Edited version of private advice

Authorisation Number: 1051900728015

Date of advice: 21 September 2021

Ruling

Subject: Employee share schemes

Question 1

Will irretrievable cash contributions made by Company A as head company of the Company A tax consolidated group to the Trustee, as trustee of the Company A Share Plan Trust (Trust), to fund the subscription for, or acquisition on-market of, shares in Company A be assessable income of the Trust pursuant to section 6-5 or 6-10 of the ITAA 1997, or Division 6 of the ITAA 1936?

Answer

No.

Question 2

Will a capital gain or capital loss that arises for the Trustee of the Trust at the time when the Participants become absolutely entitled to Company A shares (capital gains tax ('CGT') event E5), be disregarded under section 130-90 of ITAA 1997 if the employees acquire the Company A shares for the same or less than the cost base of the Company A shares in the hands of the Trustee?

Answer

Yes.

This ruling applies for the following period:

Income tax year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A is an ASX listed company and the head company of a tax consolidated group. Company A has two primary employee share schemes in operation, namely:

•         Employee Share Purchase Plan (General Plan), and

•         Executive Incentive Plan (Executive Plan).

Operation of the General Plan

Broadly, the General Plan is an employee share scheme which allows the Board to invite Eligible Employees to participate by purchasing Company A shares via a salary sacrifice arrangement.

Each year Eligible Employees are invited to participate in the General Plan.

Participants nominate an amount up to $X,000 AUD of pre-tax salary to sacrifice for the financial year. The Trustee receives the deducted salary amount, and in the same month acquires shares in Company A on behalf of the Participant on market (Purchased Shares).

The Purchased Shares acquired with salary sacrificed contributions are then held in trust for the Participant for another two years. During this time the Participant maintains the right to vote and receive all dividends (and any other entitlement) associated with the Purchased Shares.

At the end of that financial year Participants also receive 'Matched Rights'. Matched Rights provide for Participants to receive additional Company A shares equivalent to the number of Purchased Shares acquired by the Participant from their salary sacrificed contributions during the year.

Upon satisfaction of the Matching Conditions, the Matched Rights convert to Company A shares when the Participant is entitled to sell or transfer their Purchased Shares (the additional Company A shares acquired upon the Matched Rights converting are referred to as Matched Shares).

At the end of two financial years after the end of the original salary sacrificed arrangement during which Purchased Shares were acquired on behalf of the Participant, the Participant is entitled to hold, sell or transfer both their Purchased Shares and the associated Matched Shares.

The General Plan is available to permanent Australian and New Zealand resident employees of the Company A Group, other than executives.

The General Plan operates in accordance with the Employee Share Purchase Plan Rules and is a scheme to which Subdivision 83A-C of the ITAA 1997 applies, subject to the requirements of the ITAA 1997.

The Board may, in its discretion, impose transfer or other restrictions in respect of Shares allocated to a Participant. If exceptional circumstances exist in relation to a Participant, they may write to the Board and request the removal of said transfer or other restrictions imposed.

Where a Participant ceases to be an employee, they will cease to participate in the General Plan, subject to certain rules around Matched Shares. They are:

•         if the Participant has not yet become entitled to any Matched Shares, all conditional rights to the Matched Shares cease;

•         a Participant will not lose their entitlement to any Matched Shares to which they have become entitled (but which have not yet been allocated to them);

•         if the Participant ceases their employment due to death, disability or other reason approved by the Board (excluding resignation or termination for cause), before they became entitled to Matched Shares, the Board may, in its discretion, determine that they are entitled to some or all of those Matched Shares.

The Board may determine how Shares purchased by a Participant are to be held under the General Plan, including by establishing a trust.

When the Matching Conditions and any transfer restrictions have been satisfied, the Trustee will continue to hold the Purchased and Matched Shares on trust on behalf of the Participant, until directed to transfer them into the Participant's name.

Company A must ensure that Participants are regularly notified of any Shares that are acquired and registered in the name of the Trustee on their behalf.

Operation of the Executive Plan

Under the Executive Plan, Company A has offered both a long-term and short-term incentive (LTI and STI respectively).

LTI

Under the terms of the LTI, Participants are granted Performance Rights on 1 July 20XX. The number of LTI Performance Rights granted on 1 July 20XX is calculated according to the formula:

(Total Fixed Remuneration x XX%) / VWAP of Company A Shares for 5 days up to and including 1 July 20XX)

LTI Performance Rights vest based on a three-year performance period commencing 1 July 20XX.

The number of LTI Performance Rights that actually vest (as opposed to initially granted) is determined in accordance with an index return calculation. The index takes into account Total Shareholder Return (TSR) plus an additional Compound Annual Growth Rate (CAGR).

LTI Performance Rights can be exercised after three years, for a for a two-year period, at no cost. LTI Performance Rights not exercised within the two years will lapse.

STI

Under the terms of the STI, Participants are granted Rights calculated by reference to a percentage maximum of a Participant's Total Fixed Remuneration (TFR). Prior to any STI Award becoming available, there are overall company performance hurdles which determine how many STI Awards are potentially available to each Participant. These are:

•         Total Shareholder Return (TSR), and

•         Return on Capital (ROCE)

If both company performance hurdles are met, then Participants are eligible for a maximum of 100% of their own individual STI Award amount. If only one of the company performance hurdles are met, then the maximum is 50%, and if neither are achieved then no STI is available to any STI Participant.

Having determined the maximum percentage entitlement achievable, then individual employee participants are assessed against Company Goals. Once the value of the STI is determined for the Participant, then 50% is payable in cash (inclusive of superannuation), and the other 50% takes the form of Performance Rights. The number of Performance Rights acquired is calculated by dividing the STI value entitlement by the 5-day VWAP up to (and including) 30 June 20XX.

That number of Performance Rights then vest:

•         50% on 1 July 20XX, and

•         the balance on 1 July 20XX.

The offers made under the Executive Plans operates in accordance with the Executive Incentive Share Plan Rules.

An Award is defined in the Rules as an award made under the Plan in the form of a Cash Reward, Performance Right and/or Option.

An Award granted under the Executive Plan will not vest unless the Conditions (if any) advised to the Participant have been satisfied.

Notwithstanding the above, the Board may, in its discretion, determine that an Award vests prior to the date specified by the Board in the information provided at the time of grant or invitation.

If an Award is in the form of Performance Rights or Options, upon vesting (and, if applicable, exercise of the Award), Company A must procure the transfer to the Participant (or the Trustee to be held on behalf of the Participant), one Share for each Award that has vested or, if applicable, is exercised.

Where a Participant ceases to be an employee of the Group after the Award has vested, and the Award is an Option or a Performance Right to which an exercise period applies, the vested Award must be exercised within 30 days of cessation (or such other period determined by the Board) or the Award will lapse.

Subject to the Board's discretion, a Participant's unvested Award will lapse (or be forfeited) for various reasons, including ceasing to be an employee of the Group. The Board may, in its discretion, impose any transfer or other restrictions in respect of Shares allocated in respect of an Award.

The Board has absolute and unfettered discretion concerning administration of the Executive Plan.

The Company A Share Plan Trust

Company A and the Trustee executed the Deed which established the Company A Share Plan Trust (Trust).

The purpose in establishing the Trust was to facilitate the provision of Shares to Participants under the Plans.

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

Operation of the Trust

The Deed sets out the manner in which contributions can be made to the Trustee of the Trust to acquire Company A Shares. It provides:

•         the Trust is required to acquire Shares determined appropriate and necessary by the Board;

•         Company A must provide the Trustee with the funds required to comply with its obligations;

•         the Trustee is not obliged to acquire Shares if it does not receive sufficient funds to do so;

•         all funds received by the Trustee from Company A will constitute Accretions to the corpus of the Trust (except for the Trustee's remuneration, and where it subscribes for Shares in Company A), and will not be repaid to the Company. No Participant shall be entitled to receive such funds.

The Deed further sets out how the Trust will hold Shares and on what basis. It provides;

•         until Shares acquired by the Trustee are allocated to a Participant, the Trustee will hold them on trust for the benefit of Participants generally;

•         before the allocation or transfer to a Participant of an Unallocated Share held by the Trustee, the Trustee;

­   (if it is an associate of the company), must not, at its own discretion, exercise any voting rights in relation to the Unallocated Share;

­   (if it is not an associate of the company), may exercise voting rights in relation to the Unallocated Share, but only where the Trustee determines that voting in those circumstances are 'merely incidental' to obtaining, holding and providing Shares in Company A to the Participant;

­   may apply any capital receipts, dividends or other distributions received in respect of the Unallocated Share to purchase further Shares to be held on trust for the purposes of the Trust; and

­   must not participate in any rights issue or hold any bonus Shares issued in respect of the Unallocated Shares.

•         the Trustee may accumulate any income of the Trust to which no Participant is presently entitled as an Accretion to the Trust and cannot return any capital to Company A or any entity that Company A controls.

The Trust Deed sets out the powers of the Trustee. It provides, amongst other things, that;

•         the Trustee has the power to subscribe for, purchase or otherwise acquire and to sell or otherwise dispose of property, rights or privileges which the Trustee is authorised to acquire or dispose of on terms and conditions it thinks fit, pursuant to the Plan Rules;

•         the Trustee may receive dividends in respect of Unallocated Shares and interest from bank accounts and use those funds to:

­   acquire additional Shares for the purposes of the Plans, and

­   pay necessary and incidental costs of administering the Trust.

More generally, the Trust Deed sets out how the Trust will operate;

•         the Trust must operate in accordance with the Deed and the Plan Rules, and the Trustee must follow any direction given to it by the Board in relation to the operation of the Trust, subject to the Deed and applicable law.

•         Company A will pay all Trust expenses, outgoings, costs and charges incurred in the establishment and ongoing operation of the Trust.

•         Company A is not a beneficiary of the Trust and has no entitlement to any Shares or other trust property or any return of contributions made to the Trust.

•         The Trustee, on termination of the Trust, must apply any remaining part of the Fund for the benefit of one or more beneficiaries at the direction of Company A or, if no direction is provided, at the discretion of the Trustee, but must not pay any remaining amounts left in the Fund to Company A or any of its subsidiaries.

•         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 1936.

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 10-5

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 subsection 130-85(2)

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

Income Tax Assessment Act 1997 subsection 130-90(1A)

Income Tax Assessment Act 1997 subsection 130-90(1)

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1936 subsection 95(1)

Reasons for decision

Question 1

Subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines net income in relation to a trust, insofar as it is relevant, as follows:

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

Subsections 6-5(1) and (2) state that a resident taxpayer's assessable income would include income according to ordinary concepts, (called ordinary income), derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Further, subsections 6-10(1) and (2) provide that:

6-10(1) Your assessable income also includes some amounts that are not ordinary income.

Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5.

6-10(2) Amounts that are not^* ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.

'Ordinary income' is not a defined term, and as stated in the Explanatory Memorandum to the Income Tax Assessment Bill 1996 (Cth), Parliament has left it to the courts to develop principles for determining what is 'ordinary income'. The following classic description was given by Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215:

The word "income" is not a term of art, and 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 such receipts.

The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that:

The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. ...Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; ...that is income derived from property. Nothing else answers the description.

In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts 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.

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

The contributions provided by Company A to the Trustee are used in accordance with the terms of the Deed and the Plan Rules, for the sole purpose of, and under, the employee share scheme (ESS). The Deed states that all contributions provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repaid to Company A, or any other member of the consolidated group. The contributions therefore constitute receipts of a capital nature to the Trustee and will not be assessable as ordinary income under section 6-5.

As the irretrievable contributions in question are not assessable as ordinary income under section 6-5, it is necessary to consider whether they are assessable as statutory income under section 6-10. The summary list of what is included as statutory income is included at section 10-5. None of the provisions there listed are relevant in the present circumstances. Therefore, non-refundable contributions made by Company A to the Trustee will not be assessable income under section 6-10, as they are not statutory income.

Given that the irretrievable cash contributions made by Company A 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) of the ITAA 1936.

Question 2

When a Participant in the General Plan or the Executive Plan becomes absolutely entitled to the shares as against the Trustee, CGT Event E5 will occur and under section 104-75, the Trustee will make a capital gain or loss. However, section 130-90 may operate to disregard that gain or loss where specified conditions are satisfied.

Section 130-90

Shares held for future acquisition under employee share schemes

(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.

Shares held to satisfy the future exercise of rights acquired under employee share schemes

(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.

To satisfy subsection 130-90(1A), it is therefore first necessary to establish that:

•         a capital gain (or loss) must be made by an employee share trust (EST) which results from a CGT event happening

•         immediately before that CGT event, the ESS interest must be a CGT asset of the Trust (EST)

•         if the event is CGT event E5, then it must happen because a Participant becomes absolutely entitled to the ESS interest as against the Trustee, and

•         Subdivision 83A must apply to the ESS interest.

Similarly, to satisfy subsection 130-90(1), it is therefore first necessary to establish that:

•         a capital gain (or loss) must be made by an employee share trust (EST), or a beneficiary of the trust

•         that capital gain (or loss) must result from CGT event E5 happening

•         the CGT event E5 must happen in relation to a share

•         the beneficiary must have acquired the beneficial interest in the share by exercising a right, and

•         that beneficiary's beneficial interest in the right must have been an ESS interest to which Subdivision 83A applied.

ESS interests

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

The Rights or Options under both Plans are 'ESS interests' because they are either a beneficial share in the company (the Purchased Shares under the General Plan) or a 'right to acquire a beneficial interest in the company' (the Rights and Options under the Executive Plan, and the Matched Rights under the General Plan).

Employee share scheme

An 'employee share scheme' is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees of the company or its subsidiaries, in relation to their employment.

The General and the Executive Plans are employee share schemes within the meaning of subsection 83A-10(2), because they are schemes under which ESS interests are provided to employees of the company or its subsidiaries, in relation to their employment.

Employee share trust

130-85(4) states that:

An employee share trust, for an *employee share scheme, 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

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

Company A has established the Trust to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests acquired by those employees under the Plans. A clause of the Trust Deed is titled 'Sole activities test' and provides that Company A and the Trustee agree that the Trust will be administered so that it satisfies the definition of employee share trust for the purposes of subsection 130-85(4).

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

•         the Trust acquires shares in a company, namely Company A, 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 Deed and the Plan Rules.

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

ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities, and Draft Taxation Determination TD 2019/13:Income tax: what is an 'employee share trust'?, set out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c):

•         the opening and operation of a bank account to facilitate the receipt and payment of money;

•         the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee;

•         the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme;

•         dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme;

•         the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares;

•         the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and

•         receiving and immediately distributing shares under a demerger.

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.

The Deed states that Company A 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 1936.

Paragraph 130-85(4)(c) is satisfied as any activities undertaken by the Trustee other than the acquisition of Company A shares and the allocation of those shares to the employees in accordance with the Deed and the Plan Rules are merely incidental to the operation of the Plans.

When CGT Event E5 occurs under section 104-75, does section 130-90 operate to disregard the capital gain or loss to the Trustee?

Subsection 130-90(1) is applicable to the Rights and Options under the Executive Plan and the Matched Rights under the General Plan, as they apply to shares held to satisfy the future exercise of rights acquired under an ESS, where the beneficial interest in the share is acquired by the beneficiary by exercising a right.

Paragraph 130-90(1)(a)

At the time a Participant becomes absolutely entitled to Company A Shares as against the Trustee, CGT event E5 will apply. Under both the Executive and General Plan, Participants will be deemed to be absolutely entitled to the relevant Share or Right from the time of acquisition of the ESS interest for the purposes of Division 83A, Part 3-1 and Part 3-3 (see subsection 130-85(2)).

Therefore paragraph 130-90(1)(a) will be satisfied.

For the sake of completeness, CGT event E7 is not relevant in these circumstances, as it only occurs where a CGT asset is transferred to a beneficiary where the beneficiary does not have absolute entitlement but does have an interest in the trust capital.

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 Company A held by the Trustee and to which a Participant is absolutely entitled is a share in the capital of a company (i.e. Company A). Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph.

Paragraph 130-90(1)(c)

Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a share (in Company A) by exercising a right (Performance Right) provided under the Executive Plan, and the Matched Right under the General Plan.

Paragraph 130-90(1)(d)

Relevantly, subsection 83A-105(3) of Subdivision 83A-C states that it applies to an ESS interest acquired under an ESS if, if the interest is a beneficial interest in a right to acquire a beneficial interest in a share;

there is a real risk that, under the conditions of the scheme, if you exercise the right, you will forfeit or lose the beneficial interest in the share (other than by disposing of it).

As noted above, the Executive Plan and General Plan are employee share schemes within the meaning of subsection 83A-10(2). Subdivision 83A-C will apply to Performance Rights acquired under the Executive Plan as, the ESS interests (i.e. Performance Rights issued under the Executive Plan) will be acquired under an ESS (for the reasons stated above) at a discount, and there is a real risk a Participant may forfeit the beneficial interest in the share if certain performance conditions are not met.

Similarly, Matched Rights acquired under the General Plan will be acquired under an ESS (for the reasons stated above) at a discount, and there is a real risk a Participant may forfeit the beneficial interest in the share if certain continuation of employment and performance conditions are not met.

Accordingly, paragraph 130-90(1)(d) will be satisfied.

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

Provided a Participant under the Executive or General Plan does not acquire the beneficial interest in the Company A share for more than its cost base in the hands of the Trustee at the time that CGT event E5 happens, subsection 130-90(1) will apply.

Subsection 130-90(1A) is applicable to the General Plan, as it applies to shares held for future acquisition under ESSs.

Under the General Plan, Participants are invited to acquire shares in Company A under a salary sacrifice arrangement, which will then be matched 1:1 for nil consideration, after certain conditions are met. Company A will make contributions to the Trustee in order to allow it to either subscribe for shares from Company A or acquire them on-market to satisfy the offers made to the eligible employees under the General Plan.

Subsection 130-90(1A) provides that any capital gain or loss made by an employee share trust is disregarded where it results from a CGT event if immediately before the event happens an ESS interest is a CGT asset of the trust and a beneficiary of the trust becomes absolutely entitled to the ESS interest (CGT event E5), or the trustee disposes of the ESS interest to a beneficiary of the trust (CGT event E7).

For the reasons discussed above the Trust satisfies the definition of an employee share trust in subsection 130-85(4).

Paragraph 130-90(1A)(a)

Paragraph 130-90(1A)(a) is satisfied as the shares held by the Trustee are ESS interests, which are CGT assets of the Trustee.

Paragraph 130-90(1A)(b)(i)

CGT event E5 is the CGT event that will apply under the terms of the General Plan at the time the Participant becomes absolutely entitled to the Company A shares as against the Trustee. As mentioned above, Participants under the General Plan will be deemed to be absolutely entitled to the relevant Share or Right from the time of acquisition of the ESS interest for the purposes of Division 83A, Part 3-1 and Part 3-3 (see subsection 130-85(2)).

Therefore paragraph 130-90(1A)(b)(i) is satisfied.

Paragraph 130-90(1A)(c)

The General Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest is provided to a Participant in relation to their employment in Company A in accordance with the Deed.

Subdivision 83A-C will apply to the Purchased Shares acquired under the General Plan, as those ESS interests are acquired at a discount as part of a salary sacrificing arrangement (see section 83A-105(4)).

Accordingly, paragraph 130-90(1A)(c) will be satisfied.

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

Provided a Participant under the General Plan does not acquire the beneficial interest in the Company A share for more than its cost base in the hands of the Trustee at the time that CGT event E5 happens, subsection 130-90(1A) will apply.

Conclusion

Where either subsection 130-90(1) or 130-90(1A) applies, section 130-90 operates to disregard any capital gain or loss made by the Trustee on any Company A share when a Participant becomes absolutely entitled to that share.