by or for the benefit of that Participant or may appoint a proxy to represent and vote for the Participant.

If a Participant ceases to be an Eligible Participant for the purposes of the Plan, the Participant will cease to be a Participant with effect on and from the cessation. After a Participant ceases to be a Participant that Participant's entire Contribution Balance at that time must be repaid to that Participant.

The Board will manage and administer the Plan for the Company, including exercising any discretion or power conferred on the Company or the Board under the Plan and the Trust Deed.

Plan B

The Board may issue an invitation to an Eligible Employee of the Company who the Board determines is to receive a grant under the Plan, to acquire Performance Rights.

Subject to the Plan, the Board may grant, on behalf of the Company, Performance Rights to Eligible Employees. In addition, the Board may develop and amend any policies in relation to:

·         whether Performance Rights will be granted to Eligible Employees

·         determining the number of Performance Rights to be the subject of individual grants of Performance Rights, and, the Board may determine that those grants be made on a differential basis.

Performance Rights granted by the Company under the Plan will be granted for no consideration payable by Participants, unless otherwise determined by the Board.

Unvested Performance Rights cannot be exercised. Vested Performance Rights (excluding any Cash Settlement Rights) can be exercised at any time from the date the Performance Rights become Vested Performance Rights until such Performance Rights lapse. Vested Performance Rights which are Cash Settlement Rights cannot be exercised.

A Participant may exercise any of his or her Vested Performance Rights (excluding any Cash Settlement Rights) by lodging a Notice of Exercise and a cheque payable to the Company for the Total Exercise Price (if any) applicable to those Performance Rights.

The Board may specify the Performance Periods and Performance Hurdles that will apply to Performance Rights. The Board may determine and specify the number and frequency of the Test Dates applicable and the extent to which Performance Rights will become Vested Performance Rights on any Test Date upon the satisfaction of the Performance Hurdles during a Performance Period.

The Board shall determine whether and to what extent the Performance Hurdles have been satisfied during the Performance Period and the proportion of the Performance Rights that became Vested Performance Rights at the relevant time.

Performance Rights that have become Vested Performance Rights will remain Vested Performance Rights, irrespective of whether, on any subsequent requirements being satisfied in relation to a Performance Period.

A Participant may continue as a Participant under the Plan where cessation of employment with the Company occurred due to Good Leaver Reasons.

The Board may determine to waive any or all of the Performance Hurdles that apply on such terms or conditions as they think fit.

The Company must within 28 days after receipt of a Notice of Exercise and the Total Exercise Price in respect of Performance Rights (excluding Cash Settlement Rights) allot and issue to the Participant, or to the Trustee for the benefit of the Participant, that number of Shares nominated by the Participant in the Notice of Exercise under the Plan.

The Board may appoint an entity (other than the Trustee) that is unrelated to the Company (Entity) for the sole purpose of purchasing the relevant number of Shares and, for that purpose, the Company shall pay to that Entity an amount equal to the costs and expenses of the acquisition of those Shares. The Entity appointed shall acquire the number of Shares as directed by the Board and immediately allocate those Shares to and ensure those Shares are registered in the name of, the relevant Participant or in the name of, the Trustee for the benefit of the Participant.

In acquiring those Shares, the Entity acts as trustee for the relevant Participant, or for the Trustee for the benefit of the Participant until such time as those Shares have been acquired, allocated and registered in the name of that Participant, or in the name of the Trustee for the benefit of the Participant.

Shares issued as a consequence of the exercise of Performance Rights will, from the date of allotment, rank equally with all other issued Shares, and will be entitled in full to those dividends which have a record date for determining entitlements after the date of issue.

A Participant has no interest in any Share unless and until the related Performance Right (excluding a Cash Settlement Right) is exercised and Shares are either allotted and issued to, or purchased in the name of, that Participant or in the name of the Trustee for the benefit of the Participant, as a result of that exercise.

The Board may apply restrictions on dealing with some, or all Shares acquired by a Participant, or by the Trustee. While subject to restrictions, Shares cannot be transferred by the Participant, or by the Trustee other than to the relevant Participant. The Participant or the Trustee must not grant any Security Interest in or over or otherwise dispose of or deal with any such Shares acquired under the Plan or any interest in any such Shares acquired under the Plan held by the Participant or the Trustee.

The Board will manage and administer the Plan for the Company, including exercising any discretion or power conferred on the Company or the Board under the Plan and the Trust.

The Board will have power to determine appropriate procedures and regulations for administration of the Plan consistent with the provisions of Plan and resolve conclusively all questions of fact or interpretation and all calculations arising in connection with the Plan.

The Company will pay all expenses, costs and charges in relation to the establishment, implementation and administration of the Plan, including all costs incurred in or associated with the allotment and issue or purchase of Shares for the purposes of the Plan.

Deed of Retirement and Appointment of Trustee

Under the terms of the deed of retirement, the retiring trustee ceased to be trustee of the Trust and the Company appointed the new Trustee to be the trustee of the Trust.

At the same time, the Trust Deed was amended. Other than as amended the under the terms of the deed of retirement, no other terms of the Trust Deed or any obligations of either party under the Trust Deed were varied.

Under the terms of the deed of retirement the Company and the new trustee confirmed that nothing in the Deed constitutes a resettlement of the Trust or prejudices or adversely affects any right, power, authority, discretion or remedy which arose under the Trust Deed before the retirement of the retiring trustee. Nothing in the Deed discharges, releases or otherwise affects any liability or obligation which arose under the Trust Deed before the retirement of the retiring trustee.

The parties agree that on and from the date of the deed of retirement, the new Trustee holds the Trust Assets in accordance with the terms of the Trust Deed.

Employee Share Trust

The Trustee declares that in respect of each Participant the following will be held by the Trustee on trust for and on behalf of that Participant on the terms of the Trust Deed and subject to the relevant Rules:

·         the Trust Shares held by the Trustee on behalf of the Participant

·         prior to their distribution the proceeds of sale arising from the sale by the Trustee on rights under a Rights Issue on behalf of that Participant

·         Trust Assets related to or arising from Trust Shares held by the Trustee on behalf of that Participant.

Each participant is absolutely entitled to the Trust Shares held by the Trust on their behalf, all Trust Assets in respect of those Trust Shares and all other Accretions attached to those Trust Shares.

The Trustee will acquire, deliver and allocate Shares for the benefit of a Participant provided the Trustee receives sufficient payment to subscribe for or purchase Shares, or has sufficient Unallocated Trust Shares available.

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

The Trustee is not entitled to receive any fees, commission or remuneration in respect of its performance of its obligations as Trustee of the Trust. The Company will pay to the Trustee or will procure the payment of any reasonable fees, commissions or remuneration and reimburse any Trust Expenses incurred by the Trustee. The Trustee is entitled to retain any such remuneration or reimbursement.

Where the terms of the relevant Rules and relevant Terms of Participation for a Participant include that Shares may be held by a trustee for a Participant, the Board may instruct the Trustee to subscribe for, purchase or allocate Shares to be held by the Trustee as Trust Shares in respect of that Participant.

The Board must in a notice:

·         offer to the Trustee to have the Company or its related body corporate or the relevant Participant provide funds for the purpose of acquiring Trust Shares

·         request the Trustee to apply some of the capital of the Trust for the purpose of acquiring Trust Shares.

Once the Trustee has received sufficient payment or has sufficient capital, the Trustee agrees at the election of the Board to:

·         be issued the required number of Trust Shares

·         purchase the requisite number of Trust Shares on market or off market on behalf of the Participant

·         subscribe for the required number of Trust Shares on behalf of the relevant Participant

·         allocate Shares that are Trust Assets to be held on behalf of the relevant Participant

·         effect a combination of the above.

The subscription price for each of the Trust Shares must be market value of the Shares as determined by the Board on the date on which the Trust Shares are issued to the Trustee.

The Trust Deed provides the following regarding funding:

·         The Company must provide the Trustee, or cause the provision to the Trustee of, any funds required by the Trustee in order to comply with its obligations.

·         All funds received by the Trustee from the Company will constitute Accretions to the corpus of the Trust and, will not be repaid to the Company and no Participant will be entitled to receive such funds.

·         Funds received by the Trustee from the Company may be paid to the Company where the Trustee subscribes for Shares in accordance with this Deed, the relevant Scheme Rules or relevant Terms of Participation.

·         Where an amount paid by the Company to the Trustee in respect of the acquisition of Shares for the benefit of a Participant is in excess of the amount required by the Trustee to acquire, deliver or allocate those Shares, the Board may require the Trustee to

-        apply such amount to acquire, deliver or allocate Shares in accordance with this Deed, the relevant Scheme Rules or the relevant Terms of Participation

-        deposit the funds into any account opened and operated by the Trustee.

On direction of the Board the Trustee must allocate to any Participant named by the Board the number of Trust Shares specified by the Board on the date specified by the Board. Plan Shares acquired in accordance with the Trust Deed must be held by the Trustee and stand to the account of the Participant who will be the beneficial owner of the Shares.

A Participant will have an absolutely vested and indefeasible entitlement to receive from the Trustee all dividends actually paid by the Company on all Trust Shares held by the Trustee in respect of the Participant. The Trustee may make any arrangement it consider appropriate to enable participation of any Trust Shares in any dividend reinvestment plan of the Company.

Subject to the relevant Rules, the Trustee will send notice to a Participant of any Rights Issue in respect of Trust Shares held by the Trustee.

The Board my direct the Trustee to hold or reallocate any Forfeited Shares for the benefit of one or more Participants or for the benefit of any other Employee Share Scheme.

The Trustee in respect of an Unallocated Trust Share:

·         must not exercise any voting rights in relation to that Share

·         may apply any capital receipts, dividends or other distributions received in respect of any Unallocated Trust Shares to purchase further Shares to be held on trust

·         must not participate in any Rights Issues in respect of Unallocated Trust Shares

·         must hold any bonus shares issued in respect of Unallocated Trust Shares

·         must keep an account of all Unallocated Trust Shares acquired by the Trustee.

The Company may direct the Trustee to allocated Unallocated Trust Shares to a Participant Following the allocation to a Participant, the Company may direct the Trustee to continue to hold those Trust Shares on behalf of the Participant and on the terms of the Trust Deed.

Subject to the relevant Rules and the relevant Terms of Participation, a Participant is presently entitled to so much of the Net Income of the Trust for a year of Income which is attributable to the following on behalf of the Participant:

·         the Trust Share held by the Trustee

·         the proceeds of sales arising from the sale by the Trustee of rights under a Rights issue

·         transactions or events related to the Trust Share.

The balance of the Net Income of the Trust to which no Participant is entitled may be accumulated by the Trustee as an addition to the Trust Assets.

Before the end of each Year of Income, the Trustee may decide whether any amount received or held is to be treated as being on income or capital account and any actual or deemed capital gains arising in that year of income under the ITAA 1936 or ITAA 1997 is to be included as income of the Trust.

If the Trust is terminated and there are Trust Assets remaining in the Trust following the distribution to Participants of any Trust Shares and any Net Income attributable to those Participants, those Trust Assets remaining must be transferred or gifted by the Trustee at the direction of the Board to one or more Discretionary Beneficiaries.

The Trustee must not pay any balance of the Trust to the Company.

The Trustee may cease to be the trustee of the Trust under the terms of the Trust Deed.

When a party ceases to be the Trustee of the Trust the Company will appoint a new trustee. The retiring trustee must exercise all share transfers and sign all documents to transfer the Trust Assets into the name of the new trustee and will be liable for all its acts in its capacity as trustee. The new Trustee must execute all share transfers and sign all other documents necessary to transfer the Trust Assets into the name of the new trustee and will be liable for all of its acts in its capacity as the trustee.

Reasons for decision

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

Question 1

Summary

The execution of the Deed of Retirement and Appointment of Trustee & Amendment does not result in a resettlement of the EST and therefore it not does not cause CGT event E1 or E2 to occur.

Detailed reasoning

A trust resettlement will occur for income tax purposes where one trust has ended, and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue as a result of various CGT events including CGT event E1 and CGT event E2.

CGT Event E1

Section 104-55 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

CGT Event E2

Section 104-60 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.

The Commissioner has released Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court? It was published as a result of the court case Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark's case). Whilst Clark's case dealt with whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, TD 2012/21 accepts that the principles set out in Clark's case have broader application.

TD 2012/21 states that a valid amendment to a trust pursuant to an existing power will not result in CGT event E1 or E2 happening unless:

·         the change causes the existing trust to terminate and a new trust to arise for trust law purposes

·         the effect of the change is such as to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.

In relation to continuity of a trust estate, paragraph 20 of the TD 2012/21 refers to the decision made in the Clark case that, at least in the context of recoupment of losses, continuity of a trust estate will be maintained so long as the trust is not terminated for trust law purpose.

Paragraph 24 of TD 2012/21states:

·         .... the ATO accepts that a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation, will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening.

Paragraphs 26 and 27 of TD 2012/21 clarify that:

·           the validity of purported changes to a trust are to be determined in accordance with principles of trust law

·           in instances where a pre-existing trust does not terminate, the assets may commence to be held under a separate charter of obligations as a result of the variation such as to lead to the conclusion that those assets are now held on terms of a different trust.

It is accepted that neither of the two exclusions apply as a result of the appointment of the new Trustee of the Trust.

Therefore, the execution of the Deed of Retirement and Appointment of Trustee & Amendment does not result in a resettlement of the Trust nor does it give rise to the happening of a CGT event E1 or E2 under sections 104-55 or 104-60.

Question 2

Summary

The irretrievable cash contributions made to the Trustee to fund the acquisition of Shares under the Plans are neither ordinary income nor statutory income and will not be assessable income of the Trust under sections 6-5, 6-10 or Division 6 of Part III.

Detailed reasoning

Section 6-5

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

The irretrievable cash contributions made by the Company to the Trustee under the terms of the Plans and the Trust are to be used for the sole purpose of obtaining shares in the Company for the benefit of Participants, they will constitute accretions to the corpus of the Trust. Accordingly, the irretrievable cash contributions constitute capital receipts to the Trustee of the Trust.

The irretrievable cash contributions made by the Company to 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. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

Section 6-10

Under subsection 6-10(1), assessable income includes some amounts that are not ordinary income. These are included by provisions about assessable income listed under section 10-5. None of the provisions listed in section 10-5 is relevant in the present circumstances.

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

Division 6 of Part III

Under Division 6 of Part III, it is generally the beneficiaries of a trust, who are presently entitled to a share of the income of the trust, who 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.

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 ...

Given that the irretrievable cash contributions made by the Company to the Trustee are neither ordinary income nor statutory income, they will not be included in the assessable income of the Trust, and hence will not form part of the 'net income' of the Trust (under Division 6 of Part III).

Question 3

Summary

A capital gain or capital loss that arises for the Trustee at the time when a Participant becomes absolutely entitled to Shares (CGT event E5 ), or when the Trustee disposes of the shares to the Participants (CGT event E7) will be disregarded under section 130-90 if the Participants acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee. The Trustee will not make a capital gain or capital loss from CGT event A1 under section 104-10 when the Trustee transfers the legal ownership of the Shares to a Participant following allocation.

Detailed reasoning

CGT Event E5

Pursuant to section 102-20, an entity can make a capital gain or loss if, and only if, a CGT event happens.

Under subsection 104-75(1), CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee.

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

If CGT event E5 happens, the trustee may make a capital gain if the market value of the asset, at the time of the event, is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base. In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 applies.

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(TR 2004/D25) explains the principles set out in the leading English trust law case of Saunders v. Vautier (1841) 49 ER 282 in relation to 'absolutely entitled' as follows:

... if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustees to transfer the trust property to them or at their direction, even though the trust deed contains a contrary intention. The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway.

A participant will generally become absolutely entitled to the shares when the shares are vested and the restrictions in respect of the shares have ceased or no longer apply. Upon the cessation of all the restrictions, the Participant has the right to request the Trustee to transfer the shares into the Participant's name and deal with the shares at their own will. At this point, the Participant will become absolutely entitled to the shares as against the Trustee, and CGT event E5 happens pursuant to subsection 104-75(1).

However, any capital gain or loss that the Trustee makes from CGT event E5 is disregarded if section 130-90 applies.

Subsection 130-90 states:

(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

(c)   Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest.

(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.

(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."

Subsection 130-90(1A) applies to shares held for future acquisition under employee share schemes 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.

In both instances, to qualify for the exemption in section 130-90, there must be an 'employee share trust' and an 'ESS interest'.

The Trust satisfies the definition of an 'employee share trust' in subsection 130-85(4) because:

·           the Trust acquires shares in a company

·           the Trust ensures that ESS interests as defined in subsection 83A-10(1) are provided under an employee shares scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust Deed and the Plans

·           the Trust Deed provides that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purpose of subsection 130-85(4).

As such, any capital gain or loss that arises for the Trustee as a result of CGT event E5 happening is disregarded by virtue of section 130-90, provided a Participant does not acquire the beneficial interest in the Share for more than its cost base in the hands of the Trust at the time CGT Event E5 happens.

CGT Event E7

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 (section 104-85). The timing of the event is when the disposal occurs.

If CGT event E7 happens, the trustee may make a capital gain if the market value of the asset, at the time of the disposal, is more than its costs base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base.

When the Trustee transfers a share to a Participant at the end of the vesting period in satisfaction of its obligation, CGT event E7 will occur pursuant to section 104-85 and any capital gain or loss will generally be assessed for CGT purposes to the Trustee.

However, section 130-90 applies to disregard any capital gain or loss arising as result of the shares being disposed of by the Trustee to the Participant under CGT event E7 if the Trust is an employee share trust and the shares are an ESS interest. As discussed above, these two conditions are met in the present circumstances.

Consequently, section 130-90 will apply to disregard a capital gain or capital loss that arises for the Trustee at the time CGT event E7 happens if the employees acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee.