Edited version of private advice

Authorisation Number: 1052258009428

Date of advice: 31 July 2024

Ruling

Subject: Employee share trust

Question

Will the irretrievable contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group) and Company B, (collectively, Group Companies), to the trustee (Trustee) for the Company A Employee Share Trust (EST) to fund the subscription for, or acquisition on-market of, ordinary Company A shares (Company A Shares) by the EST in accordance with the EST Trust Deed (Trust Deed) be assessable income of the EST?

Answer

No.

Question

Will a capital gain or capital loss incurred by the Trustee, at the time shares held by the EST are delivered to employees, be disregarded under section 130-90 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997)?

Answer

Yes, unless the capital gain is due to the exercise of Options where the Trustee's cost base in the relevant Shares is less than the exercise price of the relevant Options.

This ruling applies for the following periods:

• Income Tax year ended 30 June 2024
• Income Tax year ended 30 June 2025
• Income Tax year ended 30 June 2026
• Income Tax year ended 30 June 2027
• Income Tax year ended 30 June 2028

Relevant facts and circumstances

Company A

• Company A is an Australian company operating in Australia and several other countries.
• Company A is the head company of an income tax consolidated group.

Company B

• Company B is a subsidiary of Company A and select employees of Company B are eligible to participate in Company A's Plans.

The Plans

• Company A operates the Plans for eligible employees of Group Companies as part of its strategy to attract, retain and motivate key talent.

Key terms of Performance Rights Plan

• Eligible employees (Participants) are granted rights to acquire ordinary shares in Company A (Shares), for no cost and subject to performance and service vesting conditions, at the sole discretion of the Board (Performance Rights).
• Participants are not entitled to any voting rights, dividends or to participate in any rights issue as a result of holding Performance Rights.
• Performance Rights are not transferable without written consent of the Board.
• Each vested Performance Right entitles the Participant to one Share for no exercise price.
• All Performance Rights granted under the Plan are subject to the satisfaction of service and/or performance conditions (Vesting Conditions), as determined by the Board and specified in the invitation letter sent to the Participant.
• The Participant will generally forfeit their unvested Performance Rights where the Vesting Conditions are not satisfied.
• Following exercise of vested Performance Rights, the Trustee is directed by the Board to acquire shares on behalf of the Participant (either on-market, via a new issue or allocation of existing shares held by the EST.) Such shares will rank equally with all other shares in Company A.
• While allocated shares are held in the EST, Participants are entitled to dividend and voting rights and to participate in any rights issue in respect of the shares. Participants are absolutely entitled to their shares as against the Trustee.
• The Participant may request the Trustee transfer the resulting Shares to them by submitting a Withdrawal Notice in accordance with the terms of the Plan.

Key terms of Employee Option Plan

• Participants are granted options (for no cost) to acquire Shares, at the sole discretion of the Board (Options).
• Participants are not entitled to any voting rights, dividends or to participate in any rights issue as a result of holding Options.
• An Option issued is personal to the Participant and cannot be assigned, transferred, encumbered or otherwise dealt with by the Participant.
• Each exercised Option entitles the Participant to one Share, subject to the payment of an exercise price.
• All Options under the Plan are subject to the satisfaction of Vesting Conditions, as determined by the Board and specified in the invitation letter.
• Any Option granted under the Plan will lapse if not exercised during its exercise period.
• On exercise of Options the Trustee is directed by the Board to acquire the Shares on behalf of each Participant, either on market, via a new share issue or allocate shares already acquired by the Trustee to the relevant Participants. Such shares will rank equally with all shares in Company A.
• While allocated shares are held in the EST, Participants are entitled to dividend and voting rights. Participants are absolutely entitled to their shares as against the Trustee.
• The Participant may request the Trustee transfer the resulting Shares to them by submitting a Withdrawal Notice with the terms of the Plan.

The EST

• Company A established the EST in 2009 under the terms of the Trust Deed to facilitate the acquisition, holding, and allocation of Shares to Participants in accordance with employee equity plans that Company A operates from time to time (including the Plans).
• For tax purposes, the EST is an independent legal entity.
• While Company A has stated an intention to only make irretrievable contributions to the EST to fund the acquisition of Shares once Performance Rights or Options (together, Rights) have been granted to a Participant under the Plans, there may be circumstances resulting in the acquisition of Shares before Rights have been granted.

Powers of the Trustee

• The Deed grants the Trustee general powers to do all things a trustee is permitted by law. These powers include
  • subscribing for, purchasing or acquiring Trust Assets or Shares
  • selling/disposing of Trust Assets
  • receiving dividends on Trust Shares and applying them in accordance with the Deed
  • selling or transferring Trust Shares to Participants

Allocating Shares to the EST

• Under the Trust Deed, Company A will instruct the Trustee to subscribe for, acquire and/or allocate a number of Shares specified in the notice.
• Company A will instruct the Trustee to subscribe for or purchase Shares on-market, depending on a number of factors including Company A's current capital management strategy.
• The Trustee will, in accordance with instructions received and pursuant to the draft Trust Deed acquire, deliver and allocate Shares to Participants provided that the Trustee receives sufficient payment from the Group Companies to subscribe for or purchase Shares and/or has sufficient unallocated Shares available in the EST.
• In respect of Rights subject to Vesting Conditions, no interest in the Shares will arise for Participants until Vesting Conditions are met and Shares are allocated.
• Group Companies must make irretrievable contributions to the EST as required under the terms of the Trust Deed.

Contributions to the EST

• All funds received by the Trustee from Group Companies would normally be in the form of irretrievable contributions that will constitute accretions to the corpus of the EST and no Participant will be entitled to receive a distribution of or from such funds. The funds will not be returned or repayable to Group Companies except where they are used for subscribing for Shares in Company A (i.e., the contributions will be irretrievable). Group Companies may also provide funds to the Trustee by way of a loan, at interest not exceeding commercial rates.
• Group Companies will not be beneficiaries under the draft Trust Deed and any funds Group Companies contribute to the EST, other than specifically in the form of a loan, may not be refunded, repaid or returned to Group Companies other than by way of the Trustee paying the issue price where it subscribes for Shares in Company A.
• No Group Company will have an interest in the Shares held by the EST.

Reasons for decision

All legislative references below are to the Income Tax Assessment Act (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 Group Companies to the Trustee will not be assessable income of the Trustee under section 6-10.

The cash contributions made by the Group Companies constitute accretions to the corpus of the EST and are irretrievable and non-refundable in accordance with the Trust Deed (other than as consideration for 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 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

Under section 130-90, capital gains or capital losses made by an employee share trust can be disregarded where shares were held for future acquisition under employee share schemes (subsection 130-90(1A)) or to satisfy the future exercise of rights acquired under employee share schemes (subsection 130-90(1)).

Under the terms of the Trust Deed, the Trustee will acquire Shares following the receipt of cash contributions from Group Companies, and, on vesting or exercise of Rights, the Shares will be transferred to Participants, therefore subsection 130-90(1) is applicable.

The conditions required to satisfy section 130-90(1) are as follows:

(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.

In addition, subsection 130-90(2) states that subsection 130-90(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.

An Employee Share Trust' as defined in subsection 130-85(4) is a trust whose sole activities are:

(a) obtaining share 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 ESS 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).

The Commissioner's view of what constitutes activities that are 'merely incidental' is contained in Taxation Determination 2019/13 Income tax: what is an 'employee share trust' (TD 2019/13).

The Commissioner is of the opinion that the EST, as determined by the terms of the Trust Deed, is an employee share trust within the definition in subsection 130-85(4).

CGT event E5 or E7

When the Rights granted to a Participant under the Plans vest and are exercised, the Participant becomes absolutely entitled to a number of Shares held (or to be acquired by the EST). This will cause event E5 for the Trustee to occur, satisfying condtion (a) of subsection 130-90(1).

Once the Participant is absolutlely entitled to Shares held on their behalf by the EST, section 106-50 deems the Shares to be the asset of the Participant rather than the EST.

In relation to a share

Upon the Rights vesting and being exercised, a Participant acquires fully-paid ordinary shares in Company A. Therefore condition (b) of 130-90(1) is satisfied.

Beneficial interest

Under the Plan, Participants are granted Rights. When the Rights vest, are exercised and Participants acquire Company A shares, the Rights are treated as rights to acquire shares from the date of grant under subsection 83A-15(2). Participants acquire a beneficial interest in the shares on vesting and exercise of their Rights, and paragraph 130-90(1)(c) is satisfied.

Subdivisions 83A-B or 83A-C

Where Rights granted under the Plans vest, are exercised and Participants acquire Company A shares, the Commissioner accepts the Rights are interests provided under an ESS to which Subdivision 83A-B or 83A-C applies.

Not acquired for more than cost base of EST

The Participants in the Plans will acquire Shares when the Rights are exercised, for a nil exercise price. Therefore the requirement in 130-90(2) will be satisfied.

In relation to Options with an exercise price, this condition will be satisfied where the Trustee's cost base in the relevant Share is not less than the respective exercise price of the Option being exercised.

Conclusion

Any capital gain or loss arising to the Trustee of the EST will be disregarded for CGT purposes in respect of Shares transferred to Participants under the Plans for any Rights that are exercised, and for Options that are exercised where the Trustee's cost base in the relevant Shares is not less than the exercise price of the relevant Options.