Edited version of private advice

Authorisation Number: 1051791893192

Date of advice: 18 December 2020

Ruling

Subject: Capital gains tax - employee share schemes

Question 1

Will the irretrievable cash contributions by Company X to the trustee of the employee share trust (Trustee) to fund the acquisition of, or subscription for, Company X shares by the employee share trust (Trust) be assessable income of the Trust under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2A

Will a capital gain or capital loss that arises for the Trustee of the Trust established pursuant to the Original Trust Deed at the time when either CGT Event E5 or E7 happens in relation to Company X shares held by the Trustee 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

Question 2B

Will a capital gain or capital loss that arises for the Trustee of the Trust established pursuant to the Amended Trust Deed at the time when either CGT Event E5 or E7 happens in relation to ESS interests held by the Trustee 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:

Income tax years ended 30 June 20XX to 30 June 20XX

The scheme commenced on:

In a particular income year

Relevant facts and circumstances

Company X

Company X is an Australian registered company involved in a particular industry.

Company X is a subsidiary of Offshore Co.

Company X is the head entity of Company X income tax consolidated group consisting of itself and all wholly owned Australian subsidiaries.

Company X's main operating subsidiary, Subsidiary Y, operates the business.

Subsidiary Y is also the only employer entity of the Company X income tax consolidated group.

The Plan is part of Company X's remuneration strategy and aims to ensure the long-term creation of value in Company X by:

a) Rewarding eligible participants (Participants) by allowing them to share in the growth of the business, and

b) Assisting with the retention of key talent personnel.

Company X Employee Share Option Plan (Plan)

The Plan was originally approved by the board of directors of Company X (the Board) in a particular year. The terms and conditions of the Plan are set out in the Company X Employee Share Option Plan Rules (Plan Rules).

Since adoption, the Plan Rules have incorporated changes in respect to the delegation of authority and relevant trading guidelines concerning the Shares. The Plan Rules were updated, and the updates approved by the Board in a particular year.

The terms on which Participants are invited to participate in the Plan are set out in the offer document (Offer).

1.    Under the Plan and Plan Rules:

a.    Participants may be granted an option (Option) to subscribe for and be allotted, credited as fully paid, a share in Company X (Share) or at the option of Company X, to be transferred an existing Share, credited as fully paid, in each case at the Exercise Price.

b.    The Board determines the procedure for offering Options to Participants, including the form and content of any invitation, offer or acceptance procedure.

c.     It is at the Board's discretion to extend an invitation to Participants to be granted a number of Options under the Plan specified in the Offer.

d.    Offers are extended on such terms and conditions as the Board decides, from time to time, including:

                                  i.    The number of Options which are being offered;

                                 ii.    Any issue price (which is intended to be nil);

                                iii.    Any vesting conditions;

                               iv.    Any exercise price (which is intended to be set at market value of the Shares at the time of exercise); and

                                 v.    The expiry date.

e.    The Board must procure at Company X's cost the preparation of a Share Valuation at least once each financial year within a certain number of months after the end of the preceding financial year.

f.      Participants must complete and sign the acceptance form attached to the Offer by the specified date in order to participate in the Plan.

g.    Participants may nominate an eligible nominee to accept an Offer and hold Options and Shares post exercise (Exercise Shares) (together Plan Securities) by lodging a signed notice of nomination to the Board in the prescribed manner.

h.    The Options are held by a Participant until such time as they are exercised, disposed of or otherwise lapse.

i.      The Options may be subject to vesting conditions as set out in the Offer. It is a vesting condition that Participants are not entitled to make payment of the purchase consideration and take delivery of any shares before vesting conditions are met.

j.      The Board gives a Participant written notice when vesting conditions are met (or otherwise waived by the Board).

k.     A Participant may only exercise Options in accordance with the Plan Rules once they are vested (or when vesting conditions are otherwise waived by the Board) (Vested Options) and must do so before the expiry date on the Offer.

l.      Vested Options are exercisable by the Participant lodging with the Company a completed and signed notice of exercise, the relevant option certificate, and payment of the exercise price, which the Board may stipulate to be paid directly to the Trustee.

m.   The Participant acquires the number of Exercise Shares they are entitled to either by the Company arranging for the issue of a new Share or procuring the transfer of an existing Share.

n.    Options must be exercised in multiples of x or such other multiple as the Board determines, unless the Participant exercises all Options able to be exercised by the Participant at that time.

o.    Options that have not vested and have not expired (Unvested Options) lapse and cease to exist on the date of whichever the following occurs first:

                                  i.    Termination of employment for cause by Company X or its related bodies corporate, with "Related Body Corporate" (Related Entities) having the meaning given to it by the Corporations Act 2001 (Corporations Act)

                                 ii.    Termination for any other reason by Company X or its Related Entities - the expiry of any time period set by the Board upon termination

                                iii.    Termination by voluntary resignation; and

                               iv.    Termination of contract of service.

p.    Vested options lapse and cease to exist at the Expiry Date.

q.    Participants may not dispose of (or in any way encumber) any Option or Exercise Share (Plan Securities) unless the Board (in its discretion) consents thereto and may only be transferred to persons nominated or a trust approved by the Board.

r.     The Plan Rules set out circumstances in which there may be a disposal of Plan Securities. This includes circumstances where:

                                  i.    The Board with the agreement of a Participant, buy-back the Plan Securities held by a Participant

                                 ii.    A Participant gives notice to the Company of their intention to dispose of Vested Options or Exercise Shares held by a Participant; and

                                iii.    The Participant is required to dispose of their Plan Securities if the Relevant person ceases to be an employee.

s.     The disposal of Plan Securities also includes a possible buy-back by Company X of Options held by Participants, outside the Trust for an amount equal to the Option Valuation. The Option Valuation is defined as the Share Valuation minus the Exercise of the Option; if the Option Valuation is less than zero, the Option Valuation will be deemed to be zero.

Contributions to the Trust may be made by the Company pursuant to the Plan on behalf of Australian tax resident Participants who are working in Australia and are performing services that generate income for Company X in Australia.

Contributions may also be made to acquire Shares in relation to awards granted to foreign tax residents that do not provide services that generate income in Australia. When Company X makes a contribution to the Trust, it will clearly identify the contribution that will be made in relation to Shares to be acquired in respect of awards offered to those Participants. The consideration of contributions made with respect to these Participants (and any associated Australian tax implication for Company X) are outside the scope of this ruling.

Company X Employee Share Trust (Trust)

The Trust was established on a particular date (Original Trust Deed) as a sole purpose trust for the purpose of acquiring, holding and transferring shares in connection with equity incentive plans established by Company X for the benefit of participants of those plans. The Trust will only be used to administer shares relating to Options already on offer or to be offered under the Plan.

The Trust broadly operates as follows:

a.    Company X must provide the Trustee with the funds required for the purchase of shares in accordance with the Plan and all funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee.

b.    These funds are used by the Trustee to acquire shares in Company X either from other shareholders or via a subscription for new shares in Company X based on written instructions from Company X.

c.     Where the Plan Rules stipulate that the shares are to be held by the Trustee on behalf of Participants, the Trustee will hold Company X shares as shares in respect of a Participant(s) (i.e. on an allocated basis), although the Participants will be the beneficial owner of and absolutely entitled to their Allocated Shares. Legal transfer of title in the Shares can occur post that time.

d.    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 shares as unallocated shares for Participants generally.

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

f.      After a disposal restriction period lapses (if any), 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 or following a written instruction by Company X.

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

h.    The Trustee may make investments and subscribe for, sell or otherwise dispose of privileges.

i.      The Trustee is not entitled to receive from the Trust any fees, commission or other remuneration for operating or administering the Trust. However, Company X must pay or reimburse to the Trustee from Company X's own resources any such fees, commission or other remuneration incurred by the Trustee, as Company X and the Trustee agree from time to time.

j.      In the event that the Trust is terminated, the Trustee must not pay any of the Surplus Assets to any Group Company. Group Company is defined as Company X and each of its subsidiaries.

k.     The Trustee is a separate legal entity to Company X. The directors of the Trustee company are also directors of Company X. The Trustee company is part of the Company X tax consolidated group.

l.      The Trust does not form part of the Company X tax consolidated group and separate tax filings will be made for the Trust.

Company X subsequently made amendments to the Original Trust Deed (Amended Trust Deed). Company X requested the Trustee's consent to the Amended Trust Deed (Request for Consent). Consent to the Amended Trust Deed was provided by the Trustee on a particular date with the Amended Trust Deed taking effect from a particular date.

Under the Amended Trust Deed:

a.    A definition for 'ESS Interest' was inserted to provide that the term has the meaning in section 83A-10 of the ITAA 1997

b.    The Trustee has the power to acquire, hold, dispose or otherwise deal with on any terms any property (being ESS Interests, Shares or Trust Assets) and to make ancillary investments thereof for the purposes of the Deed

c.     The Trustee has the power to subscribe for, purchase or otherwise acquire Trust Assets, Shares or rights which the Trustee is authorised by the Deed to acquire, and (where relevant) on such terms and conditions as it thinks fit, and do all things incidental to this activity

d.    The Trustee has the power to sell or otherwise dispose of Trust Assets, Shares or rights which the Trustee is authorised by the Deed to dispose of, and (where relevant) on such terms and conditions as directed by the relevant Participant, and do all things incidental to this activity.

Ancillary investments encompass only investing in Company X shares and retaining excessive cash in the bank account and nothing further.

As a result, under the Amended Trust Deed, the Trustee may make only ancillary investments and the Trustee is no longer able to subscribe for, sell or otherwise dispose of privileges.

Company X confirmed that the Trustee had not, to that date, undertaken any investments or dealt with any privileges except for the acquisition of shares in Company X and holding those shares on behalf of the Participants.

Company X will not typically provide cash contributions to the Trust prior to the grant of Options under the Plan to Participants.

Where appropriate, Company X will wait until the Options vest and receipt of the exercise notice and exercise price (if applicable) from Participants before providing the Trust with the cash necessary to acquire Exercise Shares to satisfy the acquisition/ subscription of shares related to those Options.

However, where it makes commercial sense to do so, Company X will make cash contributions to the Trust prior to the Options being exercised by the Participants - for example, where existing Participants wish to dispose of their Shares. This allows the Trustee to have enough Shares in the Trust ahead of the time they need to be allocated to Participants.

Associated costs

Company X will incur various on-ongoing administration costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust, such as:

a.    Employee plan record-keeping

b.    Production and dispatch of holding statements to employees

c.     Costs incurred in the acquisition of shares (e.g. brokerage costs and the allocation of shares to Participants)

d.    Preparing the annual audit of the financial statements of the Trust

e.    Preparing the annual income tax returns of the Trust

f.      An annual trustee fee; and

g.    Annual bank charges.

Company X will also incur costs in managing its own tax affairs, including:

a.    Obtaining accounting, tax and legal advice in relation to the employee share scheme and Trust; and

b.    Tax advisor fees associated with the private binding ruling application.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 130-90

Income Tax Assessment Act 1997 subsection 130-85(4)

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 104-85

Reasons for Decision

All references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Question 1

Assessable income includes both ordinary income and statutory income according to sections 6-5 and 6-10 of the ITAA 1997. Ordinary income is income according to ordinary concepts. Statutory income is income that is not ordinary income but is included in assessable income because of a specific provision of the ITAA 1997 or Income Tax Assessment Act 1936 (ITAA 1936).

As Chief Justice Jordan noted in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 (Scott):

.. what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of receipts.[1]

Ordinary income

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. The expression "income according to ordinary concepts" is not a defined term. However, case law has identified certain factors which may assist in determining whether a receipt is properly characterised as income according to ordinary concepts.

As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In GP International Pipecoaters v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 64 ALJR 392; (1990) 93 ALR 193; (1990) 21 ATR 1; 90 ATC 4413; [1990] HCA 25 (Pipecoaters), the High Court of Australia found that:

To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

The contributions made by Company X to the Trust forms part of the corpus of the Trust that will be applied for the sole purpose of acquiring, or subscribing for, shares for the benefit of the Participants under the Plan. The cash contributions received by the Trustee are therefore of a capital character.

It is irrelevant that, from Company X's perspective, the cash contribution may be deductible under section 8-1 of the ITAA 1997 because whether a receipt is income or capital depends on its objective character in the hands of the recipient, rather than the payer. This is made clear in Pipecoaters, where the High Court held that:

...although the amount expended on the construction of the plant was a capital expenditure, it does not follow that the taxpayer's receipt of the establishment costs was a receipt of capital.[2]

From the Trustee's perspective, the irretrievable cash contributions made by Company X are capital in nature and therefore not assessable to the Trust under section 6-5 of the ITAA 1997.

Statutory income

Section 10-5 provides a list of provisions of assessable income for section 6-10 purposes. None of the provisions apply to a cash contribution made by an employer to a trust established under an employee share scheme (ESS).

Therefore, the irretrievable cash contributions made by Company X to the Trustee of the Trust to fund the acquisition or subscription to of Company X shares are also not assessable income of the Trust pursuant to section 6-10 of the ITAA 1997.[3]

Question 2A

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 of the ITAA 1997 applies) as against the trustee. The time of the event is when the beneficiary becomes absolutely entitled to the asset.[4]

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.[5]

In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 of the ITAA 1997 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.[6]

Pursuant to the Original and Amended Trust Deed, a Participant is the beneficial owner of and absolutely entitled to their Allocated Shares. Allocated Shares is defined as a Trust Share that is credited to the Trust Share Account of a Participant. Once credited, the Participant (i.e. the beneficiary) will become absolutely entitled to the Allocated Shares (i.e. a CGT asset of the Trust) as against the Trustee, and thus, pursuant to subsection 104-75(1), CGT event E5 happens.

However, any capital gain or loss that the Trustee makes, if CGT event E5 happens, is disregarded if section 130-90 applies. Section 130-90 provides as follows:

(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 *shares for more than its *cost base in the hands of the *employee share trust at the time the *CGT event happens.

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

Subsection 130-85(4) of the ITAA 1997 defines an employee share trust as 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

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

An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Shares that are purchased by the Trustee to satisfy its obligation under the Plan, and subsequently allocated to Participants pursuant to the Plan, are ESS interests for the purposes of section 83A-10(1).

An 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employee's employment. Company X's ESS constitutes an 'employee share scheme' because it is a scheme under which ESS interests in Company X are provided to the employees of Company X in relation to their employment with Company X.

Therefore, paragraphs 130-85(4)(a) and (b) of the definition of an employee share trust are satisfied because:

a.    The Trust acquires shares in a company, namely Company X; and

b.    The Trust ensures that ESS interests as defined in subsection 83A-10(1) are provided under an employee share scheme by allocating those shares to the employees of Company X in accordance with the Original Trust Deed and the Plan.

Paragraph 130-85(4)(c) of the definition of an employee share trust provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b) of the ITAA 1997. The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'? (TD 2019/13).

According to paragraph 13 of TD 2019/13, 'investing in assets other than shares or rights to shares in the employer company' is not an activity that is 'merely incidental' as it is not a natural incident or consequence of administering an ESS.[7] Neither is the provision of 'additional benefits to participants and/or employees, over and above the delivery of the ESS interests or resulting shares and any dividend equivalent payment that accrues directly from the employee's ESS interest'.

The Original Trust Deed grants the Trustee the power to make investments (without limitation) and allows the Trustee to subscribe for, sell or otherwise dispose of privileges (privileges is undefined and therefore may amount to additional benefits that may be provided to the Participants).

However, whilst the relevant trust documents may include powers and/or duties that are broad reaching, the mere existence of those powers or duties in the trust document does not, of itself, mean that the trustee has breached the requirements to be an employee share trust. In examining whether the requirements of subsection 130-85(4) are met, it is necessary to examine the actual activities that the trustee has undertaken.[8]

Company X has confirmed that the Trustee has not undertaken any of the activities in the Original Trust Deed that would result in breach of the sole activities test. Therefore, while the Original Trust Deed contains powers and/or duties that are not merely incidental, the Commissioner is satisfied that the Trust established pursuant to the Original Trust Deed does satisfy the definition of an employee share trust on the basis that the Trustee has not in fact breached the requirements to be an employee share trust in subsection 130-85(4).

As the options and shares granted under the Plan will be acquired by the employees at a discount, they are ESS interests to which subdivision 83A-B of the ITAA 1997 applies.

As such, a capital gain or capital loss that arises for the Trustee of the Trust established pursuant to the Original Trust Deed at the time when CGT Event E5 happens in relation to Company X shares held by the Trustee will 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.

CGT Event E7

Under section 104-85 of the ITAA 1997, 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. The timing of the event is when the disposal occurs.[9]

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 cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base.[10]

Under the Original and Amended Trust Deeds, after the expiry of the applicable disposal restriction period, the Trustee must transfer the legal title of the relevant shares into the name of the relevant employee (or any third party as directed by the relevant employee) upon a withdrawal notice being submitted to the Trustee. Upon such a transfer, CGT event E7 will occur pursuant to section 104-85 of the ITAA 1997.

However, any capital gain or loss that the Trustee makes, if CGT event E7 happens in relation to the Allocated Shares or the shares allocated upon the exercise of an option, will be disregarded under section 130-90 of the ITAA 1997 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 of the ITAA 1997 will apply to disregard a capital gain or capital loss that arises for the Trustee at the time CGT Event E7 happens in relation to Company X shares held by the Trustee, if the employees acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee.

Question 2B

CGT Event E5

The Amended Trust Deed provides for the following amendments:

a.    The Trustee may make only ancillary investments (ancillary investments encompassing only investments in Company X shares and retaining excessive cash in the bank account and nothing further).

b.    The Trustee is no longer able to subscribe for, sell or otherwise dispose of privileges.

c.     The Amended Trust Deed also inserted a definition for 'ESS Interest' which is defined as per section 83A-10 of the ITAA 1997.

The Amended Trust Deed contains only powers and/or duties that are merely incidental, as required by subsection 130-85(4)(c) of the ITAA 1997. Therefore, the Trust established pursuant to the Amended Trust Deed satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997.

Accordingly, a capital gain or capital loss that arises for the Trustee of the Trust established pursuant to the Amended Trust Deed at the time when CGT Event E5 happens in relation to Company X shares held by the Trustee will 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.

CGT Event E7

As discussed above under Question 2A, any capital gain or loss that the Trustee makes, if CGT event E7 happens in relation to the shares allocated upon the exercise of an option, will be disregarded under section 130-90 of the ITAA 1997 if the Trust is an employee share trust and the shares are an ESS interest. These two conditions are met in respect of the Trust established under the Amended Trust Deed.

Consequently, section 130-90 of the ITAA 1997 will apply to disregard a capital gain or capital loss that arises for the Trustee at the time CGT Event E7 happens in relation to Company X shares held by the Trustee, if the employees acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee.

[1] Scott at 220.

[2] Pipecoaters at 4420.

[3] This view is consistent with ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme, whichfound that: 'The funds provided to the Trustee are used in accordance with the Trust Deed and Plan Rules for the sole purpose of and under the employee share scheme. The contributions constitute capital receipts to the Trustee, and are not assessable under sections 6-5 or 6-10 of the ITAA 1997'.

[4] Subsection 104-75(2).

[5] Subsection 104-75(3).

[6] Paragraph 41 of TR 2004/D25.

[7] See also paragraph 11 of TD 2019/13.

[8] Paragraph 6 of TD 2019/13.

[9] Subsection 104-85(2).

[10] Subsection 104-85(3).