Edited version of private advice

Authorisation Number: 1052070565910

Date of advice: 13 January 2023

Ruling

Subject: Employee share schemes

Question 1

Will the irretrievable cash contributions by Company X to the Trustee to fund the acquisition of, or subscription for, Shares by the Trustee be assessable income of the Trustee under sections 6-5 or 6-10?

Answer

No.

Question 2A

Will CGT event E5 happen at the time when the Participants become absolutely entitled to Shares held by the Trustee?

Answer

Yes.

Question 2B

If CGT event E5 does happen, will a capital gain or capital loss that arises for the Trust established by the Trust Deed as a result of CGT event E5 happening 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 Trust?

Answer

Yes.

Question 2C

If CGT event E5 does happen, will a capital gain or capital loss that arises for the Trust established by the Amended Trust Deed as a result of CGT event E5 happening 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 Trust?

Answer

Yes.

Question 3A

Will CGT event E7 happen in respect of Shares held by the Trustee?

Answer

No.

Question 3B

If CGT event E7 does happen, will a capital gain or capital loss made by the Trustee as a result of CGT event E7 happening 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 Trust?

Answer

Not applicable.

This ruling applies for the following periods:

For Questions 1, 2A, 3A and 3B

Relevant income tax years ending 30 June 20XX

For Question 2B

Relevant income tax years ending 30 June 20XX

For Question 2C

Relevant income tax years ending 30 June 20XX

The scheme commences:

In a particular income year

Relevant facts and circumstances

Company X Limited

1.    Company X is an Australian public company and its shares have been listed on the Australian Securities Exchange.

2.    Company X carries on a business for the purpose of gaining or producing assessable income.

Company X Employee Share Trust

3.    The Company X Employee Share Trust (the Trust) was established under the trust deed (Trust Deed) between Company X and trustee for the Trust (Trustee).

Employee Share Schemes (ESS)

4.    As part of its remuneration framework, Company X established multiple ESS plans to reward performance and retain and motivate employees (the Plans).

5.    The Plans provide Company X with the flexibility to offer rights to acquire a share in Company X (Rights), options which carry an entitlement to receive a share in Company X (Options) and/or shares in Company X (Shares) (collectively, Awards) to its employees, and independent contractors (that meet the requirements in section 83A-325 of the ITAA 1997) (Participants).

6.    For the purposes of this ruling, the Participants are limited to those who were / are directly employed only by Company X at the time of the granting or issue of the Awards (both Australian and foreign residents). This ruling applies to all Awards under the Plans.

The Plans

7.    Under the Plans:

a.    although some Awards may be granted to Participants for a fee, the Participants receive the Awards for no consideration

b.    the Awards may not be transferred or disposed of by the Participant without the prior consent of the board of Company X (the Board)

c.     Options and Rights will only vest and be exercisable if applicable performance hurdles and/or vesting conditions have been satisfied

d.    in the case of an Option, following vesting, the vested Option is exercisable by the Participant within the specified exercise period and an exercise price may be payable to exercise vested Options

e.    in the case of a Right, a vested Right is automatically exercised

f.      upon the vested Options or Rights being exercised, Company X will instruct the Trustee to subscribe for, acquire and/or allocate the number of Shares for which the Participant is entitled and hold those Shares on behalf of the Participant, and

g.    the Board has to discretion to determine that some or all of the vested Awards may be acquired or cancelled for cash consideration, rather than be exercised. The cash consideration will be provided by Company X and not by the Trust.

8.    The Trust was implemented as an Employee Share Trust (EST) for the purpose of delivering and holding Shares on behalf of Participants. The Plans allows Company X to provide funds to the Trustee to subscribe for and/or acquire and hold the Shares on behalf of Participants and pay for services provided by the Trustee.

Trust Deed

9.    The Trust operated under the Trust Deed as follows:

a.    the Shares are held by the Trustee on behalf of Participants, including all benefits relating to the Shares

b.    each Participant is the beneficial owner of the Shares held by the Trustee on their behalf and is absolutely entitled to all other benefits attached to, or resulting from holding those Shares

c.     the Trust assets (including unallocated Shares) are to be held by the Trustee on trust for the Participants in accordance with the terms of the Deed, the relevant Plans and terms of participation until termination of the Trust

d.    the Trustee will, as soon as reasonably practicable, acquire, allocate and deliver Shares for the benefit of a Participant provided that the Trustee receives sufficient payment to subscribe for or purchase Shares and/or has sufficient unallocated Shares available

e.    nothing in the Trust Deed confers or is intended to confer on Company X any charge, lien or any other proprietary right or interest in the Shares acquired by the Trustee in accordance with the Trust Deed

f.      neither Company X nor the Trustee will be entitled to obtain any beneficial interest in the Trust assets, other than in respect of the Trustee's right of indemnity

g.    Company X 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 section 130-85(4) of the ITAA 1997 and in accordance with Taxation Determination TD 2019/13

h.    the Trustee is not entitled to receive from the Trust any fees, commission or renumeration in respect of its performance of its obligations and Company X may pay to the Trustee from its own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as Company X and the Trustee may agree from time to time

i.      Company X is required to indemnity the Trustee in respect of liabilities, costs and expenses incurred by the Trustee in performing its obligations or in the execution of its powers, other than a liability, cost or expense arising out of gross negligence, dishonesty fraud or wilful breach of trust

j.      the Trustee can recover any costs, expenses or other liabilities of the Trust from Company X

k.     the Trustee may subscribe for, purchase and/or allocate Shares to be held by the Trustee in respect of relevant Participants

l.      Company X may instruct the Trustee to acquire Shares to be held by the Trustee on trust in respect of identified Participants or for Participants generally as unallocated Shares

m.   Company X must provide the Trustee with the funds required for the purchase of Shares

n.    all funds received by the Trustee constitutes accretions to the corpus of the Trust and cannot be repaid to Company X

o.    funds received by the Trustee from Company X may be paid to Company X where the Trustee subscribes for new Shares

p.    where an amount paid by Company X to the Trustee in respect of the acquisition of Shares is in excess of the amount required by the Trustee, the Trustee may apply the amount to acquire other Shares or deposit the funds into any account opened and operated by the Trustee

q.    on termination of the Trust, the Trustee must not pay any balance of the Trust assets to Company X or to any member of the Company X group, and

r.     no member of the Company X group can be a beneficiary of the Trust.

Amended Trust Deed

10.  The Trust Deed was amended by a Deed of Variation executed by Company X and the Trustee (Amended Trust Deed). Under the Amended Trust Deed:

a.    any dividends, bonus shares or other benefits received by the Trustee in respect of any forfeited shares or any proceeds of sale of any forfeited shares cannot be repaid to Company X

b.    no amendment may be made to the Trust Deed which may prevent the Trustee from satisfying the requirements of subsection 130-85(4) of the ITAA 1997 or entitle any member of Company X group to any benefit under the Trust Deed

c.     the Trustee is no longer able to subscribe for, purchase or otherwise acquire, or sell or otherwise dispose of, privileges

d.    the Trustee must not grant any security or encumbrances over the Trust assets at any time.

11.  Company X has confirmed that the Trustee has not undertaken any of the activities of the Trust Deed that may have resulted in the Trust not satisfying the definition of an 'employee share trust' in subsection 130-85(4) of the ITAA 1997.

12.  The Trust Deed is applicable for the period of the income tax year to a period of the income tax year and the Amended Trust Deed is applicable from a period of the income tax year.

Contributions to the Trust

13.  Company X has not and will not pay cash contributions to the Trust prior to the issue or acquisition of Awards.

14.  Where it makes commercial sense to do so in the future, Company X may make cash contributions to the Trust prior to the offer being made to the Participant or prior to the acceptance of the offer by the Participant.

On-going administration costs

15.  Company X will incur the following on-going administration costs in respect of the on-going administration and management of the Trust:

(a)  Employee plan record keeping

(b)  Production and dispatch of holding statements to employees

(c)   Costs incurred in the acquisition of Shares on market, such as brokerage costs and the allocation of such shares to Participants

(d)  Annual audit of the financial statements, and

(e)  Preparation of the annual income tax return of the Trust.

Relevant legislative provisions

Subsection 6(1) of the ITAA 1936

Subsection 95(1) of the ITAA 1936

Section 6-5 of the ITAA 1997

Section 6-10 of the ITAA 1997

Section 10-5 of the ITAA 1997

Subsection 83A-10(1) of the ITAA 1997

Subsection 83A-10(2) of the ITAA 1997

Subsection 83A-105(1) of the ITAA 1997

Section 83A-325 of the ITAA 1997

Section 83A-340 of the ITAA 1997

Subdivision 83A-B of the ITAA 1997

Subdivision 83A-C of the ITAA 1997

Subsection 104-75(1) of the ITAA 1997

Subsection 104-85(1) of the ITAA 1997

Division 128 of the ITAA 1997

Section 130-85(4) of the ITAA 1997

Paragraph 130-85(4)(a) of the ITAA 1997

Paragraph 130-85(4)(b) of the ITAA 1997

Paragraph 130-85(4)(c) of the ITAA 1997

Section 130-90 of the ITAA 1997

Subsection 130-90(1) of the ITAA 1997

Paragraph 130-90(1)(a) of the ITAA 1997

Paragraph 130-90(1)(b) of the ITAA 1997

Paragraph 130-90(1)(c) of the ITAA 1997

Paragraph 130-90(1)(d) of the ITAA 1997

Subsection 130-90(1A) of the ITAA 1997

Paragraph 130-90(1A)(a) of the ITAA 1997

Paragraph 130-90(1A)(b) of the ITAA 1997

Paragraph 130-90(1A)(c) of the ITAA 1997

Subsection 130-90(2) of the ITAA 1997

Reasons for decision

Question 1

All legislative references are to the ITAA 1997 unless otherwise specified.

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 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 for section 6-10 purposes) are relevant in the present circumstances. Therefore, the irretrievable cash contributions made by Company X to the Trustee will not be assessable income of the Trustee under section 6-10.

The contributions made by Company X constitute accretions to the corpus of the Trust and are irretrievable and non-refundable in accordance with the Trust Deed and Amended Deed (the Deeds) (other than as consideration for Shares under the terms of the Deeds). Therefore, the contributions constitute capital receipts to the Trustee, and are not assessable under section 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 2A

All legislative references are to the ITAA 1997 unless otherwise specified.

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.

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

Under the Trust Deed, the Trustee will, in accordance with instructions received from Company X pursuant to the rules of the Plans and as soon as reasonably practicable, acquire and allocate Shares for the benefit of a Participant. This will occur when the applicable vesting conditions attaching to the Awards are satisfied and the vested Awards are validly exercised.

Further, under the Trust Deed, each Participant is, subject to the relevant rules of the Plans, the beneficial owner of the Shares held by the Trustee on their behalf and absolutely entitled to all other benefits attached to, or resulting from holding, those Shares.

At this point, the Participant (i.e. the beneficiary) will become absolutely entitled to the Shares (i.e. the CGT asset of the Trust) as against the Trustee, and thus, pursuant to subsection 104-75(1), CGT event E5 happens.

Question 2B

All legislative references are to the ITAA 1997 unless otherwise specified.

Any capital gain or loss that the Trustee makes, if CGT event E5 happens, is disregarded if section 130-90 applies. To qualify for the exemption in section 130-90, there must be an employee share trust (EST).

Employee share trust

Subsection 130-85(4) defines an employee share trust (EST) as a trust whose sole activities are:

(a) obtaining shares or rights in a company; and

(b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of:

                           i.                   the company; or

                          ii.                   a subsidiary of the company, and

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

An employee share scheme (ESS) 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 a subsidiary of the company, in relation to the employee's employment.

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

The Shares granted under the Plans are beneficial interests in a share in Company X. Therefore, they are ESS interests for the purposes of subsection 83A-10(1) at the time they are granted to the relevant Participant.

Under some of the Plans. the Board may in its discretion determine that some or all of the vested Awards be acquired or cancelled for cash consideration, rather than be exercised. Therefore, at the time these Awards are acquired by the Participants, they are not rights to acquire a beneficial interest in shares, but are indeterminate rights pursuant to section 83A-340.

Once the Board determines that it will not exercise its discretion to determine that some or all of the vested Awards be acquired or cancelled for cash consideration, and will satisfy the Awards by the provision of Shares, section 83A-340 will operate to treat the indeterminate right as if it had always been a right to acquire a beneficial interest in shares, and therefore an ESS interest as defined in section 83A-10(1).

On the other hand, the Awards granted under the Plans that are rights to acquire a beneficial interest in a share of Company X are not indeterminate rights. Therefore, they are ESS interests for the purposes of subsection 83A-10(1) at the time they are granted to the Participants.

Consequently, the Plans are all ESSs as defined in subsection 83A-10(2) as they are schemes under which ESS interests in a company (i.e. Company X) are provided to employees of Company X, or its subsidiaries, in relation to their employment. When the Awards are exercised under the Plans, the beneficial interest in the Share itself is also provided under the ESS because it is provided under the same scheme.

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

(a)  acquires Shares in a company, namely Company X, and

(b)  ensures that ESS interests (being the Awards that are granted under the Plans which are settled with Shares and the Shares granted under the Plans) are provided under an ESS (that is, the schemes established by the Plans) by allocating Shares to Participants in accordance with the Trust Deed and the Plans.

Paragraph 130-85(4)(c) of the definition of an EST provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). 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'?.

According to paragraph 13 of TD 2019/13, the following activities are not 'merely incidental' as they are not a natural incident or consequence of administering an ESS:

•         provision of additional benefits to participants and/or employees, over and above the delivery of the ESS interests or resulting shares and any dividend equivalent payment that accrues directly from the employee's ESS interest

•         engaging in trading activities in relation to shares in the employer company, other than purchasing and selling shares to satisfy obligations under the ESS, and

•         providing security over any of the trust's assets.

However, paragraph 6 of TD 2019/13 provides that, whilst the relevant trust documents may include powers and/or duties that are broad-reaching, the mere existence of those powers or duties in the trust document does not, of itself, mean that the trustee has breached the requirements to be an EST. In examining whether the requirements of subsection 130-85(4) are met, it is necessary to examine the actual activities that the trustee has undertaken.

Therefore, while the Trust Deed contains powers and/or duties that are not merely incidental, the Commissioner is satisfied that the Trust established pursuant to the Trust Deed does satisfy the definition of an EST on the basis that the Trustee has not in fact breached the requirements to be an EST in subsection 130-85(4).

Other requirements in subsection 130-90

In respect of the Awards which are the granting of Rights and/or Options under the Plans, the other requirements in subsection 130-90(1) will be satisfied because:

(a)  at the time the Participant becomes absolutely entitled to the Shares as against the Trustee, CGT event E5 will happen (paragraph 130-90(1)(a))

(b)  CGT event E5 happens in relation to the Shares (paragraph 130-90(1)(b))

(c)   the Participants acquired the Shares by exercising a right granted under the Plans (paragraph 130-90(1)(c)), and

(d)  as the Awards are granted under the Plans for nil consideration, they are acquired by the Participants at a discount and therefore are ESS interests (where they are not cash settled) to which Subdivision 83A-B applies, unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C applies - that is, they are ESS interests to which either Subdivision 83A-B or 83A-C applies (paragraph 130-90(1)(d)).

In respect of Awards which are the granting of Shares, the other requirements in subsection 130-90(1A) will be satisfied because:

(a)  the Shares held by the Trustee are ESS interests which are CGT assets of the EST (paragraph 130-90(1A)(a))

(b)  CGT event E5 happens in relation to a share in Company X (paragraph 130-90(1A)(b), and

(c)   as the Shares will be granted for nil consideration, they are acquired by the employees at a discount and therefore are ESS interests to which Subdivision 83A-B applies, unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C applies - therefore, they are ESS interests to which either Subdivision 83A-B or 83A-C applies (paragraph 130-90(1A)(c)).

Conclusion

Subsection 130-90(2) requires that the employee does not acquire the beneficial interest in the Share for more than its cost base in the hands of the EST at the time that CGT event E5 happens.

As such, any capital gain or capital loss that arises for the Trust established pursuant to the Trust Deed at the time when CGT event E5 happens 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 Trust.

Question 2C

All legislative references are to the ITAA 1997 unless otherwise specified.

The Amended Trust Deed contains only powers and/or duties that are merely incidental as required by subsection 130-85(4)(c). Accordingly, the Commissioner is satisfied that the Trust established by the Amended Trust Deed is an EST as defined in subsection 130-85(4).

Further, Company X has confirmed that where the Awards are ultimately satisfied through cash settlement, cash payments will not flow through or involve the Trust.

Therefore, any capital gain or capital loss that arises for the Trust established pursuant to the Amended Trust Deed at the time when CGT event E5 happens will be disregarded under section 130-90, if the Shares are acquired by the Participants for the same or less than the cost base of the Shares in the hands of the Trust.

Question 3A

All legislative references are to the ITAA 1997 unless otherwise specified.

Under subsection 104-85(1), CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary'sinterest, orpart of it, in the trust capital.

The scheme as described in the Ruling does not include any facts that gives rise to CGT event E7 happening. Therefore, CGT event E7 does not occur.

Question 3B

All legislative references are to the ITAA 1997 unless otherwise specified.

As CGT event E7 does not happen under the specified scheme, it is not necessary to consider whether a capital gain or capital loss made by the Trustee as a result of CGT event E7 happening is disregarded under section 130-90.