Edited version of private advice

Authorisation Number: 1052225275136

Date of advice: 28 February 2024

Ruling

Subject: Employee share trust

Question

Will a capital gain or capital loss that arises for the trustee (Trustee) of the Company's Employee Award Plan Trust (Trust) at the time when CGT event E5 happens in relation to shares in the Company (Shares) held by the Trustee under the Company's Plan be disregarded under section 130-90 of the Income Tax Assessment Act 1997 (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 Trust?

Answer

Yes.

This ruling applies for the following period:

A particular income year

The scheme commenced

During a particular income year

Relevant facts and circumstances

Overview

1.       The Company is an Australian public company with its shares listed on the Australian Securities Exchange (ASX).

2.       The Company is an Australian resident for income tax purposes and is the head entity of a consolidated group (Group).

3.       The Company is the only employer entity, employing only Australian staff.

4.       The Company carries on a business for the purpose of gaining or producing assessable income.

The Company's Award Plan

5.       According to the Plan rules, the purpose of the Plan is to:

•         assist in the reward, retention and motivation of employees

•         align the interests of employees with shareholders of the Group by providing an opportunity to employees to receive an equity interest in the Company in the form of awards, and

•         provide a framework for the Board to implement and offer remuneration arrangements which are competitive in the market.

6.       The Plan applies to full or part time employees (including an executive director), a non-executive director, a contractor, a casual employee or a prospective participant in relation to the Company and has been determined by the Board to be eligible to participate in the Plan from time to time (Eligible Participants).

7.       The Plan broadly operates in the following manner:

a.    the Board will invite an Eligible Participant to participate in the Plan by providing them with an invitation letter, application form and ancillary documentation

b.    upon receipt of the invitation, the Eligible Participant can participate in the Plan by completing the application form and returning it to the Company

c.     the Board may accept an application in whole or in part, and

d.    following receipt of a completed and signed application form together with all applicable ancillary documentation, the Company will grant the Eligible Participant the relevant number of awards subject to the terms and conditions set out in the invitation, rules and ancillary documentation (where applicable).

8.       Under the terms and conditions of the Plan, eligible Australian employees are granted performance rights or options (Awards) for nil consideration.

9.       The Awards may be granted subject to vesting conditions. An Award that is granted without vesting conditions vests on the grant date.

10.     Participants are not able to sell, assign, transfer or otherwise dispose of their Awards) and, prior to vesting, carry no voting or dividend rights.

11.     Upon the Board determining the conditions are met over the relevant performance/vesting period, Awards vest and the Board must allocate one Share to the Eligible Participant per vested Award exercised.

12.     An exercise price may be payable in respect of a vested option. No exercise price is payable to validly exercise a performance right.

13.     Shares received upon the exercise of vested Awards may be subject to disposal restrictions for a period.

14.     In the event of a change of control, the Board may exercise discretion to determine whether all, or a portion, of the unvested Awards vest.

15.     The Board may use an employee share trust to hold and deliver the Shares and may do all things necessary for the establishment, administration, operation and funding of the trust.

16.     An Award which has not yet vested will be forfeited immediately on the date that the Board determines that any applicable vesting conditions have not or will not be met.

17.     The Company is responsible for all brokerage costs payable in relation to the issue or transfer of Shares upon the exercise of the Award.

The Trust

18.     The Company established the Trust under the terms of an amended trust deed (Trust Deed).

19.     An independent third party is the trustee of the Trust.

20.     Under the terms of the Trust Deed, the Trust operates as follows:

a.    the objects and sole purpose of the Trust are limited to subscribe for, purchase or otherwise acquire hold and deliver Shares under the Plan for the benefit of employees and this clause cannot be amended

b.    nothing in the deed confers on the Company any charge, lien or any other proprietary right or proprietary or beneficial interest in Shares acquired by the Trustee

c.     the Board by written notice may direct the Trustee to purchase Shares on the ASX, subscribe for a number of Shares or otherwise acquire a number of Shares to be held by the Trustee for the purposes of the Plan

d.    the Company must provide the Trustee any funds required by the Trustee in order to acquire the Shares, and/or request the Trustee to apply any surplus capital of the Trust for the purpose of acquiring or subscribing for Shares

e.    the Trustee may not repay any contributions received to the Company

f.      the Board may direct the Trustee to allocate Shares held by the Trustee to a named participant (Allocated Participant) who has exercised an Award and the Trustee must allocate the number of Shares (Allocated Plan Shares) as specified in the allocation notice given by the Board

g.    an Allocated Participant shall be absolutely entitled to the Allocated Plan Shares, and the Allocated Participant is absolutely entitled to so much of the net income of the Trust for a year of income which is reasonably attributable to their Allocated Plan Shares

h.    where required, the Trustee must as soon as practicable do all things necessary to transfer legal title in the Allocated Plan Shares to the Allocated Participant

i.      the balance of the net income of the trust to which no beneficiary is presently entitled shall be accumulated by the Trustee as an accretion to the trust fund

j.      upon termination of the Trust, any trust property remaining following the transfer of allocated trust property to participants will not be transferred to the Company or any of its subsidiaries

k.     the Trustee must not grant a security interest over any Shares

l.      the Trustee is not entitled to receive from the Trust any fees, charges, commission or other remuneration for operating or administering the Trust. However, the Company must pay to the Trustee from the Company's own resources any such fees or other remuneration incurred by the Trustee, as the Company and the Trustee agree from time to time.

Contributions to the Trust

21.     The Company usually makes contributions to the Trust to fund the acquisition of Shares once awards have been granted to the employee under the Plan.

22.     However, the Company may also make contributions to the Trust to fund the acquisition of Shares before the awards have been granted to the employee under the Plan.

Relevant legislative provisions

Section 130-85 of the Income Tax Assessment Act 1997

Section 130-90 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Will a capital gain or capital loss that arises for the trustee (Trustee) of the Company's Employee Award Plan Trust (Trust) at the time when CGT event E5 happens in relation to shares in the Company (Shares) held by the Trustee under the Company's Plan be disregarded under section 130-90 of the Income Tax Assessment Act 1997 (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 Trust?

Summary

Yes, any capital gain or loss made by the Trustee, as a result of CGT event E5 happening to Shares held by the Trustee under the Plan, will be disregarded under section 130-90, if the employees acquire the Shares for the same or less than the cost base of the Shares in the hands of the Trust.

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 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 interests under the Plan which is 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 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 Plan are beneficiaries of the Trust which was established for the purpose of administering the Plan
• the participants are granted Awards under the Plan that provides them with the right to acquire Shares and therefore the participants acquire 'ESS interests' as defined in subsection 83A-10(1), and
• the Plan is a scheme under which participants are granted Awards in relation to their employment and therefore is an 'employee share scheme' as defined in subsection 83A-10(2).

Subdivision 83A-B or 83A-C applies to the Awards

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 the Awards are provided to participants of the Plan for no consideration, they are acquired by those participants at a discount.

Therefore, 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 participants hold an interest in an employee share trust

As outlined earlier, the Awards granted to participants of the Plan provide the participants with 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 Trust:

•      acquires Shares in the Company, and

•      ensures Awards (which are 'ESS interests' under subsection 83A-10(1)) are provided under the Plan (which is an 'employee share scheme' as defined in subsection 83A-10(2)) to participants (who are employees of the Company) 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).

Based on the available facts, the Trust Deed contains only powers and/or 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 granted Awards under the Plan pursuant to subsection 130-85(2), and CGT event E5 will happen at that time.

Capital gain or capital loss to be disregarded under section 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(1) states that any capital gain or capital loss made by 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 (paragraph 130-90(1)(a))

(b)  the CGT event happens in relation to a share (paragraph 130-90(1)(b))

(c)   the beneficiary had acquired a beneficial interest in the share by exercising a right (paragraph 130-90(1)(c)), and

(d)  the beneficiary's beneficial interest in the right was an ESS interest to which Subdivision 83A-B or 83A-C applied (paragraph 130-90(1)(d)).

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

• by application of subsection 130-85(2), CGT event E5 happens when the Awards are granted to the participants
• CGT event E5 happens in relation to shares in the Company
• participants acquire a beneficial interest in those Shares when they exercise their vested Awards, and
• as explained earlier, Subdivision 83A-B or 83A-C would apply to those Awards as they are acquired by the participants at a discount.

Conclusion

As the requirements under subsection 130-90(1) are met, 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 do not acquire the Shares for more than their cost base in the hands of the Trust).