Edited version of private advice

Authorisation Number: 1052198899628

Date of advice: 30 November 2023

Ruling

Subject: Employee share scheme

Question 1

Will any capital gain or loss that arises for the Trustee, at the time an Eligible Person becomes absolutely entitled to Shares under the Plan under Capital Gains Tax (CGT) event E5 in section 104- 75, be disregarded, under section 130-90, if the Eligible Person acquires the Shares for the same or less than the cost base of the Shares in the hands of the Trustee?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20xx

Income year ending 30 June 20xx

Income year ending 30 June 20xx

Income year ending 30 June 20xx

Income year ending 30 June 20xx

Relevant facts and circumstances

The Company is the head company of a tax consolidated group.

One employee entity is part of the tax consolidated group, while one employee entity is not part of the tax consolidated group.

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 until the relevant vesting date.

The employees of the Company are Australian residents and are engaged only in activities that generate assessable income for the Company.

The Trust was established to facilitate the provision of shares to participants under the Plan. The Trust is governed by the Trust Deed.

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. These contributions are irretrievable and non-refundable because the Company is not a beneficiary of the Trust and is not entitled to any part of the Trust fund (including shares held by the Trustee).

The Company incurred costs to establish the Trust and Plan. The Company also incurred costs (and will continue to incur costs) for the ongoing administration of the Trust.

The Company receives reimbursements from the employee entity that is not part of the Company's tax consolidated group for costs in establishing and maintaining the EST.

On DD Month YYYY, the Trust Deed was executed and the executed Trust Deed took effect from that date onwards.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 section 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

Subsection 102-5(1) states that your assessable income includes your net capital gain (if any) for the income year. You make a capital gain or capital loss if and only if a CGT event happens (section 102-20).

CGT event E5 happens when participants become absolutely entitled to the Shares

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 Company's Employee Share Trust which was established for the purpose of holding Shares for the benefit of Participants who are or will become the beneficial owners of Shares pursuant to a Company Plan.
• the 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 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 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

As outlined earlier, 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 Plan (which both are 'employee share schemes' as defined in subsection 83A-10(2)) to participants (who are employees of employee entities) by allocating those Shares to the participants in accordance with the Trust Deed and the rules of the plan.

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.

However, for the purposes of this Ruling, it is assumed that the Trustee will exercise its powers and obligations as set out in the relevant clauses of the Trust Deed.

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

After the Restrictive Period, the Trustee must transfer the relevant Shares to the Participant (upon receipt of a direction by the Board to do so) 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 (legally and beneficially) entitled to those Shares.

Capital gain or capital loss to be disregarded under section 130-90

However, 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 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 Plan participants become absolutely entitled to them 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 Plan participants 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 Plan because:

• CGT event E5 happens when the Rights are granted to participants
• CGT event E5 happens in relation to shares in the Company
• Plan participants 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 at a discount.

Conclusion

As the requirements under section 130-90(1A) and subsection 130-90(1) are met, any capital gain or loss made by the Trustee as a result of CGT event E5 happening will be disregarded.