Edited version of private advice

Authorisation Number: 1052094838125

Date of advice: 7 March 2023

Ruling

Subject: Employee share scheme

Question 1

Will the irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for, or acquisition on-market of, ordinary shares in the Company for the Trust be assessable income of the Trust pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997?

Answer

No.

Question 2

Will CGT event E5 happen at the time when a Participant pursuant to the Plan becomes absolutely entitled to the shares held by the Trustee?

Answer

Yes.

Question 3

If CGT event E5 does happen, will a capital gain or loss made by the Trustee, as a result of CGT event E5 happening, be disregarded under section 130-90 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 4

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

Answer

No - the scheme does not include any facts that gives rise to CGT event E7 happening.

Question 5

If CGT event E7 does happen, will a capital gain or loss made by the Trustee, as a result of CGT event E7 happening, be disregarded under section 130-90 of the Income Tax Assessment Act 1997?

Answer

Not necessary to rule.

Question 6

Will dividends and other income received by the Trustee, in relation to the shares it holds under the Plan but which have not yet been allocated to Participants, be included in the calculation of the net income of the Trust under section 95 of the Income Tax Assessment Act 1936 and assessed to the Trustee under section 99A of that Act?

Answer

Yes.

Question 7

Will the Trustee be entitled to a tax offset for the franking credits attached to the franked dividends it receives, in relation to the shares it holds under the Plan but which have not yet been allocated to Participants, under Subdivision 207-B of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XY

Income year ending 30 June 20XZ

Income year ending 30 June 20YX

Income year ending 30 June 20YY

The scheme commenced on:

DD Month YYYY

Relevant facts and circumstances

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

The Company established an employee share plan (the Plan) that is governed by the Plan rules as part of its remuneration and reward program for its employees. Under the Plan, Participants are provided Company shares that are allocated and held in the Trust on behalf of the Participant during the Restriction Period. Participants are not required to pay for the shares.

The Trustee of the Trust is an independent third party.

The Company will make cash contributions to the Trustee to fund the acquisition of Company shares.

The Trustee will use these cash contributions to acquire, by purchase or subscription, the number of Company shares based on instructions from the Company.

All funds provided to the Trustee by the Company will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee (the Trust deed does not contain any clauses which allow any trust funds to be returned to the Company from the Trust for purposes other than acquiring shares to implement the Plan).

The Trustee must allocate the relevant number of shares to each Participant based on instructions from the Company and the Participants are absolutely entitled to any shares allocated to them (including any income, including dividends, that derive from those shares), which continue to be held by the Trustee unless transferred to the Participant.

Unless and until the shares are allocated or transferred to a Participant, the Trustee will hold those unallocated shares (including any income the Trustee receives, including dividends, that derive from those unallocated shares) on trust for the general purposes of the Trust.

The Trustee will hold the unallocated shares at risk for a period of not less than 45 days and will not make a related payment in respect of the dividend.

Following the Restriction Period, the Company will direct the Trustee to transfer to the Participant the shares that had been allocated and held on trust for them.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 subsection 44(1)

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 130-85

Income Tax Assessment Act 1997 section 130-90

Income Tax Assessment Act 1997 section 207-45

Income Tax Assessment Act 1997 section 207-150

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Detailed reasoning

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 both income under ordinary concepts (sections 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 the Company to the Trustee will not be assessable income of the Trustee under section 6-10.

The contributions made by the Company constitute accretions to the corpus of the Trust and are irretrievable and non-refundable in accordance with the Trust Deed (other than as consideration for Shares under the terms of the Trust Deed). Therefore, the contributions constitute capital receipts to the Trustee, and are not assessable under sections 6-5 or 6-10 (ATO Interpretative Decision ATOID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme).

Question 2

Detailed reasoning

Under subsection 104-75(1), CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee.

A beneficiary becomes absolutely entitled to a CGT asset of a trust if they can call for the asset (for which they have a vested and indefeasible interest in) to be transferred to them or at their direction. The shares held on trust for the purposes of the Plan are CGT assets of the Trust as defined in subsection 108-5(1).

After the Restriction Period, the Trustee must transfer the relevant shares to the Participant (upon receipt of a direction by the Company) and the Company will register the Participant as the holder of those shares.

CGT event E5 will happen at that time as the Participant thereby becomes absolutely entitled to those shares.

Question 3

Detailed reasoning

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

Employee share trust

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

(a)  obtaining shares or rights in a company

(b)  ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the ESS 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 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 Plan are beneficial interests in a share in the Company. Therefore, they are ESS interests for the purposes of subsection 83A-10(1) at the time they are granted to the relevant Participant.

Consequently, the Plan is an ESS as defined in subsection 83A-10(2) as it is a scheme under which ESS interests in a company (i.e. the Company) are provided to employees of the Company, or its subsidiaries, in relation to their employment.

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

(a)  acquires shares in the Company; and

(b)  ensures that those shares are provided to Participants under the Plan by allocating those shares to them in accordance with the Trust deed and the Plan rules.

Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'? sets out the Commissioner's views on the type of activities that are considered, and not considered, merely incidental for the purposes of paragraph 130-85(4)(c).

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.

The Commissioner is satisfied that the Trust satisfies the definition of an EST based on the terms of the Trust deed.

Other requirements in section 130-90

The other requirements in subsection 130-90(1A) are satisfied as:

(a)  the shares held by the Trustee for the purposes of the Plan (which are ESS interests) are CGT assets of the Trust (paragraph 130-90(1A)(a))

(b)  CGT event E5 happens in relation to the shares (paragraph 130-90(1A)(b)), and

(c)   as the shares will be granted to Participants for no consideration, they are acquired by the Participants at a discount and 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 CGT event E5 happens.

As such, any capital gain or loss that arises for the Trust 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 4

Detailed reasoning

Under subsection 104-85(1), CGT event E7 happens if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital.

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

Question 5

Detailed reasoning

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.

Question 6

Detailed reasoning

Section 95 of the ITAA 1936

Net income is defined by section 95 of the ITAA 1936 to mean the total assessable income of the trust estate calculated under Division 6 of the ITAA 1936 as if the trustee were a resident taxpayer in respect of that income, less allowable deductions.

Under subsection 44(1) of the ITAA 1936, 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 general purpose of the Trust, and if the Trustee receives any income, including dividends, deriving 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.

Section 99A of the ITAA 1936

Under section 99A of the ITAA 1936, 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 of the ITAA 1936 (paragraph 99A(4A)(a))

•         in respect of which the trustee is not assessed and is not liable to pay tax under section 98 of the ITAA 1936 (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 Participant is only absolutely entitled to those shares that are allocated to them, and only has a right to receive income, including any dividends, deriving from those allocated shares.

Therefore, as a Participant is not presently entitled to any income derived from shares which are unallocated, 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 those unallocated Shares.

Question 7

Detailed reasoning

Section 207-45 provides that trustees, who are liable to be assessed under section 99A of the ITAA 1936 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 of the ITAA 1936.

Tax offset under section 207-45

Pursuant to 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 of the ITAA 1936.

As determined at Question 6 above, the Trustee will be liable to be assessed under section 99A of the ITAA 1936 in relation to dividends received by the Trustee in respect of the shares that have not yet been allocated to Participants. 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 of the ITAA 1936).

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 of the ITAA 1936 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 the unallocated shares.