Edited version of private advice

Authorisation Number: 1051733247109

Date of advice: 28 August 2020

Ruling

Subject: Employee share trust

Question 1

Will irretrievable contributions from the Company to the Trustee of the Company's employee share trust (the Trust) to fund the acquisition of Shares, be assessable income of the Trust pursuant to sections 6-5, 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 made by the Trustee arising as a result of either capital gains tax (CGT) event E5 or CGT event E7 happening in respect of Shares allocated to a Participant be disregarded under section 130-90 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income year tax ended 30 June 2020

Income year tax ended 30 June 2021

Income year tax ended 30 June 2022

Income year tax ended 30 June 2023

Income year tax ended 30 June 2024

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

The Company is the head company of an income tax consolidated group (TCG) comprising itself and its wholly owned Australian subsidiary companies (Company Group).

The Company through its employee share scheme (ESS) provides benefits (ESS interests) to its employees through share ownership in the Company that assists the Company in creating sustainable shareholder returns.

The Board of the Company adopted plan rules which provide an overarching framework for making offers under the ESS. The Commissioner provided the ruling on the basis of the specific offer made pursuant to the plan rules. Generally, eligible employees who participate in the offers (Participants) may have their interests vested subject to achievement of certain performance conditions.

The Company established the Company employee share trust (Trust) to administers the ESS interests under the ESS.

The Trustee of the Trust is neither a subsidiary nor a related body corporate of the Company for the purposes of the Corporations Act 2001.

The Trust is an independent legal entity and is not part of Company Group.

The Trustee will acquire Shares either on-market or off-market, using contributions from the Company. These Shares will be used to satisfy vested ESS interests.

Broadly, the Trust property is characterised in the Trust Deed as either general trust property, which are held for the benefit of all beneficiaries, and allocated trust property, which are the assets that have been allocated to identified beneficiaries.

The Trust Deed provides that a request or direction from the Board to the Trustee to acquire Shares is only effective if the Trustee has been provided with sufficient funds to acquire the relevant Shares by the Company or a Participant. Otherwise, the Trustee is not obliged to act in accordance with such request or direction.

The Trust Deed sets out the powers of the Trustee in respect of the Trust and the Trust Fund that it is legally possible for a Trustee to have, including entering into and executing all contracts, sell any rights that accrue to a Share and apply the proceeds in accordance with the Trust Deed and the Plan, to open and operate any bank accounts for the Trust.

The Trust Deed can be amended, however, any amendment cannot confer on the Company any right to any money or Shares already in the hands of the Trustee, or adversely affect the rights and entitlements of the Beneficiaries to allocated trust assets.

Pursuant to the Trust Deed, the Company will indemnify the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in executing the Trust or any of the powers vested in the Trustee.

According to the Trust Deed, each member of the Company Group is not a Beneficiary and has no entitlement to any Shares or other trust property forming part of the Trust Fund or to any return of contributions made to the Trust.

The Trust Deed further provides that the rights of the Company under the Trust Deed are purely contractual and nothing in the Trust Deed confers on the Company any encumbrance, proprietary right or interest in the Shares acquired by 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

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 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 pursuant to the Trust Deed. 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 2

Detailed reasoning

CGT Event E5

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)).

If CGT event E5 happens, the trustee makes a capital gain or capital loss if the market value of the share (at the time of the event) is more than its cost base or less than the share's reduced cost base, respectively (subsection 104-75(3)).

However, any capital gain or capital loss the trustee makes from CGT event E5 is disregarded under section 130-90.

Section 130-90 operates to disregard any capital gain or capital loss if the conditions in that section are satisfied, subsection 130-90(1) applies in respect of shares held to satisfy the future exercise of rights acquired under employee share schemes.

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 applies under the terms of the Trust and the Rules at the time the Participant becomes absolutely entitled to the Company shares as against the Trustee when Vesting Conditions are met and the rights are 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 the Company 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). 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 has acquired a beneficial interest in a share (in the Company) by exercising a right or option.

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 under the Offer is an 'ESS interest' under paragraph 83A-10(1)(b) because it is a beneficial interest in a right to acquire a share in the Company.

Subsection 83A-10(2) defines an employee share scheme as being a scheme under which ESS interests in a company are provided to employees, relation to the employees' employment. The Offer is 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 the Company 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 options for no cost, the ESS interest is acquired by the Participant at a discount. Therefore, Subdivision 83A-B or 83A-C applies to the ESS interests.

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

Provided a Participant does not acquire the beneficial interest in the Company share for more than its cost base in the hands of the Trust at the time that CGT event E5 happens, subsection 130-90(1) applies. Any capital gain or capital loss that the Trustee makes from CGT event E5 is disregarded.