Edited version of private advice

Authorisation Number: 1052200849949

Date of advice: 6 December 2023

Ruling

Subject: Employee share scheme

Question 1

Will the irretrievable cash contributions made by Company X, or any subsidiary member of the Company X tax consolidated group, to Company Y as trustee for the Company X Employee Share Trust (the Trustee) to fund the acquisition of Company X shares by the Company X Employee Share Trust (the Trust) for the purposes of the Company Plans be assessable income of the Trust under section 6-5 or 6-10 of the 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 Company X shares held by the Trustee 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 X shares at a price that is the same as, or less than, the cost base of the Company X shares in the hands of the Trustee?

Answer

Yes.

Question 2C

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

Answer

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

Question 2D

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 Company X shares at a price that is the same as, or less than, the cost base of the Company X shares in the hands of the Trustee?

Answer

Not applicable

This ruling applies for the following periods:

Years ended 30 June 20XX to 30 June 20XX

The scheme commenced on:

In a particular income year

Relevant facts and circumstances

Company X Limited

1.    Company X is listed on the Australian Stock Exchange.

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

3.    As detailed in Company X's 20XX Annual Report, the objective of the company's remuneration strategy is to attract and retain a high calibre of employees and to compensate its personnel with remuneration packages that are competitive within the market.

4.    The remuneration framework was developed with Company X's strategic objectives in mind and aims to ensure that its workforce is incentivised and rewarded for their work.

5.    As part of the overall remuneration strategy, in addition to fixed remuneration, Company X offers an incentive program to eligible personnel whereby they receive shares in the company upon the satisfaction of certain performance conditions.

6.    Company X will incur the following costs in relation to the on-going administration of the Trust:

•         Employee plan record keeping;

•         Production and dispatch of holding statements to employees;

•         Provision of annual income tax return information for employees;

•         Costs incurred in the acquisition of shares on market (e.g., brokerage costs and the allocation of such shares to Participants); and

•         Management of employee termination.

7.    Company X will incur the following costs in relation to the establishment and implementation of the EST, including but not limited to:

•         Legal advice obtained in respect of the implications which may arise for both Company X and the Participants of the Plans in respect of the EST structure;

•         Legal documents required in respect of the EST and the Plans;

•         Legal advice obtained in respect of the drafting of changes required to the existing Plans in order to accommodate the EST structure; and

•         Professional fees associated with the establishment of the EST including such costs associated with the creating and registration of the EST with various authorities.

8.    Company X will also incur costs relating to tax advice associated with the implementation of the EST, including taxation fees associated with the drafting and lodgement of the private ruling application with the ATO. In addition, Company X will incur costs in relation to the annual audit of the financial statements and annual income tax return of the Trust.

Company Plans

9.    Company X operates the following two plans (collectively the Company Plans) which form part of its remuneration strategy:

•         The Employee Securities Incentive Plan (ESIP) dated XX August 20XX (20XX ESIP); and

•         The ESIP dated XX November 20YY (20YY ESIP).

10.    Company X and one of its subsidiaries, Company Z, are the employers of individuals that participate in the Company Plans (Employer Entities).

11.    The 20YY ESIP is ongoing with new offers to relevant employees annually.

12.    No further incentives are planned to be provided under the 20XX ESIP. However, it is Company X's intention to seek an ASX waiver under ASX Listing Rule 6.23 to allow for the use of the Company X Employee Share Trust (the Trust) for any remaining performance rights on issue under this plan.

13.    As of X August 20XX, there are XX,XXX,XXX Convertible Securities on issue under the 20XX ESIP.

The 20XX ESIP

14.    The Board will determine the commencement date of the Plan (Rule 2.2) and eligibility for participating in the Plan (Rule 3.1).

15.    Eligible Participants (hereafter referred to as Participants), upon being issued written invitations by the Board (Rule 3.2(a)), can apply for up to a specified number of Securities[1] which vest according to performance criteria. The invitation will outline the number of Securities that a Participant can apply for, and the relevant conditions attached to the Securities (Rule 3.2(b)).

16.    A Participant may accept the invitation in accordance with the instructions accompanying the invitation, ancillary documentation (if any), the Plan Rules and the constitution of the Company by submitting a completed Application Form (Rule 3.4).

17.    The Board may accept an Application Form from a Participant in whole or in part (Rule 3.6(a)).

18.    To the extent it accepted the Application Form, the Company will grant the Participant the relevant number and type of Securities, subject to the terms and conditions set out in the invitation, the Plan Rules and the Ancillary Documentation (Rule 4.1) and issue the Participant a certificate (Rule 4.2).

19.    Participants do not have any legal, equitable or other interest in any share underpinning the Convertible Security (unless expressly set out in the Plan Rules) (Rule 5.1(a)) and accordingly is not entitled to:

•         notice of, or to vote, or attend shareholders' meetings of the Company; nor

•         receive any dividends declared by the Company (Rule 5.1(b)).

20.    Restrictions on Participants' dealings with Convertible Securities includes no disposal (Rule 5.2) and no hedging of economic exposure of the Convertible Security (Rule 5.3).

21.    Unless determined otherwise by the Board, a Convertible Security will not be quoted on the ASX or any other recognised exchange (Rule 5.5).

22.    A Convertible Security will vest when a Vesting Notice in respect of that Convertible Security is given to the Participant (Rule 6.1), noting that vesting conditions may be waived (as determined by the Board) (Rule 6.2).

23.    To exercise a Convertible Security, the Participant must (Rule 7.1(b)):

•         deliver a signed Notice of Exercise; and

•         subject to clause 7.2, pay the Exercise Price (if any) to or as directed by the Company,

at any time prior to the earlier of:

•         any date specified in the Vesting Notice; and

•         the Expiry Date.

24.    As soon as practicable after the valid exercise of a Convertible Security, the Company will:

•         Issue, allocate or cause to be transferred the number of shares to which the Participant is entitled (Rule 8(a)); and

•         Issue a substitute Certificate for any remaining unexercised Convertible Securities held by that Participant (Rule 8(b)).

25.    Convertible Securities may be forfeited, for example under the following circumstances (subject to the Board's discretion):

•         Purported disposal of the Convertible Security by a Participant in breach of the Plan Rules (Rule 5.2(a));

•         Where a Participant ceases to be eligible to participate in the Plan (e.g., termination or resignation of employment) (Rule 9.1);

•         Where the Board determines that a Participant has acted fraudulently or dishonestly or wilfully breached their duties to the Company X group company (Rule 9.2);

•         Failure to satisfy the vesting conditions (Rule 9.3);

•         A Participant becomes insolvent (Rule 9.4); or

•         Expiration date of the Convertible Security occurs prior to vesting (Rule 9.5).

26.    Notwithstanding the above examples of forfeiture circumstances, the Board also has the discretion to decide that some or all of the Participant's Convertible Securities will not be forfeited at that time (on any conditions which it thinks fit), but will be forfeited at the time and subject to the conditions it may specify by written notice to the Participant (Rule 9.6).

27.    Where a Convertible Security has been forfeited in accordance with these rules (Rule 10):

•         the Convertible Security will automatically lapse;

•         the Participant or the Participant's agent or attorney must sign any transfer documents required by the Company to effect the forfeiture of that Convertible Security; and

•         the Company will not be liable for any damages or other amounts to the Participant in respect of that Convertible Security.

28.    All Plan shares will rank equally in all respects with the shares of the same class for the time being on issue (except for any rights attaching to the shares by reference to a record date prior to the date of the allotment or transfer of the Plan shares) (Rule 12.1).

29.    If Plan shares are in the same class as shares which are listed on the ASX, the Company will apply for quotation of the Plan shares issued (or any unquoted Plan shares transferred) within the time required by the Listing Rules after the date of allotment (Rule 12.2).

30.    The Board may, in its discretion, use an employee share trust or other mechanism for the purposes of holding Company X shares and Plan shares before or after the exercise of a Convertible Security or delivering any Plan shares arising from exercise of a Convertible Security under these Rules on such terms and conditions as determined by the Board. For the avoidance of doubt, the Board may do all things necessary for the establishment, administration, operation and funding of an employee share trust (Rule 17).

The 20YY ESIP

31.    The Board will determine the commencement date of the Plan (Rule 2.2) and eligibility for participating in the Plan (Rule 3.1).

32.    ESS Participants (hereafter referred to as Participants), upon being issued written invitations by the Board (Rule 3.2(a)), can apply for up to a specified number of Securities[2] which vest according to performance criteria. The invitation will outline the number of Securities that a Participant can apply for, and the relevant conditions attached to the Securities (Rule 3.2(b)).

33.    The Participant may accept the invitation in accordance with the instructions accompanying the invitation, ancillary documentation (if any), the Plan Rules and the constitution of the Company by submitting a completed Application Form (Rules 3.3 and 3.4).

34.    The Board may accept an Application Form from a Participant in whole or in part (Rule 3.6(a)).

35.    To the extent it accepted the Application Form, the Company will grant the Participant the relevant number and type of Securities, subject to the terms and conditions set out in the invitation, the Plan Rules and the Ancillary Documentation (Rule 4.1) and issue the Participant a certificate (Rule 4.2).

36.    Participants do not have any legal, equitable or other interest in any share underpinning the Convertible Security (unless expressly set out in the Plan Rules) (Rule 5.1(a)) and accordingly is not entitled to:

•         notice of, or to vote, or attend shareholders' meetings of the Company; nor

•         receive any dividends declared by the Company (Rule 5.1(b)).

37.    Restrictions on Participants' dealings with Convertible Securities includes no disposal (Rule 5.2) and no hedging of economic exposure of the Convertible Security (Rule 5.3).

38.    Unless determined otherwise by the Board, a Convertible Security will not be quoted on the ASX or any other recognised exchange (Rule 5.5).

39.    A Convertible Security will vest when a Vesting Notice in respect of that Convertible Security is given to the Participant (Rule 6.1), noting that vesting conditions may be waived (as determined by the Board) (Rule 6.2).

40.    To exercise a Convertible Security, the Participant must (Rule 7.1(b)):

•         deliver a signed Notice of Exercise; and

•         subject to clause 7.2, pay the Exercise Price (if any) to or as directed by the Company,

at any time prior to the earlier of:

•         any date specified in the Vesting Notice; and

•         the Expiry Date.

41.    As soon as practicable after the valid exercise of a Convertible Security, the Company will:

•         Issue, allocate or cause to be transferred the number of shares to which the Participant is entitled (Rule 8(a)); and

•         Issue a substitute Certificate for any remaining unexercised Convertible Securities held by that Participant (Rule 8(b)).

42.    Convertible Securities may be forfeited, for example under the following circumstances (subject to the Board's discretion):

•         Purported disposal of the Convertible Security by a Participant in breach of the Plan Rules (Rule 5.2(a));

•         Where the Board determines that a Participant has acted fraudulently or dishonestly, acted in contravention of a Company policy or wilfully breached their duties to the Company X group company (Rule 9.1);

•         Failure to satisfy the vesting conditions (Rule 9.2);

•         Where a Participant ceases to be an eligible Employee Share Scheme (ESS) Participant in the Plan (Rule 9.3);

•         A Participant becomes insolvent (Rule 9.4); or

•         Expiration date of the Convertible Security occurs prior to vesting (Rule 9.5).

43.    Notwithstanding the above examples of forfeiture circumstances, the Board also has the discretion to decide that some or all of the Participant's Convertible Securities will not be forfeited at that time (on any conditions which it thinks fit), but will be forfeited at the time and subject to the conditions it may specify by written notice to the Participant (Rule 9.6).

44.    Where a Convertible Security has been forfeited in accordance with these rules (Rule 10):

•         the Convertible Security will automatically lapse;

•         the Participant or the Participant's agent or attorney must sign any transfer documents required by the Company to effect the forfeiture of that Convertible Security; and

•         the Company will not be liable for any damages or other amounts to the Participant in respect of that Convertible Security.

45.    All Plan shares will rank equally in all respects with the shares of the same class for the time being on issue (except for any rights attaching to the shares by reference to a record date prior to the date of the allotment or transfer of the Plan shares) (Rule 12.1).

46.    If Plan shares are in the same class as shares which are listed on the ASX, the Company will apply for quotation of the Plan shares issued (or any unquoted Plan shares transferred) within the time required by the Listing Rules after the date of allotment (Rule 12.2).

47.    The Board may, in its discretion, use an employee share trust or other mechanism for the purposes of holding Company X shares and Plan shares before or after the exercise of a Convertible Security or delivering any Plan shares arising from exercise of a Convertible Security under these Rules on such terms and conditions as determined by the Board. For the avoidance of doubt, the Board may do all things necessary for the establishment, administration, operation and funding of an employee share trust (Rule 17).

Company X Employee Share Trust (the Trust)

48.    The Amended Trust Deed was amended on XX October 20XX replacing the former Trust Deed.

49.    The Trust was set up for the sole purpose of subscribing for, acquiring, holding and transferring shares in connection with the Company Plans for the benefit of the Participants in those Company Plans.

50.    Company Y is the current trustee for the Trust.

51.    The Trust will be funded by contributions from Company X or a member of the Company X Group (i.e., for the subscription or purchase of shares in accordance with the Company Plans) as specified in clause 5.3 of the Amended Trust Deed.

52.    Company X or a member of the Company X Group are likely to contribute funds by way of capital contributions to the Trust when written notice is provided by the Board to the Trustee. A notice can be issued from time to time, however, typically are issued when the incentives vest to the Participant and are subsequently exercised by the Participant or when incentives vest and are converted into vested rights.

53.    These funds will be used by the Trustee of the Trust to acquire the shares in Company X either by on-market purchase or via a subscription for new shares in Company X based on the notice provided by Company X (clause 5.2 of the Amended Trust Deed).

54.    Upon being directed by the Board, the Plan Trustee must allocate the specified number of Plan shares to the specified Participant on the date as directed by the Board (clause 5.1(a) of the Amended Trust Deed). The Participant will become the beneficial owner of the allocated Plan shares.

55.    The Plan Trustee will hold any and all allocated Plan shares held on behalf of the Participant and agrees that the Participant is absolutely entitled to these shares (clause 3.1(b) of the Amended Trust Deed). The Plan Trustee also holds on behalf of, and the Participant is entitled to, all other benefits and privileges attached to or resulting from the allocated shares (clause 3.1(a) of the Amended Trust Deed). The Plan Trustee's activities as trustee of the Trust will be limited to the Company Plans (clause 4.2(a) of the Amended Trust Deed).

56.    The structure of the Trust and the Company Plans is such that the shares may be dealt with at any time after the Restrictive Period lapses by allocating shares to each Participant by way of transfer into the name of the Participant (i.e., legal title) (or to a third party nominated Participant) upon notification by the Board (clause 9.2 of the Amended Trust Deed).

57.    The Amended Trust Deed removed clauses 5.1(a)(iv), 5.2(e) and 6(b)(i)(C) from the Trust Deed and included a revised clause 6(b)(i)(A).

58.    The Trustee did not exercise any of the broad discretionary powers contained in clauses 5.1(a)(iv), 5.2(e), 6(b)(i)(C) and 6(b)(i)(A) of the Trust Deed.

Relevant legislative provisions

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 10-5

Income Tax Assessment Act 1997 subsection 83A-10(1)

Income Tax Assessment Act 1997 subsection 83A-10(2)

Income Tax Assessment Act 1997 section 83A-325

Income Tax Assessment Act 1997 subsection 104-75(3)

Income Tax Assessment Act 1997 subsection 104-85(3)

Income Tax Assessment Act 1997 section 130-85

Income Tax Assessment Act 1997 subsection 130-85(4)

Income Tax Assessment Act 1997 subsection 130-90(1)

Income Tax Assessment Act 1997 subsection 130-90(2)

Income Tax Assessment Act 1997 Subdivision 207-B

Income Tax Assessment Act 1997 section 207-35

Income Tax Assessment Act 1997 section 207-45

Income Tax Assessment Act 1997 subsection 207-150(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

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

Will the irretrievable cash contributions made by Company X, or any subsidiary member of the Company X tax consolidated group, to Company Y as trustee for the Company X Employee Share Trust (the Trustee) to fund the acquisition of Company X shares by the Company X Employee Share Trust (the Trust) for the purposes of the Company Plans be assessable income of the Trust under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Assessable income includes both ordinary income and statutory income according to sections 6-5 and 6-10 of the ITAA 1997. Ordinary income is income according to ordinary concepts. Statutory income is income that is not ordinary income but is included in assessable income because of a specific provision of the ITAA 1997 or Income Tax Assessment Act 1936 (ITAA 1936).

As Chief Justice Jordan noted in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 (Scott):

.. what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of receipts.

Ordinary income

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. The expression "income according to ordinary concepts" is not a defined term. However, case law has identified certain factors which may assist in determining whether a receipt is properly characterised as income according to ordinary concepts.

As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In GP International Pipecoaters v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 64 ALJR 392; (1990) 93 ALR 193; (1990) 21 ATR 1; 90 ATC 4413; [1990] HCA 25 (Pipecoaters), the High Court of Australia found that:

To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

The contributions made by Company X or any other member of the Company X tax consolidated group to the Trust forms part of the corpus of the Trust (clause 5.3(b) of the Amended Trust Deed) that will be applied for the sole purpose of acquiring, or subscribing for, shares for the benefit of the Participants under the Company Plans (clause 5.2 of the Amended Trust Deed). The cash contributions received by the Trustee are therefore of a capital character.

It is irrelevant that, from Company X's perspective, the cash contribution may be deductible under section 8-1 of the ITAA 1997 because whether a receipt is income or capital depends on its objective character in the hands of the recipient, rather than the payer. This is made clear in Pipecoaters, where the High Court held that:

...although the amount expended on the construction of the plant was a capital expenditure, it does not follow that the taxpayer's receipt of the establishment costs was a receipt of capital.

From the Trustee's perspective, the irretrievable cash contributions made by Company X are capital in nature and therefore not assessable to the Trust under section 6-5 of the ITAA 1997.

Statutory income

Section 10-5 of the ITAA 1997 provides a list of provisions of assessable income for section 6-10 purposes. None of the provisions apply to a cash contribution made by an employer to a trust established under an employee share scheme (ESS).

Therefore, the irretrievable cash contributions made by Company X or any other member of the Company X tax consolidated group to the Trustee of the Trust to fund the acquisition of, or subscription to, Company X shares are also not assessable income of the Trust pursuant to section 6-10 of the ITAA 1997.[3]

Question 2A

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

Detailed reasoning

Pursuant to section 102-20 of the ITAA 1997, an entity can make a capital gain or loss if, and only if, a CGT event happens.

Under subsection 104-75(1) of the ITAA 1997, 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 of the ITAA 1997 applies) as against the trustee. The time of the event is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)).

According to subsection 104-75(3), if CGT event E5 happens, the trustee may make a capital gain if the market value of the asset, at the time of the event, is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base.

In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 of the ITAA 1997 applies.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) explains the principles set out in the leading English trust law case of Saunders v. Vautier (1841) 49 ER 282 in relation to 'absolutely entitled' as follows:

... if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustees to transfer the trust property to them or at their direction, even though the trust deed contains a contrary intention. The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway.

Pursuant to clause 3.1(b) of the Amended Trust Deed, a Participant is the beneficial owner of and absolutely entitled to their allocated shares. Allocated shares is defined as a Trust share that is credited to the Trust share account of a Participant. Once credited, the Participant (i.e., the beneficiary) will become absolutely entitled to the allocated shares (i.e., a CGT asset of the Trust) as against the Trustee. Accordingly, pursuant to subsection 104-75(1), CGT event E5 happens.

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 X shares at a price that is the same as, or less than, the cost base of the Company X shares in the hands of the Trustee?

Detailed reasoning

If CGT event E5 happens, any capital gain or loss that the Trustee makes is disregarded if section 130-90 of the ITAA 1997 applies. Section 130-90 provides as follows:

(1A) Disregard any *capital gain or *capital loss made by an *employee share trust to the extent that it results from a *CGT event, if:

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

(b) either of the following subparagraphs applies:

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

(ii) the event is CGT event E7, and the event happens because the trustee *disposes of the ESS interest to a beneficiary of the trust; and

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

(1) Disregard any *capital gain or *capital loss made by an *employee share trust, or a beneficiary of the trust, to the extent that it results from a *CGT event, if:

(a) the CGT event is CGT event E5 or E7; and

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

(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 (about employee share schemes) applied.

(2) Subsection (1A) or (1) does not apply if the beneficiary acquired the beneficial interest in the *share for more than its *cost base in the hands of the *employee share trust at the time the *CGT event happens.

To qualify for the exemption in section 130-90, there must be an 'employee share trust' and an 'ESS interest'.

Subsection 130-85(4) of the ITAA 1997 defines an employee share trust 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 ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Shares that are purchased by the Trustee to satisfy its obligation under the Company Plans, and subsequently allocated to Company X's Participants pursuant to the Company Plans, are ESS interests for the purposes of subsection 83A-10(1).

An 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employee's employment.

Company X's Company Plans each constitute an 'employee share scheme' because each are a scheme under which ESS interests in Company X are provided to the employees of Company X in relation to their employment with Company X.

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

a. The Trust acquires shares in a company, namely Company X; and

b. The Trust ensures that ESS interests as defined in subsection 83A-10(1) are provided under an employee share scheme by allocating those shares to the employees of Company X in accordance with the Amended Trust Deed and the Company Plans.

Paragraph 130-85(4)(c) of the definition of an employee share trust provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b) of the ITAA 1997. 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'? (TD 2019/13).

However, 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 employee share trust. 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 (paragraph 6 of TD 2019/13).

The Amended Trust Deed contains only powers and/or duties that are merely incidental, as required by paragraph 130-85(4)(c) of the ITAA 1997. Therefore, the Trust established pursuant to the Amended Trust Deed satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997.

As the rights granted under the Company Plans will be acquired by the employees at a discount, they are ESS interests to which Subdivision 83A-B of the ITAA 1997 applies.

As such, a capital gain or capital loss that arises for the Trustee of the Trust established pursuant to the Amended Trust Deed at the time when CGT Event E5 happens in relation to Company X shares held by the Trustee will be disregarded under section 130-90 of the ITAA 1997, if the employees acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee.

Question 2C

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

Detailed reasoning

Under subsection 104-85(1) of the ITAA 1997, 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's interest, or part of it, in the trust capital. The timing of the event is when the disposal occurs (subsection 104-85(2)).

According to subsection 104-85(3), if CGT event E7 happens, the trustee may make a capital gain if the market value of the asset, at the time of the disposal, is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base.

However, in relation to the scheme as set out in the 'Relevant facts and circumstances' section above, CGT event E7 does not occur. This is because the scheme does not include any facts that gives rise to CGT event E7 happening.

Question 2D

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 Company X shares at a price that is the same as, or less than, the cost base of the Company X shares in the hands of the Trustee?

Detailed reasoning

As per the answer in Question 2C above, CGT event E7 does not arise. Therefore, 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 be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Company X shares at a price that is the same as, or less than, the cost base of the Company X shares in the hands of the Trustee.

[1] Securities means a security in the capital of the Company granted under the Plan Rules, including a Plan Share, Option, Performance Right or other Convertible Security.

[2] Securities means a security in the capital of the Company granted under these Rules, including a Plan Share, Option, Performance Right or other Convertible Security.

[3] This view is consistent with ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme, which found that: 'The funds provided to the Trustee are used in accordance with the Trust Deed and Plan Rules for the sole purpose of and under the employee share scheme. The contributions constitute capital receipts to the Trustee, and are not assessable under sections 6-5 or 6-10 of the ITAA 1997'.