Edited version of private advice

Authorisation Number: 1051967575529

Date of advice: 16 August 2023

Ruling

Subject: CGT - employee share scheme

Question

Question 1

Will irretrievable cash contributions made by either ACo or BCo to Trustee, as trustee of the Trust in accordance with the Plan and the Trust Deed to fund the subscription for, or acquisition on-market of, ACo ordinary shares be assessable income of the Trust pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997), thereby forming part of the net income of the Trust pursuant to Division 6 of the Income Tax Assessment Act 1936 (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 capital gain tax (CGT) event E5 happens in relation to shares held by the Trustee under the Plan 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 3

Will dividend income received by the Trustee in respect of awards made under the Plan that have been allocated but not yet transferred to a trust participant be included in the calculation of the net income of the Trust pursuant to section 95 of the ITAA 1936?

Answer

Yes.

Question 4

Will dividends and other income received by the Trustee on unallocated shares be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936?

Answer

Yes.

Question 5

Will the net income of the Trust under section 95 of the ITAA 1936 be assessed to the Trustee under section 99A of the ITAA 1936?

Answer

Yes.

Question 6

Will the Trustee be entitled to a tax offset for the franking credits attached to the franked dividend on the unallocated shares under Subdivision 207-B of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commenced on:

X 2021

Relevant facts and circumstances

ACo is an Australian resident public company.

ACo is the parent company of the ACo Group, which carries on a business in Australia and overseas.

ACo has no employees. BCo is a wholly owned subsidiary of ACo.

As part of ACo Group's remuneration strategy, ACo may provide awards under the Plan to ACo Group employees.

ACo may grant or allocate awards consisting of options, rights or ACo shares.

ACo currently provides awards in the form of rights which are subject to performance conditions and/or service requirements.

ACo may provide an award of shares to which it is intended that section 83A-35 of the ITAA 1997 applies.

ACo will meet the ongoing administration expenses of the Plan.

The Plan will be administered in accordance with the Plan Rules.

Invitations

The ACo board may, make an invitation to eligible persons to participate in the Plan. Invitations may be made upon such additional terms and any performance, service and/or other conditions that must be satisfied in relation to the grant of an award.

An invitation may provide information in relation to, amongst other things:

•         the acquisition price (if any) for an award

•         details of any applicable conditions attaching to an award

•         the performance period over which the conditions in relation to the grant of an award are assessed

•         in respect to an award of options or rights

•         the amount payable on the exercise of an option or right (if any)

•         details of the manner in which an option or right may be exercised

•         the expiry date after which the option or right lapses and may no longer be exercised.

An invitation may provide that an award may be granted on the condition that the participant sacrifices an amount of their salary or fees.

An invitation made under the Plan is personal to the eligible person to whom it is made and the invitation may only be accepted by, and the awards may only be made to, the eligible person to whom the invitation is made, unless otherwise determined by the ACo board.

Options or rights

An option or right which has not lapsed vests if and when any conditions applicable to the award have been satisfied, or waived.

A vested option or right may only be exercised by a participant once the conditions have been satisfied.

Following the exercise of an option or right, ACo must either, at the election of the ACo board:

•         allocate to, or procure the transfer to or for the benefit of, the participant (or their representative) ACo shares

•         make a cash payment of an amount equivalent to the market value of an ACo share in full satisfaction of the vested option or right (less any exercise price in respect of the option or right).

Where an option or right is settled by cash, the payment will not flow through the Trust as it will be paid by ACo or BCo and reported via payroll.

Some or all of the ACo shares allocated or transferred on exercise of an option or right remain subject to dealing restrictions.

On exercise of an option or right, dealing restrictions which apply to a share may apply from the date of allocation of a share until the earlier of:

•         the date the participant ceases to be an employee of an ACo Group company and the relevant conditions (if any) are satisfied

•         the ACo board determines that the shares should be released having regard to the existence of special circumstances

•         the end of the period during which awards granted under the Plan or shares allocated in respect of awards are subject to dealing restrictions

•         the fifteenth anniversary of the date of grant of the options or rights.

Shares

A share which has not been forfeited vests if and when any conditions applicable to the share have been satisfied, or waived. Dealing restrictions and the restriction period applicable to a share may continue after the share has vested or after a participant ceases employment within the ACo Group.

Ownership of an unvested share or a restricted share may be forfeited.

Shares cease to be restricted shares and cease to be subject to dealing restrictions at the end of the restriction period.

On or before the end of the restriction period, the ACo board may determine that ACo will pay a cash amount to the participant equal to the market value of a share as at the end of the restriction period instead of the participant retaining the share. Where a restricted share is settled by cash, the payment will not flow through the Trust as it will be paid by ACo or BCo and reported via payroll.

Lapse or forfeiture of awards

Unless the Board determines otherwise, an award, will lapse or be forfeited on the earliest of:

•         the date the ACo board determines that any applicable condition cannot be satisfied

•         in the case of an option or right, the expiry date

•         cessation of employment prior to vesting or exercise of the award, or an award ceasing to be subject to any dealing restrictions or restriction period

•         in clawback and malus circumstances

•         a change of control event prior to vesting or exercise of the award, or an award ceasing to be subject to any dealing restrictions or restriction period

•         the participant purporting to deal or enter into any arrangement in respect of the award in breach of the Plan.

Under the Plan Rules, a participant's entitlement to:

•         specified awards may not be amended, adjusted, reduced, extinguished or be deemed to have lapsed in clawback and malus circumstances

•         a specified award may not be forfeited by the participant for any reason.

FYXX Award

During the income year ended 30 June 20XX eligible persons were invited to apply for an award under the Plan (FYXX Award).

Eligible persons who accept the FYXX Award invitation, were granted performance rights which entitled the participant to acquire one ACo share allocated under the terms of the Plan for no consideration. This may occur by way of issue or transfer of a share, or a cash payment in lieu of a Performance Share at the discretion of the ACo board, once certain conditions have been met.

The performance conditions are measured at the end of an X-year period.

Participants are not entitled to notice of, or to attend, a meeting of shareholders, or to receive any dividends in respect of Performance Rights, until the Performance Rights have vested and the participant has been awarded a Performance Share.

Performance rights cannot be transferred, disposed of, or have a security interest imposed over them without the prior written consent of the ACo board or unless required by law.

The vesting of performance rights will also be conditional on the participant continuing to be an employee of an ACo group company on the date the relevant performance rights are due to vest.

Under the FYXX Award, performance rights which have not lapsed will vest on the date provided for under the invitation, subject to the performance conditions being satisfied.

The shares a participant receives following the vesting of performance rights will not be subject to a trading lock or disposal restrictions. Participants are free to sell, transfer or otherwise deal with shares subject to compliance with ACo's share trading policy and minimum shareholding guidelines and any applicable laws.

The Trust

The Trust was established under the trust deed. The Trustee will hold the trust fund on trust for trust participants in accordance with the trust deed and terms and conditions, including any rules, of the relevant Plan.

In addition, the Trustee has power to do all acts and things which the Trustee is required to do or may do under the rules of the Plan or under the Trust Deed, including power to:

•         subscribe for, purchase or otherwise acquire, and to transfer, sell or otherwise dispose of ACo shares

•         sell ACo shares and apply the proceeds of sale in accordance with the Trust Deed and the rules of the Plan

•         receive dividends and distributions paid on ACo shares and apply those amounts in accordance with the Trust Deed and the rules of the Plan

•         enter into and execute contracts, deeds and documents and do all things which it considers expedient for the purpose of giving effect to and carrying out the trusts, authorities, powers and discretions conferred on the Trustee

•         appoint and remove or suspend custodians, trustees, managers, servants and other agents

•         institute, conduct, defend, compound or abandon any legal proceeding concerning the Trust

•         make and give receipts, releases and other discharges for money payable to the Trustee in respect of the Trust

•         open bank accounts and to retain, on current or deposit account at any bank, money it considers proper

•         take and act upon the advice or opinion of any legal practitioner or any other professional person

•         generally do all other acts and things which the Trustee considers necessary or expedient for the administration, maintenance and preservation of the Trust and in performance of the Trustee's obligations under the Trust Deed and rules of the Plan.

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).

Each ACo Group company is prohibited from benefitting from the trust fund.

The Trustee is not entitled to any benefit from the trust fund at any time and is prohibited from being or becoming a trust participant.

Any moneys held by the Trustee but which are not currently required for the Plan may be placed on deposit with any bank or financial institution but the Trustee has no other powers of investment other than those necessary for the Plan.

The Trustee must not, and does not have the power to, mortgage, charge, pledge or otherwise encumber any ACo shares or other property held by it under the Plan.

The Trustee is not entitled to receive from the Trust or trust participants any charges, fees, commissions or other remuneration in respect of its office or in respect of operating or administering the Trust. ACo must pay to the Trustee from its own funds such charges, fees, commissioners or other remuneration as the Trustee and ACo may agree from time to time.

Acquisition and transfer of Shares

The Trustee will apply the trust fund to acquire ACo shares as required for the purposes of the Plan.

On receipt of a direction by ACo, following assessment of vesting conditions, the Trustee must allocate to any trust participant nominated by ACo the number of ACo shares specified and, on the date, specified, in accordance with the rules of the Plan and any other conditions imposed (Plan Shares).

Upon Plan Shares being allocated to a trust participant, the relevant trust participant becomes beneficially entitled to such Plan Shares and is entitled to receive dividends, bonus shares received by the Trustee, rights issues, accretions and voting rights in respect to Plan Shares.

The Trustee must, as soon as reasonably practicable, do all things necessary to transfer legal title in the relevant Plan Shares of a trust participant to that trust participant (or their nominee):

•         where required to do so, or permitted, by the rules of the Plan

•         if the Trust is terminated in accordance with the Trust Deed

•         in any other case, where the ACo board in its absolute discretion determines.

Unallocated shares

Shares held by the Trustee which have not been allocated (unallocated shares) to a trust participant are held on trust for the benefit of trust participants generally in accordance with the terms and conditions of the Trust Deed.

The Trustee may apply any capital, dividends or other distributions received in respect of unallocated shares to purchase further ACo shares to be held on trust for the purposes of any relevant Plan.

The balance of net income of the Trust for a year of income to which no participant is presently entitled must be accumulated by the Trustee as an accretion to the property of the Trust.

Funding

ACo will keep the Trustee in funds necessary to do any act requested by the ACo board.

ACo will pay all costs and expenses in administering the provisions of the Trust Deed or incurred in connection with the acquisition, registration, disposal of or other dealing with ACo shares and otherwise incurred by the Trustee in properly and diligently administering the Trust and carrying out its duties.

ACo may, from time to time and in its absolute discretion, do one or a combination of the following:

•         provide funds to the Trustee, or procure the provision to the Trustee of funds for the Plan, with contributions being made by either ACo or BCo (depending on the commercial position of the ACo Group at the time)

•         issue or otherwise transfer ACo shares to the Trustee without payment by the Trustee for the purposes of the Plan, in circumstances where restricted shares which were held by a participant are forfeited

•         notify the Trustee that a trust participant has become entitled to receive Plan Shares under the Plan and request that the Trustee administer the Plan on that basis.

Inconsistency with the Plan Rules

If the Trust Deed is inconsistent with the rules of the Plan, the rules of the Plan prevail to the extent of the inconsistency.

Reasons for decision

All legislative references are to provisions of the ITAA 1936 or to provisions of the ITAA 1997, unless otherwise indicated.

Issue 1

Question 1

Will irretrievable cash contributions made by either ACo or BCo to Trustee, as trustee of the Trust in accordance with the Plan and the Trust Deed to fund the subscription for, or acquisition on-market of, ACo ordinary shares be assessable income of the Trust under sections 6-5 or 6-10, thereby forming part of the net income of the Trust under Division 6?

Summary

The irretrievable cash contributions made by either ACo or BCo to the Trustee in accordance with the Plan and the Trust Deed to fund the subscription for, or acquisition on-market of, ACo shares will not be assessable income of the Trust under sections 6-5 or 6-10, thereby not forming part of the net income of the Trust under Division 6.

Detailed reasoning

Irretrievable cash contributions

It must be determined as a conclusion of fact whether the contributions made by ACo or BCo to the Trustee are irretrievable cash contributions.

The Trust Deed outlines that the Trustee holds the trust fund on trust for all beneficiaries, in the manner required by the Plan and that it may apply any part of the general trust property for the benefit of the beneficiaries. The Trustee must comply with any direction of the board to acquire shares on behalf of a participant in accordance with the relevant rules of the Plan and must apply any amount paid to it by a ACo group company or a participant pursuant to the relevant rules of the Plan in accordance with any such direction of the board.

The Trust Deed enables the Trustee to discharge its obligations under the Trust Deed and rules of the Plan and for no other purpose. Accordingly, a refund of any contributions by the Trustee would be in breach of the powers of the Trustee under the Trust Deed.

The Trust Deed states that ACo and each of its ACo group companies are not beneficiaries of the Trust and have no entitlement to any shares forming part of the trust fund at any time. Accordingly, a contribution made to the Trust will not be refundable or retrievable by ACo group companies (other than as consideration for shares under the terms of the Trust Deed).

In conclusion, the above terms support the conclusion that the cash contributions made by ACo or BCo to the Trustee are irretrievable.

Assessable income of the Trust under section 6-5 or 6-10

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)).

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

Section 10-5 contains a summary list of the provisions for statutory income. None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, the non-refundable contributions made by ACo or BCo to the Trustee of the Trust will not be assessable income under section 6-10. The contributions will only be included in the calculation of the net income of the Trust under section 95 if they are assessable as income according to ordinary concepts under section 6-5.

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

In 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, the Commissioner expresses the view that funds provided to the trustee of an employee share scheme (ESS) for the sole purpose of providing shares under an ESS will constitute capital receipts to the trustee, and are not assessable under sections 6-5 or 6-10.

An ESS is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2)).

An ESS interest is a beneficial interest in a share in a company or a right to acquire a beneficial interest in a share in a company (subsection 83A-10(1)).

A share, an option or a right, including a performance right, provided under the Plan are indeterminate rights for the purposes of section 83A-340. That is the case because the awards can be settled by either shares or by making a payment of a cash equivalent amount in lieu of a share, to be determined at a future time at the discretion of the employer. Therefore, an award of shares is not a beneficial interest in shares and an award of rights or options under the Plan is not a right to acquire a beneficial interest in shares unless and until the time when it is determined by the board that they will be satisfied by the provision of shares.

Although the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate right will, under section 83A-340, be treated as if it had always been an ESS interest.

Subject to the board's discretion to make a cash payment in lieu of allocating shares, under the Plan, each participant will acquire a share, option or right (as the case may be), with each being a beneficial interest in a share in a company or a right to acquire a beneficial interest in a share. Therefore, the Plan is an 'employee share scheme' within the meaning of subsection 83A-10(2) because it is a scheme under which beneficial interests in shares and rights to acquire beneficial interests in shares are provided to employees in relation to their employment.

The irretrievable cash contributions made by ACo or BCo to the Trustee under the terms of the Plan and the Trust Deed are to be used for the sole purpose of acquiring, holding and transferring shares for the benefit of participants. Accordingly, the irretrievable cash contributions constitute capital receipts to the Trustee and will not be assessable income of the Trustee under sections 6-5 or 6-10.

Given that the irretrievable cash contributions made by ACo or BCo to the Trustee are neither ordinary nor statutory income under sections 6-5 or 6-10, they will not be included in the net income of the Trust, and cannot be assessed to the Trustee under section 95 in Division 6.

Question 2

Will a capital gain or capital loss that arises for the Trustee of the Trust at the time when CGT event E5 happens in relation to shares held by the Trustee under the Plan be disregarded under section 130-90 if the participants acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee?

Summary

A capital gain or loss that arises to the Trustee at the time when CGT event E5 happens in relation to shares held by the Trustee under the Plan will be disregarded under section 130-90 if the participants acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee.

Detailed reasoning

Under section 102-20, an entity can make a capital gain or loss if, and only if, a CGT event happens.

Participants become absolutely entitled to a share under the Plan - CGT event E5

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 applies) as against the trustee.

The time of the event is when a beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)).

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

In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 applies.

Subsection 130-85(2) treats a beneficiary as absolutely entitled to the relevant share from the time of acquisition of the ESS interest until they no longer have the ESS interest in the share. Subsection 130-85(2) only applies if the following requirements under subsection 130-85(1) are satisfied:

a) the beneficiary acquires an ESS interest under an ESS

b) Subdivision 83A-B or 83A-C applies to the ESS interest

c) the ESS interest is, or arises because of, an interest the beneficiary holds in an employee share trust (EST).

Participants acquire ESS interest under an ESS (paragraph 130-85(1)(a))

As stated in response to Question 1, as participants are granted awards under the Plan in relation to their employment, which provide them with a beneficial interest in shares or the right to acquire a beneficial interest in shares, they will be taken to have acquired ESS interests under an ESS and paragraph 130-85(1)(a) will be satisfied.

Subdivision 83A-B or 83A-C applies to the shares, options or rights (paragraph 130-85(1)(b))

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.

Under the Plan, awards may be acquired for no consideration or at a discount. Awards, involving the sacrifice of an amount of pre-tax salary or fees, are acquired at a discount as part of a salary sacrificing arrangement in which the employee foregoes an expected entitlement to future salary and wages (Taxation Ruling TR 2001/10: Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements).

As participants may acquire shares, options or rights under the Plan at a discount or, as in the case of the performance rights granted under the FYXX Award, for nil consideration (i.e. at a discount), Subdivision 83A-B will apply to those shares, options or performance rights (unless Subdivision 83A-C applies instead). Therefore, paragraph 130-85(1)(b) is satisfied.

The ESS interest arose because of an interest the participants hold in an employee share trust (paragraph 130-85(1)(c))

The awards granted to participants under the Plan provide participants with an interest in the shares held in the Trust.

Subsection 130-85(4) provides that an EST for an ESS (having the meaning given by subsection 83A-10(2)) 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:

(c)   the company; or

(d)  a subsidiary of the company; and

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

The beneficial interest in a share and the right to acquire a share and the beneficial interest in the share that is acquired on the exercise of a right or option are both ESS interests within the meaning of subsection 83A-10(1).

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, or associates of employees (including past or prospective employees) in relation to the employees' employment.

As stated in response to Question 1, the Plan is an ESS within the meaning of subsection 83A-10(2) because it is a scheme under which beneficial interests in shares and rights to acquire beneficial interests in shares are provided to employees in relation to their employment.

ACo has established the Trust to facilitate the Plan by acquiring shares and allocating those shares to participants, in order to satisfy the awards acquired under the ESS. The beneficial interest in the share is itself provided under the same rules of the Plan under which awards to acquire shares are provided to participants in relation to the participants' employment, being an ESS as defined in subsection 83A-10(2).

Therefore, paragraph 130-85(4)(a) and (b) of the definition of an EST are satisfied because:

•         the Trustee acquires shares

•         the Trustee ensures that awards, which are ESS interests, are provided under an ESS by allocating those shares to the participants in accordance with the Trust Deed and the rules of the Plan.

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Draft Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'?.

Whether the Trust is an 'employee share trust' for the purposes of subsection 130-85(4) requires an analysis of what the Trustee actually does, not only the powers and duties that are prescribed in the Trust Deed.

In the present case, the Trust Deed supports the conclusion that the Trustee may only use cash contributions received from ACo and BCo to acquire shares for participants in accordance with the rules of the Plan. All other duties and general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with shares to be acquired for participants and paragraph 130-85(4)(c) is satisfied.

Therefore, the Commissioner considers the Trust to be an EST based on the terms of the Trust Deed and paragraph 130-85(1)(c) is satisfied.

As all of the conditions in subsection 130-85(1) are satisfied, CGT event E5 is the CGT event that will apply under the terms of the Plan at the time that participant becomes absolutely entitled to the shares as against the Trustee.

Exemptions under section 130-90

Any capital gain or capital loss that the Trustee makes, if CGT event E5 happens, is disregarded if section 130-90 applies.

Shares held for future acquisition under employee share scheme: subsection 130-90(1A)

Subsection 130-90(1A) applies to disregard any capital gain or capital loss made by an EST to the extent that it results from a CGT event if:

•         immediately before the event happens, an ESS interest is a CGT asset of the trust (paragraph 130-90(1A)(a))

•         either of the following subparagraphs applies

•         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 (subparagraph 130 90(1A)(b)(i))

•         the event is CGT event E7, and the event happens because the trustee disposes of the ESS interest to a beneficiary of the trust (subparagraph 130-90(1A)(b)(ii))

•         Subdivision 83A-B or 83A-C applies to the ESS interest (paragraph 130-90(1A)(c)).

Paragraph 130-90(1A)(a) is satisfied as the shares held by the Trustee are ESS interests (as defined by paragraph 83A-10(1)(a)) which are CGT assets of the Trust.

Paragraph 130-90(1A)(b)(i) is satisfied. As set out above, CGT event E5 is the CGT event that will apply under the terms of the Plan at the time the participant becomes absolutely entitled to the shares as against the Trustee.

Paragraph 130-90(1A)(c) is satisfied, because as stated above:

•         the Plan is an ESS for the purpose of Division 83A as it is an arrangement under which an ESS interest is provided to a participant in relation to their employment by BCo

•         Subdivision 83A-B or 83A-C will apply, as participants may acquire shares under the Plan at a discount.

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

Shares held to satisfy the future exercise of rights acquired under employee share schemes: subsection 130-90(1)

Subsection 130-90(1) applies to disregard any capital gain or loss made by an EST if all of the following apply:

•         the CGT event is CGT event E5 or E7 (paragraph 130-90(1)(a))

•         the CGT event happens in relation to a share (paragraph 130-90(1)(b))

•         the beneficiary had acquired a beneficial interest in the share by exercising a right (paragraph 130-90(1)(c))

•         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)(d)).

As stated above, CGT event E5 will apply under the terms of the Plan when the participant becomes absolutely entitled to Plan shares as against the Trustee. Under subsection 130-85(2), participants are taken to be absolutely entitled to the Plan shares held by the Trustee from the time they were granted the option or right under the terms of the Plan. Therefore, paragraph 130-90(1)(a) will be satisfied.

Paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share (as defined in section 995-1), being a share in the capital of ACo held by the Trustee to which a trust participant is absolutely entitled upon the vesting (or exercise if applicable) of a right, an option or a performance right granted under the FYXX Award.

Paragraph 130-90(1)(c) is satisfied as a participant will have acquired a beneficial interest in a share on vesting of an option or right, and if applicable, by exercising an award after vesting, in accordance with the Plan.

Paragraph 130-90(1)(d) is satisfied because as stated above:

•         the Plan is an ESS for the purpose of Division 83A as it is an arrangement under which an ESS interest is provided to a participant in relation to their employment

•         Subdivision 83A-B or 83A-C will apply, as participants may acquire options, rights or performance rights under the Plan at a discount.

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

Conclusion

As all of the conditions in subsections 130-90(1A) and 130-90(1) are satisfied, any capital gain or capital loss that arises for the Trust at the time when CGT event E5 happens will be disregarded if the shares are acquired by the employee for the same or less than the cost base of the shares in the hands of the Trust.

Question 3

Will dividend income received by the Trustee in respect of awards made under the Plan that have been allocated but not yet transferred to a trust participant be included in the calculation of the net income of the Trust pursuant to section 95?

Summary

Dividend income received by the Trustee in respect of awards made under the Plan that have been allocated but not yet transferred to a trust participant will be included in the calculation of the net income of the Trust pursuant to section 95.

Detailed reasoning

Subsection 95(1) defines 'net income', in relation to a trust estate, to mean the total assessable income of the trust estate calculated under Division 6 as if the trustee were a resident taxpayer in respect of that income, less allowable deductions.

Subsection 6-5(1) states that your assessable income includes income according to ordinary concepts, which is called ordinary income.

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

Section 10-5 provides that dividends assessable under subsection 44(1) are to be included in assessable income.

Under subsection 44(1), the assessable income of a resident shareholder in a company includes dividends that are paid to the shareholder by the company out of profits derived by it from any source.

Under the Trust Deed, a share which is allocated to a trust participant is held by the Trustee on the terms of the Trust Deed and the rules of the Plan for the relevant trust participant. The trust participant is beneficially entitled to the share. If the Trustee receives any income, including dividends, deriving from those shares, the income is held by the Trustee for the benefit of the trust participant.

Therefore, dividends income received by the Trustee in respect of shares are required to be included in calculating the net income of the Trust as defined under section 95.

Question 4

Will dividends and other income received by the Trustee on unallocated shares be included in the calculation of the net income of the Trust under section 95?

Summary

Dividends and other income received by the Trustee on unallocated shares will be included in the calculation of the net income of the Trust under section 95.

Detailed reasoning

Subsection 95(1) defines 'net income', in relation to a trust estate, to mean the total assessable income of the trust estate calculated under Division 6 as if the trustee were a resident taxpayer in respect of that income, less allowable deductions.

Subsection 6-5(1) states that your assessable income includes income according to ordinary concepts, which is called ordinary income.

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

Section 10-5 provides that dividends assessable under subsection 44(1) and credits on franked dividends under subsections 207-20(1), 207-35(1) and 207-35(3) are to be included in assessable income. Therefore, dividends and other income received by the Trustee on unallocated shares are required to be included in calculating the net income of the Trust as defined under subsection 95(1).

As stated in response to Question 3, under subsection 44(1), the assessable income of a resident shareholder in a company includes dividends that are paid to the shareholder by the company out of profits derived by it from any source.

Under the Trust Deed, unallocated shares are held by the Trustee for the benefit of trust participants generally. If the Trustee receives any income, including dividends which have been derived from those unallocated shares, the income is held by the Trustee for the general purposes of the Trust.

As such, dividends and other income received by the Trustee in respect of unallocated shares will be included in the calculation of the net income of the Trust under section 95.

Question 5

Will the net income of the Trust under section 95 be assessed to the Trustee under section 99A?

Summary

The net income of the trust estate which is not included in the assessable income of a beneficiary of the trust estate under section 97, and in respect of which the Trustee will not be assessed and liable to pay tax under section 98, will be assessed to the Trustee under section 99A.

Detailed reasoning

Under section 99A, the trustee of a trust estate is assessed and liable to pay tax on the part of the net income of the trust estate:

•         that is not included in the assessable income of a beneficiary of the trust estate under section 97 (paragraph 99A(4A)(a))

•         in respect of which the trustee is not assessed and is not liable to pay tax under section 98 (paragraph 99A(4A)(b)), and

•         that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident of, and is also attributable to sources out of, Australia (paragraph 99A(4A)(c)).

The critical requirement for these 3 exclusion categories is that a beneficiary is presently entitled to a share of the income of a trust estate.

Under the Trust Deed, a trust participant is absolutely entitled to shares, being shares that are allocated to them, and has a right to receive income, including any dividends derived from those allocated shares. A trust participant who is absolutely entitled to shares, is presently entitled to any income derived from those shares. Such income will be included in the assessable income of a beneficiary of the trust estate under section 97. In the case of a non-resident beneficiary, the Trustee will be assessed and is liable to pay tax under section 98. The exclusions in paragraphs 99A(4A)(a) and 99A(4A)(b) will apply to income of the trust estate which is included in the assessable income of a beneficiary of the trust estate under section 97 and in respect of which the Trustee will be assessed and liable to pay tax under section 98.

However, in the circumstance where a trust participant is not presently entitled to income derived from the trust fund, including dividends and other income received by the Trustee on unallocated shares, none of the 3 exclusion categories apply, and the Trustee will be assessed and liable to pay tax under section 99A on any dividends and other income received by the Trustee in respect of the trust fund.

Question 6

Will the Trustee be entitled to a tax offset for the franking credits attached to the franked dividend on the unallocated shares under Subdivision 207-B?

Summary

The Trustee will be entitled to the benefit of franking credits attached to franked distributions on unallocated shares under Subdivision 207-B.

Detailed reasoning

Section 207-45 provides that trustees, who are liable to be assessed under section 99A and to whom a franked distribution flows indirectly, are entitled to a tax offset for that income year equal to its share of the franking credits attached to the distribution.

However, subsection 207-150(1) denies a tax offset otherwise available under section 207-45 where the trustee is not a qualified person for the purposes of Division 1A of former Part IIIAA.

Tax offset under section 207-45

Under subsection 207-50(4), a franked distribution will be taken to flow indirectly to the trustee of a trust where, relevantly, the trustee is liable to be assessed on all or part of the trust's net income for that year under section 99A.

As determined in the response to Question 5, the Trustee will be liable to be assessed under section 99A on dividends received by the Trustee in respect of unallocated shares. Therefore, the requirements of section 207-45 are satisfied and the Trustee will be entitled to a tax offset equal to its share of the franking credits attached to the dividends.

Qualified person

Broadly, a person will be taken to be a qualified person in respect of a dividend paid on shares if the shares are held at risk for a continuous period of at least 45 days where the person or an associate does not make a related payment in respect of the dividend (former section 160APHO).

It is accepted that no related payment will be made by the Trustee in respect of the dividend and that the Trustee will hold the unallocated shares at risk for a period of not less than 45 days during the period beginning the day after the Trustee acquires the unallocated shares and ending on the 45th day after the unallocated shares become ex-dividend.

Therefore, the Trustee will be a 'qualified person' for the purposes of Division 1A of former Part IIIAA and subsection 207-150(1) will not apply.

Conclusion

The Trustee will be entitled to a tax offset for the franking credits attached to the franked dividends it receives in respect of unallocated shares.