Edited version of private advice

Authorisation Number: 1052147196210

Date of advice: 4 August 2023

Ruling

Subject: Employee share trust

Question 1

Will the irretrievable cash contributions made by Subsidiary A and Subsidiary B to the Trustee of the Trust, to fund the acquisition of ordinary shares in the Company for the purposes of the Share Plan and the Rights Plan, be assessable income of the Trust under sections 6-5 or 6-10 of the Income Tax Assessment Act 1997?

Answer

No.

Question 2

Will a capital gain or capital loss that arises for the Trust at the time when the participants of the Share Plan and the Rights Plan become absolutely entitled to the shares in the Company be disregarded under section 130-90 of the Income Tax Assessment Act 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.

This ruling applies for the following periods:

The income years ending 30 June 20XX to 30 June 20YY

The scheme commenced:

In a particular income year

Relevant facts and circumstances

The Company is an Australian company with its shares listed on the Australian Securities Exchange.

The Company is an Australian resident for tax purposes and is the head company of a consolidated group that carries on a business.

Subsidiary A and Subsidiary B are subsidiary members of the consolidated group and are the only employer entities of the group.

The Company operates two employee share plans as part of its remuneration and reward program for its employees: the Share Plan and the Rights Plan (collectively, the Plans). The Plans are governed by the respective plan rules.

Under the Share Plan, participants are provided with shares in the Company, for nil consideration, based on a portion of the Company's profit before tax. The shares are held within a trust (the Trust) that was established to facilitate the provision of shares to participants under the Plans. The shares are held on behalf of the participants until the end of the holding lock period.

Under the Rights Plan, participants are granted with rights to acquire shares in the Company for no consideration. The rights are subject to vesting conditions until the relevant vesting date. Upon vesting, the shares to which the rights relate are held within the Trust on behalf of the participants until a participant directs the transfer of legal ownership of the shares to themselves.

The Trustee of the Trust is an independent third party.

Subsidiary A and Subsidiary B will make cash contributions to the Trustee to fund the acquisition of shares in the Company. These contributions are irretrievable and non-refundable because the Company and its subsidiaries are not beneficiaries of the Trust and are not entitled to any part of the Trust fund (including shares held by the Trustee). The cash contributions form part of the corpus of the Trust.

On a particular date, the Trust Deed was amended and the amended Trust Deed took effect from that date onwards. The amended Trust Deed removed certain powers or duties that were considered not merely incidental to those activities described in paragraphs 130-85(4)(a) and (b) of the ITAA 1997. The Trustee confirmed that up to the date of amendment, the Trustee had not undertaken any of the powers or duties that had been removed by the amended Trust Deed.

Relevant legislative provisions

Division 6 of the Income Tax Assessment Act 1936

section 95 of the Income Tax Assessment Act 1936

section 6-5 of the Income Tax Assessment Act 1997

section 6-10 of the Income Tax Assessment Act 1997

section 130-85 of the Income Tax Assessment Act 1997

section 130-90 of the Income Tax Assessment Act 1997

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 income under ordinary concepts (section 6-5) or statutory income (section 6-10). Section 10-5 provides a list of provisions that include in your assessable income amounts that are statutory income.

The contributions made by Subsidiary A and Subsidiary B capital receipts as they form part of the corpus of the Trust which the Trustee will use to subscribe for, or acquire, shares in the Company that will be held on trust for the benefit of participants of the Plans. Therefore, they are not assessable under section 6-5.

None of the provisions listed in section 10-5 are relevant in the present circumstances. The irretrievable cash contributions made by Subsidiary A and Subsidiary B to the Trustee of the Trust will therefore not be included in the assessable income of the Trust under section 6-10.

As the irretrievable cash contributions are neither ordinary income nor statutory income, the contributions are not assessable income of the Trust. See ATO Interpretative Decision ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme.

Question 2

Detailed reasoning

You make a capital gain or capital loss if and only if a CGT event happens (section 102-20).

CGT event E5

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

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 83-B or 83-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 interests under the Plans which are employee share schemes

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 beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company.

Paragraph 130-85(1)(a) is satisfied because:

•      the participants of the Plans are beneficiaries of the Trust which was established for the purpose of administering the Share Plan and the Rights Plan

•      the Share Plan is a scheme under which participants are provided with shares in relation to their employment that provides them with beneficial interests in the Company's shares; and

•      the Rights Plan is a scheme under which participants are granted rights in relation to their employment that provides them with the right to acquire shares in the Company.

Subdivision 83A-B or 83A-C applies to the shares and rights

Subsection 83A-20(1) states that Subdivision 83A-B applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

As shares and rights are provided to the participants of the Plans for no consideration, they are acquired by those participants at a discount and Subdivision 83A-B would apply to those ESS interests (unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C would apply instead).

Accordingly, paragraph 130-85(1)(b) is satisfied.

The shares and rights arose because of an interest the participants hold in an employee share trust

The participants of the Plans are beneficiaries of the Trust as they have an interest in the shares that are held in the Trust.

Subsection 995-1(1) defines 'employee share trust' as having the meaning given by subsection 130-85(4).

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; 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).

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

•      acquires shares in the Company, and

•      ensures those shares (which are 'ESS interests' under subsection 83A-10(1)) are provided under the Share Plan and the Rights Plan (which both are 'employee share schemes' as defined in subsection 83A-10(2)) to participants (who are employees of Subsidiary A or Subsidiary B) by allocating those shares to the participants in accordance with the Trust Deed and the rules of the respective plans.

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 merely incidental for the purposes of paragraph 130-85(4)(c).

Whether a 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's deed.

In the present case, the Trustee confirmed that up to the date of amendment, the Trustee had not undertaken any of the powers or duties that had been removed from the original Trust Deed by the amended Trust Deed (because they were not considered merely incidental to those activities described in paragraphs 130-85(4)(a) and (b) of the ITAA 1997). The amended Trust Deed contains only powers and duties that are merely incidental as required by subsection 130-85(4)(c).

Accordingly, the Commissioner considers the Trust to be an 'employee share trust' for the purposes of subsection 130-85(4) and paragraph 130-85(1)(c) is satisfied.

As all 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 allocated the shares under the Share Plan or granted rights under the Rights Plan pursuant to subsection 130-85(2), and CGT event E5 will happen at that time.

Subsection 130-90

Subject to subsection 130-90(2), any capital gain or capital loss made by an employee share trust, to the extent that it results from CGT event E5, is disregarded if either subsection 130-90(1A) or subsection 130-90(1) applies.

Subsection 130-90(1A)

Subsection 130-90(1A) states that any capital gain or capital loss made by an employee share trust to the extent that it results from CGT event E5 is disregarded if:

(a)    immediately before the event happens, an ESS interest is a CGT asset of the trust

(b)    CGT event E5 happens because a beneficiary of the trust becomes absolutely entitled to the ESS interest as against the trustee; and

(c)    Subdivision 83A-B or 83A-C applies to the ESS interest.

Subsection 130-90(1A) applies to the shares held by the Trust for the Share Plan because:

•      the shares (which are 'ESS interests' under subsection 83A 10(1)) are CGT assets of the Trust (shares are CGT assets pursuant to subsection 100-25(2))

•      CGT event E5 happens to those shares as participants of the Share Plan become absolutely entitled to them pursuant to subsection 130-85(2) when they are allocated those shares by the Trustee, and

•      as explained earlier, Subdivision 83A-B or 83A-C would apply to those shares as they are acquired by participants of the Share Plan at a discount.

Subsection 130-90(1)

Subsection 130-90(1) states that any capital gain or capital loss made an employee share trust to the extent that it results from a CGT event is disregarded if:

(a)    the CGT event is CGT event E5

(b)    the CGT event happens in relation to a share

(c)    the beneficiary had acquired a beneficial interest in the share by exercising a right; and

(d)    the beneficiary's beneficial interest in the right was an ESS interest to which Subdivision 83A-B or 83A-C applied.

Subsection 130-90(1) applies to the shares held by the Trust for the Rights Plan because:

•      by application of subsection 130-85(2), CGT event E5 happens when the rights are granted to participants of the Rights Plan

•      CGT event E5 happens in relation to shares in the Company

•      participants of the Rights Plan acquire a beneficial interest in those shares when they exercise their rights, and

•      as explained earlier, Subdivision 83A-B or 83A-C would apply to those rights as they are acquired by participants of the Rights Plan at a discount.

Conclusion

As the requirements under subsection 130-90(1A) and subsection 130-90(1) are met in relation to the shares held by the Trust for the Share Plan and the Rights Plan respectively, any capital gain or capital loss made by the Trust as a result of CGT event E5 happening will be disregarded (provided that the participants of the Plans do not acquire the shares for more than their cost base in the hands of the Trust at the time the CGT event happens).