Edited version of private advice

Authorisation Number: 1051885318399

Date of advice: 18 August 2021

Ruling

Subject: Employee share scheme

Question 1

Will irretrievable contributions made by the Company to the Trustee to fund the acquisition of Company shares for the Trust be assessable income of the Trust pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 or Division 6 of the Income Tax Assessment Act 1936?

Answer 1

No

Question 2

Will any capital gain or 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 Company shares allocated to a participant be disregarded under section 130-90?

Answer 2

Yes

This ruling applies for the following periods:

Income years ending 30 June 20XX to 30 June 20YY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

The Company has ordinary shares listed on the Australian Securities Exchange.

The Company is the head company of a tax consolidated group comprising itself and its wholly owned Australian subsidiary companies.

Sub Co is the employer entity of the group and is a subsidiary member of the Company's tax consolidated group.

The Company has an employee share scheme (ESS) in place that is governed by the Plan rules. Under the Plan, participants have the opportunity to receive an award subject to achieving key performance indicators in the relevant financial year. The award includes Company shares that are will be allocated and held in the Trust on behalf of the participant until the relevant vesting date.

The Trust was established to facilitate the provision of ESS interests to participants under the Plan.

The Trustee of the Trust is an independent third party.

The Company will make contributions to the Trust to fund the acquisition of Company shares by making cash payments to the Trust. These contributions are irretrievable and non-refundable because:

•                 no group entity is a beneficiary or has any entitlement to any part of the Trust fund at any time

•                 during the life of the Trust, the Trustee can only deal with the Trust fund and property for the benefit of the beneficiaries; and

•                 where the Trust is terminated and wound up, no group entity is entitled to any of the Trust's funds.

The Company shares allocated and held in the Trust are ESS interests that qualify for tax deferral under Subdivision 83A-C of the Income Tax Assessment Act 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 130-90

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (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 contributions made by the Company to the Trustee under the terms of the Plans are to be used for the sole purpose of obtaining shares in the Company for the benefit of Participants and 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 and these are included by provisions about assessable income listed under section 10-5. However, 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.

As the contributions are not assessable income, they are not included in the Trust's net income under Division 6 of the Income Tax Assessment Act 1936.

Question 2

Detailed reasoning

Subsection 130-90(1A) provides that, subject to subsection 130-90(2), any capital gain or capital loss made by an employee share trust to the extent that it results from a CGT event is disregarded, 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 of the ITAA 1997 (about employee share schemes) applies to the ESS interest.

The Trust is an employee share trust under section 130-85

To qualify as an employee share trust, a trustee's activities must be limited to those described in paragraphs 130-85(4)(a), (b) and (c).

Paragraph 130-85(4)(a) and (b) are satisfied because:

•                 the Trust acquires shares in the Company, and

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

Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.

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'?

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 to be merely incidental.

In the present case, the objects of the Trust are for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under section 130-85(4) including paragraph 130-85(4)(c) as the other activities undertaken by the Trustee are merely incidental to managing the ESS.

Therefore the Trust is an employee share trust under section 130-85.

Section 130-90(1A) applies to the Trust

The requirements of section 130-90(1A) are met by the Trust for the following reasons:

(a)             the Company shares are CGT assets as defined under section 108-5

(b)             CGT event E5 or E7 will happen when the Company shares are transferred to participants on the relevant vesting dates; and

(c)             Subdivision 83A-C applies to the Company shares.

As participants do not pay anything when the Company shares are transferred to them by the Trustee, the exception under subsection 130-90(2) will not apply.

Therefore, any capital or loss made by the Trustee arising as a result of either CGT event E5 or E7 happening in respect of the Company shares allocated to a participant will be disregarded under section 130-90(1A).