Edited version of private advice

Authorisation Number: 1052096237015

Date of advice: 30 May 2023

Ruling

Subject: Employee share trust

Question 1

Will the irretrievable cash contributions by Company or any subsidiary member of the Company tax consolidated group to the Trustee to fund the subscription for or acquisition on-market of ordinary shares in Company (Company Shares) by the Trust for the purposes of Plan A and Plan B (collectively the Company 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 2a

Will capital gains tax (CGT) event E5 happen at the time when the Participants become absolutely entitled to the Company Shares held by the Trustee of the Trust under the Company Plans?

Answer

Yes.

Question 2b

If CGT event E5 does happen, will a capital gain or capital loss made by the Trustee as a result of CGT event E5 happening be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Company Shares at a price that is the same as, or less than, the cost base of the Company Shares in the hands of the Trustee?

Answer

Yes.

Question 2c

Will CGT event E7 happen in respect of Company Shares held by the Trustee when the Trustee transfers the Company Shares to the Participants?

Answer

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

Relevant facts and circumstances

Company is an Australian public company and is the head company of a tax consolidated group (TCG).

Plan A

The Plan A was approved by Company shareholders.

The Plan A allows Company to grant Performance Rights to Eligible Participants, being Company's key management personnel, employees of a Group Company holding the position of General Manager, or a person who is declared by the Board to be an Eligible Participant for the purposes of Plan A.

Invitation

The Board may invite an Eligible Participant to apply for a specified number of Performance Rights on the terms of Plan A.

Unless determined otherwise by the Board, Performance Rights will be granted for nil consideration.

The Invitation will include the following information:

• the number of Performance Rights the Eligible Participant is able to apply for
• the date and time by which the application for Performance Rights must be received by
• any applicable Vesting Conditions
• the date the Performance Rights will vest and exercise automatically into Shares (Vesting Date), and
• any other relevant terms and conditions attaching to the Performance Rights (including any Disposal Restrictions).

An Eligible Participant may accept, in part or in full, the Invitation by making an application to Company within the Acceptance Period.

The grant of Performance Rights is subject to the Company receiving a signed and completed application form. On receiving the completed form, the Company may accept the application, at the discretion of the Board, and issue the Eligible Participant with Performance Rights.

Performance Rights

A Performance Right granted under Plan A will not vest or become exercisable until the Vesting Conditions have been satisfied. The Board has the absolute discretion to vary or waive Vesting Conditions.

Once vested, a Performance Right will be exercised automatically and the Participant will become entitled to receive a Share or cash equivalent.

Once the Performance Right has been exercised, the Company will:

• issue or procure the relevant number of Shares to satisfy the number of Performance Rights being exercised, or
• pay the Participant a cash amount equal to the number of Shares not being issued or transferred, multiplied by the volume weighted average price of Shares over 5 trading days on the ASX in the immediately prior to the date the Shares would have been issued or transferred, or
• issue or transfer a combination of Shares and a payment of a cash amount equal to the number of Shares not being issued or transferred.

The Board may, in its absolute discretion impose Disposal Restrictions as part of the terms of terms of an Invitation or allow Eligible Participants to elect to be subject to Disposal Restrictions and nominate a period of time which the Disposal Restrictions will apply.

The Board may also implement any procedures it deems necessary to restrict a Participant from trading in Shares while they remain subject to a Disposal Restriction, including imposing a holding lock on the Shares.

Lapse of Performance Rights

Unless the Board determines otherwise, an unvested Performance Right will lapse upon the earliest to occur of:

• a Participant purporting to transfer, assign, mortgage, charge or otherwise dispose of or encumber a Performance Right without consent of the Board
• an Eligible Participant or its nominee enters, or purports to enter into any scheme, arrangement or agreement which may alter the economic benefit to be derived from an unvested or unexercised Performance Rights
• a Change of Control event occurs and the Board determines Vesting Conditions will not be satisfied
• the Participant fails to meet the Vesting Conditions in the prescribed period
• a Participant resigns or is Terminated for Cause, for example due to an act of fraud, defalcation or gross misconduct, or active to bring the company into disrepute, or
• any date set out in an Invitation by which it is stated that the Participant will automatically lapse.

Plan B

Plan B was approved by the Company shareholders on [Date].

Plan B allows Company to grant Shares, Options and Performance Rights (ESS Interests) to Eligible Participants.

Invitation

The Board may invite an Eligible Participant to participate in Plan B. The terms of the Invitation may require either no Monetary Consideration or Monetary Consideration to be provided by the Eligible Participant in order to participate in Plan B.

An Invitation may state the following, including:

• the maximum number of ESS Interest which the Eligible Participant is eligible to apply for
• any applicable Grant Conditions or Vesting Conditions
• whether Vesting or exercise (or both) is automatic or requires a Notice of Exercise or any Exercise Price (or both)
• the date on which the ESS Interests will vest (Vesting Date)
• in respect to Shares:

­   the Issue Price (if any) or the manner of determining the Issue Price (if any) of the Shares, and

­   details of the Vesting Conditions (if any) attached to the Shares

• in respect to Options or Performance Rights:

­   the Issue Price or manner of determining the Issue Price (if any)

­   details of the Vesting Conditions attached (if any)

­   the first and last Exercise dates, and

­   the Exercise Price or manner of determining the Exercise price (if any)

• any other specific terms or conditions including any Disposal Restrictions.

The Invitation will include the Issue Price (if any) in respect of a Share, Option or Performance Right and the Exercise Price (if any) in respect of an Option or Performance Right.

An Invitation is personal and can only be accepted by the Eligible Participant to whom the Invitation is made. Where the Eligible Participant nominates a Third Party in whose favour the Eligible Participant wishes the ESS Interests the subject of the Invitation to be issued or transferred, and the Board permits the ESS Interests to be issued to the Third Party, the Eligible Participant procures that the Third Party also agrees to be bound by the Plan.

An Eligible Participant may accept the Invitation by applying for all or some of the ESS Interests specified in the Invitation in the method set out by the Invitation during the Acceptance Period. Where an Invitation includes an Issue Price, the Eligible Participant must also pay the Issue Price.

Following the receipt of an application from an Eligible Participant, the Company will be deemed to have accepted the application once the Company issues or transfers the ESS Interests the subject of the application to the Eligible Participant (or their Third Party where applicable).

ESS Interests

ESS Interests granted by the Company to an Eligible Participant (or their Third Party) have effect from the Grant Date and are subject to any Grant Conditions being met or waived, the terms of Plan B, and any additional conditions the Board determines in its absolute discretion.

The Company must provide the Eligible Participant a Certificate in respect of the Options and Performance Rights issued or granted.

An ESS Interest will not vest or be exercisable unless the Vesting Conditions attached to the ESS Interest have been satisfied. Where the ESS Interest is an Option or a Performance Right, a Vesting Notice will be issued to the Eligible Participant (or their Third Party) once Vesting Conditions have been satisfied.

The Board has the absolute discretion to amend or waive any Vesting Condition.

ESS Interests that have the Vesting Conditions met will be exercisable or exercise automatically in accordance with the terms of the Invitation.

If the ESS Interest is a Performance Right or Option, the Vested ESS Interest may be exercised by the Participant upon the Company receiving:

• the Certificate of Options or Performance Rights
• a signed Notice of Exercise, and
• payment of the Exercise Price (if any).

A Participant, in lieu of payment of the Exercise Price (where relevant), may elect to instead exercise their Vested Options or Performance Rights by surrendering a portion of their exercisable Options or Performance Rights.

Once the Vested ESS Interest is exercised, the Company will issue or transfer a Share to the Participant.

The Board may, in its absolute discretion impose Disposal Restrictions as part of the terms of an Invitation or allow Eligible Participants to elect to be subject to Disposal Restrictions and nominate a period of time which the Disposal Restrictions will apply.

The Board may also implement any procedures it deems necessary to restrict a Participant from trading in Shares while they remain subject to a Disposal Restriction, including imposing a holding lock on the Shares.

Lapse of ESS Interests

Unless the Board determines otherwise, an Unvested ESS Interest will lapse if:

• the Participant purports to transfer, assign, mortgage, change or otherwise dispose of or encumber (in whole or in part) the ESS Interest in a manner other than in accordance with the Plan Rules
• it lapses in accordance with Plan Rules (including circumstances where in the Board's opinion, there has been fraudulent or dishonest actions by a Relevant Person)
• an Eligible Participant or Third Party breaches the prohibition against entering into or purporting to enter into any activity in relation to the ESS Interests that is considered to alter the economic benefit derived from those ESS Interests
• a Change of Control event occurs and the Board determines Vesting Conditions will not be satisfied
• the Participant ceases employment or engagement with the Company due to resignation or Termination for Cause
• the Participant ceases employment or engagement with the Company for any other reason other than resignation or Termination for Cause, a portion of the Unvested ESS Interests equivalent to the remaining prescribed period in which the Vesting Conditions must be satisfied will lapse
• the Vesting Conditions have not been reached, or
• any date set out in an Invitation by which the ESS Interest will automatically lapse.

An Unvested Share will be forfeited upon the earliest of:

• the Board determining that any Vesting Conditions have not been satisfied, reached or met
• the Unvested Share being forfeited in accordance with a provision of the Plan Rules,
• the Board providing the Participant with a written notice under the Plan Rules, or
• the Participant purporting to Deal or enter into an arrangement in the Unvested Shares in breach of the Plan Rules.

The Trust

On [DATE], the Company established the Trust under a Deed (Trust Deed) entered into between the Company and the Trustee.

The Trust is an independent third party.

The Recitals to the Trust Deed states that the Company wishes to establish the Trust for the sole purpose of subscribing for, acquiring, holding and transferring Shares in connection with equity incentive plans for the benefit of participants in those plans.

Trust Assets means cash (including the Settlement Sum), ESS Interests, and income of the Trust and includes Accretions in respect of the relevant Trust Asset.

The Trustee has the powers to do all things a trustee is permitted to do by law in respect to the Trust, Trust Shares and Trust Assets, including to:

• enter into and execute all agreements, deeds and documents
• subscribe for, acquire, hold, dispose or otherwise deal with Trust Assets for the purpose of, and as authorised under, the Trust Deed and to do all things incidental to these activities
• take and act upon any advice or opinion of any legal practitioner or any other professional advisor
• open and operate any bank account, retain on current or deposit account at any bank any money it considers proper
• borrow money for the purpose of acquiring Shares or rights in the Company, where no security is provided over the assets of the Trust and the interest payable on the loan is not more than arm's length commercial rates
• receive dividends in respect to Unallocated Shares and any interest from bank accounts and using those funds to:

­   acquire additional shares for the purpose of a Plan

­   pay any necessary and incidental costs of administering the Trust in accordance with paragraphs 130-85(4)(a), (b) and (c) of the ITAA 1997, or

­   pay interest on loans provided to the Trust for the acquisition of Shares or rights to Shares in the Company.

• do all acts, matters or things which the Trustee in its discretion considers necessary or expedient to administer and maintain the Trust and the Trust Assets for the purpose of the Trust Deed.

The Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purpose of section 130-85(4) of the ITAA 1997.

The Trustee's activities in its capacity as trustee will be limited to the relevant Plan Rules and relevant Terms of Participation.

Acquisition of Trust Shares

The Board may instruct the Trustee by way of a Dealing Notice, and subject to the Trustee having or receiving sufficient funds or having sufficient capital, to:

a)    purchase or subscribe for the required number of Shares on behalf of the relevant Participant(s)

b)    allocate any Unallocated Shares to one or more Participants

The Trustee must hold all Trust Assets (including any Unallocated Shares) on trust in accordance with the Trust Deed. Nothing in the Trust Deed confers or intends to confer on the Company any charge, lien, or any other proprietary right or beneficial interest in the Trust Assets.

Funding

The Company must provide, or cause the provision to the Trustee, of any funds required by the Trustee to comply with its obligations to acquire Trust Shares under the Trust Deed.

All funds provided to the Trustee will constitute Accretions to the corpus of the Trustand may be paid to the Company as consideration for the subscription for Shares.

In accordance with the Company Plans, if the Board has made the decision to settle ESS Interest in cash, any payment that is made to a Participant will not be made from Trust Assets.

The Trustee may recover from the Trust Assets (excluding Allocated Shares, Unallocated Shares and dividends from Allocated Shares) all reasonable disbursements actually incurred by the Trustee in performing its duties, or alternatively, may seek reimbursement from the Company of reasonable expenses incurred by the Trustee for managing the Trust.

The Company incurs costs in relation to the on-going administration of the Trust including:

• employee plan record keeping
• production and dispatch of holding statements to Participants
• provision of annual income tax return information for Participants
• costs incurred in the acquisition of shares on market (e.g., brokerage costs and the allocation of such shares to Participants)
• management of Participant termination (as it pertains to the Company Plans)
• annual audit of the financial statements
• annual income tax return of the Trust, and
• drafting and lodging a private ruling application with the Australian Taxation Office and obtaining related tax advice associated with the implementation of the Trust.

Allocation of Shares

The Board may instruct the Trustee by way of Dealing Notice to allocate the specified number of Plan Shares to a specified Participant or Participants. The specified Participant(s) will become the beneficial owner of the Allocated Plan Shares.

Each Participant must not assign, transfer, sell, or grant an encumbrance over an interest in that Allocated Share of that Participant during any applicable Restriction Period. After the expiry of the Restriction Period and subject to the guidelines set by the Board, the relevant Plan Rules and the relevant Terms of Participation, a Participant may give the Trustee a Withdrawal Notice requiring the Trustee to transfer some or all of the Participant's Allocated Shares to the Participant (or their nominated third party).

The Trustee must do all things required to transfer some or all of a Participant's Allocated Shares and pay any monies held on account for the Participant, subject to:

• a valid Withdrawal Notice being provided and approved by the Board
• requirement to do so by the relevant Plan Rules or Terms of Participation
• termination of the Trust, or
• if the Trustee determines so, following a written instruction from the Board.

Unallocated Shares

The Trustee must deal with Unallocated Shares in the manner set out in a Dealing Notice.

In respect to the Unallocated Shares held by the Trustee, the Trustee must:

• if instructed by the Board:

­   dispose of any Unallocated Shares (including pursuant to a buyback being conducted by the Company)

­   participate in a Rights Issue in respect to the Unallocated Shares, or

­   dispose of any rights under a Rights Issue in respect of the Unallocated Shares.

• hold any bonus shares issued in respect of that Unallocated Shares.

The Board may from time to time specify that certain Unallocated Shares be held by the Trustee for a particular Plan.

Income and capital distributions

Subject to Applicable Law, the relevant Plan Rules and relevant Terms of Participation, a Participant is presently entitled to so much of the Net Income of the Trust for a Year of Income which is attributable to:

• the Participant's Allocated Shares
• the proceeds of sales arising from the sale by the Trustee of rights under a Rights Issues relating to that Participant's Allocated Shares, and
• transactions or events related to that Participant's Allocated Shares or property related to or arising from that Participant's Allocated Shares.

Reasons for decision

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

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 ITAA 1936).

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 irretrievable cash contributions made by the Company to the Trustee will not be assessable income of the Trustee under section 6-10.

The cash 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 Company Shares under the terms of the Trust Deed).

Therefore, the contributions constitute capital receipts to the Trustee, and are not assessable under section 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 2a

Detailed Reasoning

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

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 employee share scheme

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

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

Participants acquire ESS interest under an employee share scheme

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

Subsection 83A-10(1) defines an 'ESS interest' in a company as a beneficiary interest in either a share in the company or a right to acquire a beneficial interest in a share in the company.

As Participants are granted Options or Rights under the Company Plans in relation to their employment, which provide them with the right to acquire Company Shares, they are taken to have acquired ESS interests under an employee share scheme and paragraph 130-85(1)(a) is satisfied.

Subdivision 83A-B or 83A-C applies to the Options or Rights

As Participants acquire Options or Performance Rights under the Company Plans at a discount or for nil consideration (i.e. at a discount), Subdivision 83A-B will apply to those Options or Performance Rights (unless Subdivision 83A-C applies instead) and paragraph 130-85(1)(b) is satisfied.

The Options or Performance Rights arose because of an interest the Participants hold in an employee share trust

The Options or Performance Rights granted to Participants under the Company Plans provide Participants with an interest in the Company Shares held in the Trust.

Subsection 130-85(4) defines an 'employee share trust', for an employee share scheme, 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 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 paragraph (a) or (b).

Paragraphs 130-85(4)(a) and (b) of the definition of an employee share trust are satisfied because:

•         the Trust acquires shares or rights to shares in the Company, and

•         the Trust ensures that Options and Performance Rights (which are ESS interests) are provided to Participants under the employee share schemes by allocating shares to them in accordance with the governing documents of the scheme.

Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'? sets out the Commissioner's view on the type of activities that are and are not considered to be 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 considers the Trust to be an employee share trust 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, the Participants are taken to be absolutely entitled to the shares held by the Trustee from the time they were granted the Options or Performance Rights under the Company Plans pursuant to subsection 130-85(2), and CGT event E5 will happen at that time.

Question 2b

Detailed Reasoning

Any capital gain or capital loss that the Trustee makes, if CGT event E5 happens, is disregarded if section 130-90 applies. The exemption in section 130-90 will apply because:

• as set out in the response to Question 2a, the Commissioner considers the Trust to be an employee share trust as defined in subsection 130-85(4) (subsection 130-90(1))
• at the time the Participants become absolutely entitled to the shares as against the Trustee, CGT event E5 happens (paragraph 130-90(1)(a))
• CGT event E5 happens in relation to shares (paragraph 130-90(1)(b))
• the Participant acquires the share by exercising an Option or Performance Right granted under the Company Plans (paragraph 130-90(1(c)), and
• the Participant acquired the Options or Performance Rights under the Company Plans for a discount or nil consideration (i.e. at a discount) and therefore Subdivision 83A-B will apply to those Options or Performance Rights (unless Subdivision 83A-C applies instead) (paragraph 130-90(1)(d)).

As all the conditions in section 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 2c

Detailed Reasoning

Not applicable.