Edited version of private advice

Authorisation Number: 1051929618161

Date of advice: 7 December 2021

Ruling

Subject: Employee share schemes

Question 1

Will the irretrievable cash contributions by Company A or any subsidiary member of the Company A tax consolidated group (the Group) to the Trustee of the Employee Share Trust (the EST) to fund the subscription for, or acquisition on-market or off-market of, shares in Company A by the Trustee for the purposes of the incentive plans be assessable income of the Trust under section 6-5 or 6-10 of Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will a capital gain or capital loss that arises for the Trustee of the EST at the time the interest-holders become absolutely entitled to shares in Company A under the incentive plans, where the ESS interest was one to which 83A-B or 83A-C applied, be disregarded under section 130-90 of the ITAA 1997 if the interest-holders acquire their shares in Company A for the same or less than the cost base of Company A's shares in the hands of the Trustee?

Answer

Yes

This ruling applies for the following periods:

•         Income tax year ended 30 June 2022

•         Income tax year ended 30 June 2023

•         Income tax year ended 30 June 2024

•         Income tax year ended 30 June 2025

•         Income tax year ended 30 June 2026

Relevant facts and circumstances

This private ruling is based on the facts stated in the description of the scheme that is set out below, including the following documents, or relevant parts of them, which are to be read with the description:

The Share Trust (the Trust) Deed as amended (Trust Deed). The original provided to the Commissioner on 4 August 2021 and the amendment provided on 1 December 2021.

The Plan Rules provided to the Commissioner on 4 August 2021 consisting of:

•         Employee Share Option Plan Rules (EOP Rules).

•         Employee Long Term Incentive Plan (ELTIP Rules).

•         Employee Securities Incentive Plan (ESIP Rules).

The template invitation letters provided to the Commissioner on 29 September 2021 for grants of:

•         share options under the Employee Option Plan (EOP)

•         performance rights under the Employee Long Term Incentive Plan (ELTIP)

•         performance rights under the Employee Securities Incentive Plan (ESIP)

•         share options for directors under the ESIP

If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company information and incentive plans

Company A is an Australian resident greenfields exploration company which holds interests in various mining tenements across Australia.

Given the nature of Company A as a greenfields exploration company, key management staff including corporate executives (the Participants) are awarded several options and performance rights (awards) annually as part of their remuneration packages.

The issuance of such awards is aimed to assist Company A in rewarding, motivating and retaining these key management staff members, and linking their personal remuneration to shareholder wealth creation by providing a portion of their annualised remuneration as rewards.

These awards (granted at different times since the 2018-19 income year) have differing vesting dates, at which time the awards will vest and be exercised into ordinary shares, which Company A is committed to issue.

Some of the options mentioned in the plans below will be issued at an exercise price that is at a sufficient premium to the Company A share price that they will have a nil market value (premium priced options).

Premium Priced Awards are any options with nil market value or other awards provided to employees that have a nil market value i.e., those that are not provided at a discount.

The shares required to satisfy the premium priced options are intended to be provided via the Trust.

Company A has the following incentive plans (the Plans) under which awards have been granted:

EOP

•         This plan allows for the Directors of Company A (the Board) to grant options to Participants for no cost to the Participants (see f the EOP Rules).

•         These options allow for the relevant Participant to subscribe for and be issued the relevant number of ordinary shares as specified in the option by paying the exercise price (see the EOP Rules).

•         The plan further details how the relevant Participant converts their awarded options into ordinary shares, including details outlining the mechanical transfer of shares.

•         Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) does not apply to EOP awards.

ELTIP

•         This plan allows for the Board to issue an invitation to an employee (being an Eligible Person) to participate in the plan and be granted performance rights in Company A for no cost (see the ELTIP Rules).

•         These performance rights then vest to ordinary shares at a prescribed date in the future, subject to the conditions of the plan.

•         After vesting and the shares issued to the Participant these shares will not be subject to any transfer, dealing or disposal restrictions beyond the Company's Share Trading Policy (see the ELTIP Rules).

•         The plan provides further details concerning the application process, and the mechanics surrounding the future conversion to ordinary shares.

•         Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) does apply to ELTIP awards.

ESIP

•         This plan allows for the Board to issue Securities to Participants, which may include an ordinary share, option, performance right or other convertible security in the share capital of Company A (see definitions of Convertible Securities, Securities and Plan Shares in the ESIP Rules).

•         This plan also allows for issued securities to be cash settled (see the ESIP Rules)

•         Mechanically, under this plan, the Board advises the Participant that they are eligible to participate in the plan (i.e. are an Eligible Participant), with the Board prescribing the amount of Securities the Eligible Participant may apply for, along with any amount payable, vesting conditions, disposal restrictions, whether cashless exercise is permitted if any (see the ESIP Rules).

•         Securities granted to Participants may specify that there is a cashless exercise facility such that the Participant will receive the shares with a market value of the difference between the market value of the shares at the time of exercise and the exercise price (see the ESIP Rules)

•         The plan further details how the application process mechanically operates, and key terms regarding the vesting of these awarded convertible securities to ordinary shares.

•         Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) does not apply to ESIP awards issued to Directors.

•         Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) does apply to ESIP awards issued to Eligible Participants (other than Directors).

Employee share trust

Company A has established an employee share trust to manage the shareholding on behalf of the new shareholders, the 'Employee Share Trust'.

The sole purpose being the acquisition, holding, and ongoing administration of Company A shares under the Plans for the benefit of the Participants.

The Trust Deed outlines the prescribed terms of the trust as signed by Company A and the Trustee.

The trust was formed by the contribution of $100 cash (being the Initial Sum) by Company A to the Trustee.

The Trust Deed indicates that Company A and the Trustee agree to manage and administer the Trust so that it satisfies the definition of 'employee share trust' within the meaning of section 130-85(4).

Company A must provide the Trustee with the total funds required to enable the Trustee to subscribe for or acquire on-market the shares in Company A for which the Participants are entitled at such time the performance rights vest or options are exercised.

The cash contributions made to the Trust for the acquisition of shares must not be repaid to the Company A or any subsidiary as per the Trust Deed. The Trustee cannot pay the proceeds of sale of forfeited shares to Company A or any subsidiary. Company A or its subsidiaries do not have any beneficial interest in the Trust Assets.

The income of the Trust to which no participant is presently entitled is accumulated by the Trustee as an accretion and not returned to Company A or its subsidiaries. The Capital of the trust cannot be returned to the Company A or its subsidiaries.

On termination of the Trust the Company or its subsidiaries are not entitled to receive a benefit as the residual amount after regarding Allocated Plan Shares may be applied for the benefit of Participants, default beneficiaries or trust expenses and default beneficiary meaning in the Trust Deed is another employee share trust for the participants or a deductible gift recipient.

Company A or a subsidiary must provide the funds to acquire plan shares or request the Trust use the capital of the Trust to acquire them. Where the awards are ultimately satisfied in cash, the outgoing will not flow through the Trust.

The Trust is administered according to the Trust Deed.

Reasons for decision

Question 1

The total assessable income of a trust estate is calculated as if the trustee were a resident taxpayer in respect of that income (subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936)).

The assessable income of a taxpayer includes income under ordinary concepts (section 6-5) or statutory income (section 6-10).

None of the provisions listed in section 10-5 (list of provisions about assessable income that is not ordinary income) are relevant in the present circumstances. The irretrievable cash contributions made by the Company A Mining Limited or its subsidiaries to the Trustee of the Trust will therefore not be included in the assessable income of the Trustee under section 6-10.

The contributions made by Company A or its subsidiaries are irretrievable and non-refundable to it in accordance with the Trust Deed. The funds provided to the Trustee are used in accordance with the Trust Deed and the Plan Rules for the sole purpose of the employee share schemes. Therefore, the contributions constitute capital receipts to the Trustee, and are not assessable under sections 6-5 or 6-10. (ATO Interpretative Decision ATO ID 2002/965 Income Tax -Trustee not assessable on employer contributions made to it under the employer's employee share scheme).

Question 2

Subsection 130-90

Broadly, section 130-90 applies to disregard any capital gain or capital loss made by an employee share trust when providing shares or rights to shares in the trust to a beneficiary as a part of the operation of an employee share scheme subject to certain conditions. Relevantly,

• The Trust must be an Employee Share Trust
• the event must be regarding an ESS interest to which Subdivision 83A-B or 83A-C applied/applies
• The CGT event must be E5 or E7
• the beneficiary must not acquire 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.

Employee Share Trust

To determine whether the Trust is an 'employee share trust' for the purposes of subsection 130-85(4) an analysis of what the Trustee actually does and its powers and duties that are prescribed in the Trust Deed is required. However, as indicated in the facts the Trustee will exercise its powers and obligations as set out in the Trust Deed. Therefore, it meets the definition of 130-85(4) as:

•         The Trust acquires shares in a company, namely Company A

•         The sole purpose being the acquisition, holding, and ongoing administration of holding Company A shares under the Plans for the benefit of the Participants and the Commissioner accepts that the other activities undertaken by the Trustee will be merely incidental to this purpose 130-85(4)(c)

•         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 Plans

•         the Trust Deed indicates that the Company and the Trustee agree 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).

Further, the Trustee did not act of the former Trust Deed prior to its replacement by supplementary Amendment Deed.

ESS interest to which Subdivision 83A-B or 83A-C applied/applies

Under the Plans, Participants acquire an ESS interest as defined in subsection 83A-10(1) as they acquire either a beneficial interest in a share in Company A or a beneficial interest in a right to acquire a beneficial interest in the share in Company A. All of Company A's ESS interests that are not Premium Priced Awards are provided at a discount and therefore the Commissioner accepts that 83A-B or 83A-C applies.

The CGT event must be E5 or E7

Subsection 104-75(1) provides that CGT event E5 happens when a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee.

On satisfying any vesting conditions, an interest-holder will have an unconditional right to receive a Company A share. At this point, they will be absolutely entitled to that share (being a CGT asset of the Trust) as against the Trustee and CGT event E5 will happen (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).

Conclusion

Therefore, as shown above the conditions of 130-90 have been met such that where the beneficiary does not acquire 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, the capital gain or loss made by the Trustee will be disregarded.