Edited version of private advice

Authorisation Number: 1052261410855

Date of advice: 28 June 2024

Ruling

Subject: Employee share trust

Question 1

Will the irretrievable cash contributions by Company A or any subsidiary member of the Company A tax consolidated group (Company TCG), to the Trustee as trustee of the Company A Trust (Trust), to fund the subscription for, or acquisition on-market of fully paid ordinary shares in Company A (Shares) pursuant to the Plan, be assessable income of the Trust under sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2a

Will CGT event E5 of section 104-75 of the ITAA 1997 happen for the Trustee at a time when a Participant becomes absolutely entitled to the Shares acquired pursuant to the Plan?

Answer

Yes.

Question 2b

If CGT event E5 does happen, will a capital gain or loss made by the Trustee, as a result of CGT event E5 happening, be disregarded under section 130-90 of the ITAA 1997, if Participants acquire 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 period:

Income year ending 30 June 20XX to 30 June 20XX

The scheme commenced on:

XX July 20XX

Relevant facts and circumstances

Background

Company A is an Australian incorporated company.

Company A is a public company with shares listed on the Australian Securities Exchange.

Company A is the head company of the Company A tax consolidated group (Company A TCG)

The Plan

Company A established the Plan in 20XX. The Plan has been renewed and approved by shareholders at their Annual General Meeting in 20XX and 20XX.

The purpose of the Plan is to assist in advancing the interests of Company A by creating a stronger link between the performance and reward of Company A's employees and contractors, and shareholder value, by enabling them to have greater involvement with, and share in the future growth and profitability of Company A.

The Plan is administered by Company A's board of directors (the Board) or by any persons the Board delegates the exercise of its powers and discretions to, under the Plan.

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 employee in relation to the Group and has been determined by the Board to be eligible to participate in the Plan from time to time (Eligible Person).

Offer

The Plan broadly operates in the following manner:

• the Board will offer to an Eligible Person the ability to participate in the Plan (Offer) by providing them with the terms and conditions of the Offer, an Application Form, and any ancillary documentation (if applicable)
• an Offer will include, amongst other things:

              i.        the date of the Offer

             ii.        the name of the Eligible Person

            iii.        the number or value of Performance Rights

           iv.        any applicable conditions relating to the performance of the Eligible Person and/or any or all of the Group Companies (Performance Conditions)

             v.        any restrictions on the ability of a Participant to exercise a vested Performance Right (Exercise Restrictions)

           vi.        the approximate date at which a Performance Condition will be measured (Measurement Date)

          vii.        whether any Performance Rights may be settled by a cash amount equal to the Market Price of the Shares (Cash Equivalent Value)

         viii.        the period or periods which vested Performance Rights may be exercised (including if vested Performance Rights may be automatically exercised)

           ix.        the Expiry Time.

• upon receipt of an Offer, an Eligible Person can only participate in the Plan by completing the Application Form and returning it to Company A, or by nominating a Nominee to whom they wish to be granted the Performance Rights specified in the Offer
• the Board, in its discretion, can refuse to allow an Eligible Person (or Nominee) to participate in the Plan in accordance with the Plan Rules
• following the receipt of a completed Application Form, Company A will grant to the Eligible Person (or Nominee), as the case may be, the number of Performance Rights set out in the Offer, at which time the Eligible Person (or Nominee) will become a Participant (or Permitted Nominee) of the Plan and is thereby bound by the terms and conditions of the Plan
• a Participant cannot transfer, assign, encumber or otherwise dispose of any Performance Rights, and cannot grant any Security Interest in or over any Performance Rights until the relevant Shares are acquired by that Participant.

Vesting and Exercise

Performance Conditions which must be met for Performance Rights to vest (and become exercisable), may include:

• individual performance metrics
• corporate performance metrics
• a payment of cash consideration for the issuance of Shares (Cash Payment Performance Condition)
• the completion of a period of time (Time-based Performance Condition).

At each Measurement Date, the Board will notify Participants the extent to which Performance Conditions applicable to any Performance Rights have been satisfied.

A Performance Right is exercised if the Participant follows the process set out in the Offer or, if the terms that provide that those Performance Rights are to be automatically exercised, are met.

Upon valid exercise of Performance Rights, Company A must, as soon as reasonably practicable, either:

• issue, allocate or procure the transfer to, or for the benefit of, the Participant, the relevant number of Shares
• provide the Participant with a Cash Equivalent Value (settleable outside of the Trust)
• issue, allocate or transfer a combination of Shares and Cash Equivalent Value.

Lapse of rights

A Performance Right will automatically lapse, unless otherwise determined by the Board, if:

• any Performance Conditions are not satisfied or cannot be satisfied by the Measurement Date
• an Eligible Person ceases to be an Eligible Person due to termination of employment or any contracting agreement, for serious misconduct, fraud or applicable law (Cause)
• a vested Performance Right is not exercised earlier by the earlier of 3 months after the vesting date or the Expiry Time.

Upon the occurrence of a takeover bid, a change of control, a merger or a winding up event (each, a Notification Event), the Board may exercise its discretion to determine whether all, or a portion of unvested Performance Rights will vest.

The Board may use an employee share trust for the purposes of holding and delivering Shares and may do all things necessary for the establishment, operation and funding of the trust.

Company A is responsible for all expenses, costs and charges in relation to the establishment, implementation and administration of the Plan, including costs incurred or associated with the allocation of Shares for the purpose of the Plan.

Trust Deed

On X May 20XX, Company A established the Trust under the terms of a trust deed between Company A and the Trustee as trustee of the Trust (Trust Deed).

The Trustee is an independent third party.

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

• the sole purpose of the Trust is limited to subscribing for, acquiring, holding and transferring Shares in connection with equity incentive plans established by Company A for the benefit of participants of those plans
• nothing in the Trust Deed confers on Company A any charge, lien or any other proprietary right or proprietary or beneficial interest in the Trust Assets
• the Board may by notice in writing (Dealing Notice) instruct the Trustee to subscribe for, purchase or allocate Shares to be held by the Trustee as Allocated Shares in respect of a Participant
• the Board may by a Dealing Notice instruct the Trustee to subscribe for, purchase or allocate Shares to be held by the Trustee as Unallocated Shares in accordance with the Trust Deed
• the Trustee must establish and maintain a separate trust share account in respect of each Participant containing details of Shares allocated to or transferred from, proceeds of sale from Trust Shares and any other credit or debit relevant to that Participant
• Company A must provide the Trustee, or cause the provision of, any funds required by the Trustee to subscribe for, or purchase Shares and, to meet any costs in connection with the relevant dealing
• all funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable to Company A
• the Trustee must not use any Trust Assets of Trust Shares as security
• the Trustee is not entitled to be paid whether from Trust Assets or any Participant, any fees or charges for administering the Trust. Notwithstanding, the Trustee may recover from Trust Assets (excluding Allocated Shares, Unallocated Shares (other than those Unallocated Shares which are also Forfeited Shares) and dividends from Allocated Shares) all reasonable disbursements actually incurred by the Trustee for managing the Trust
• the Trustee is not prohibited from charging Company A fees, charges, commission or other remuneration, and may also seek reimbursement of reasonable disbursements actually incurred by the Trustee for managing the Trust
• where required, the Trustee must as soon as practicable do all things necessary to transfer legal title in a Participant's Allocated Shares to the Participant (or Permitted Nominee)
• the Board may direct the Trustee to do all things required to transfer a Participant's Allocated Shares to the relevant recipient and pay any monies held on account for the Participant
• a Participant will be the beneficial owner of, and is absolutely entitled to their Allocated Shares, and is presently entitled to so much of the Net Income of the Trust for a Year of Income which is attributable to their Allocated Shares
• the balance of the Net Income for a Year of Income to which no Participant is presently entitled to may be accumulated by the Trustee as an accretion to the corpus of the Trust
• upon termination of the Trust, any Surplus Assets must not be paid to any Group Company.

Company A and its subsidiaries within the Company A TCG will incur various costs in relation to the implementation and on-going administration of the Trust, including:

• brokerage fees
• audit and tax advisor fees
• bank and other administrative charges
• fees paid to share registry as Trustee of the EST
• legal fees
• regulatory fees and stamp duty.

Unallocated Shares

The Trustee must deal with Unallocated Shares in the manner set out in a Dealing Notice.

In respect of each Unallocated Share held by the Trustee, the Trustee must, if instructed by the Board and subject to the Trust Deed:

• dispose of any Forfeited Shares that are Unallocated Shares, provided that such disposal is in accordance with the Trust Deed
• reallocate any Forfeited Shares to one or more Participants to be held under the Trust Deed as Allocated Shares
• participate in any Rights Issue in respect of that Unallocated Share
• hold any bonus shares issued in respect of that Unallocated Share on trust.

In the absence of any direction from the Board, Forfeited Shares (or proceeds of sale of such Forfeited Shares) must be held by the Trustee in accordance with the Trust Deed.

The Trustee may apply any capital receipts, dividends or other distributions received in respect of an Unallocated Share or a right issued under a Rights Issue in respect of that Unallocated Share to purchase further Shares to be held on trust for the purposes of the Trust.

The Board may specify that a certain Unallocated Share is to be held by the Trustee for a particular Plan (Specified Unallocated Share).

Reasons for decision

Question 1

Summary

The irretrievable cash contributions made by Company A or any subsidiary member of the Company A TCG to the Trustee to fund the subscription for, or acquisition on-market of Shares, pursuant to the PLAN will not be assessable income of the Trust under sections 6-5 or 6-10 of the ITAA 1997.

Detailed reasoning

Irretrievable cash contributions

It must be determined as a conclusion of fact whether the contributions made by Company A or any subsidiary member of the Company A TCG to the Trustee are irretrievable cash contributions.

The Trust Deed provides that all funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee. The Trustee must comply with any direction of the Board to acquire Shares on behalf of Participants in accordance with the relevant Plan and must apply any amount paid to it by Company A or any subsidiary member of the Company A TCG, in accordance with the Plan.

No Group Company may acquire any interest in the capital, or be entitled to any income, of the Trust.

Accordingly, a contribution made to the Trust will not be refundable or retrievable by Company A or any subsidiary member of the Company A TCG (other than as consideration for Shares under the terms of the Trust Deed).

In conclusion, the above terms support that the cash contributions made by Company A or any subsidiary member of the Company A TCG to the Trustee are irretrievable.

Assessable income of the Trust under section 6-5 or 6-10

The total assessable income of a trust estate is calculated as if the trustee were a resident taxpayer in respect of that income year (subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936)).

Subsection 6(1) of the ITAA 1936 states that 'assessable income' has the meaning given by subsection 995-1(1), which relevantly has the meaning given by sections 6-5 and 6-10.

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 non-refundable cash contributions made by Company A or any subsidiary member of the Company A TCG to the Trustee of the Trust will not be assessable income under section 6-10.

Receipts of a capital nature do not constitute income according to ordinary concepts, whether incurred in carrying on a business or not.

In ATO Interpretative Decision ATO ID 2022/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme, the Commissioner expresses the view that funds provided to the trustee of an employee shame scheme (ESS) for the sole purpose of providing shares under an ESS will constitute capital receipts to the trustee and are not assessable under sections 6-5 or 6-10.

An ESS is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2)).

An ESS interest is a beneficial interest in a share in a company or a beneficial interest in a right to acquire a beneficial interest in a share in a company (subsection 83A-10(1)).

The Commissioner accepts that Performance Rights provided under the Plan are indeterminate rights for the purposes of section 83A-340. That is because a Performance Right can be settled by either Shares or by making a payment of a cash equivalent amount in lieu of a Share, to be determined at a future time at the discretion of the employer. Accordingly, the issue of a Performance Right under the Plan is not a right to acquire a beneficial interest in a Share unless, and until the time it is determined by the Board that they will be satisfied by the provision of Shares.

Although the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate right will, under section 83A-340, be treated as if it had always been an ESS interest.

Subject to the Board's discretion to make a cash payment in lieu of allocating a Share under the Plan, each Participant will acquire a Performance Right, being a beneficial interest in a share in a company or a right to acquire a beneficial interest in a Share. Therefore, the Plan is an 'employee share scheme' within the meaning of subsection 83A-10(2).

The irretrievable cash contributions made by Company A or any subsidiary member of the Company A TCG to the Trustee under the terms of the Plan and the Trust Deed are to be used for the sole purpose of acquiring Shares for the benefit of Participants. Accordingly, the irretrievable cash contributions constitute capital receipts to the Trustee and will not be assessable income of the Trustee under sections 6-5 or 6-10.

Given that the irretrievable cash contributions made by Company A or any subsidiary member of the Company A TCG to the Trustee are neither ordinary nor statutory income under sections 6-5 or 6-10, they will not be included in the net income of the Trust and cannot be assessed to the Trustee under section 95(1).

Question 2a

Summary

CGT event E5 will happen to the Trustee in relation to Shares held by the Trustee under the Plan at a time when a Participant becomes absolutely entitled to those Shares under the terms of the Plan.

Detailed reasoning

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

Participants become absolutely entitled to a Share under the Plan - CGT event E5

Under subsection 104-75(1), 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 applies) as against the trustee.

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

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

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

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 an 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 (EST).

Participants acquire ESS interests under an employee share scheme (paragraph 130-85(1)(a))

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

As stated in response to Question 1, as Participants are granted Performance Rights under the Plan in relation to their employment, which provide them with a beneficial interest in a right to acquire a beneficial interest in Shares, they will be taken to have acquired ESS interests under an ESS and paragraph 130-85(1)(a) will be satisfied.

Subdivision 83A-B or 83A-C applies to the Performance Rights (paragraph 130-85(1)(b))

Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states:

"This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount."

Under the Plan, Performance Rights may be acquired by Participants for no consideration or otherwise at a discount. As such, Subdivision 83A-B will apply to those Performance Rights (unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C would apply instead). Therefore, paragraph 130-85(1)(b) is satisfied.

The ESS interest arises because of an interest you hold in an employee share trust (paragraph 130-85(1)(c))

As outlined above, Performance Rights granted to Participants under the Plan constitute ESS interests, as defined, as they provide Participants with a beneficial interest in a right to acquire a beneficial interest in the Shares held in the Trust.

Subsection 130-85(4) provides that an EST for an employee share scheme (having the meaning given by subsection 83A-10(2)) is 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).

As stated in the response to Question 1, the Plan is an ESS within the meaning of subsection 83A-10(2) because it is a scheme under which rights to acquire beneficial interests in a right to acquire a beneficial interest in Shares are provided to employees in relation to their employment.

Company A has established the Trust to facilitate the Plan by acquiring Shares and allocating those Shares to Participants in order to satisfy the Performance Rights granted to those Participants under the ESS. A Participant's beneficial interest in a Share (being an ESS interest under paragraph 83A-10(1)) is itself provided under the same Plan under which Performance Rights are granted to Participants in relation to the Participant's employment. Paragraphs 130-85(4)(a) and (b) of the definition of an EST are satisfied because the Trustee:

• acquires Shares in Company A
• ensures those Shares (which are ESS interests under subsection 83A-10(1)), are provided under the Plan (each being an 'employee share scheme' as defined in subsection 83A-10(2)) to Participants (who are employees of the Company A TCG) by allocating those shares to the Participants in accordance with the Trust Deed and the terms of the Plan.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the Trust.

Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean:

'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.

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'?

Whether the 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 Deed.

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental.

In the present case, the Trust Deed supports the conclusion that the Trustee may only use irretrievable cash contributions received from Company A or any subsidiary member of the Company A TCG to acquire Shares for Participants in accordance with the Plan. All other duties and general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with Shares to be acquired for Participants and paragraph 130-85(4)(c) is satisfied.

Therefore, the Commissioner considers the Trust to be an EST based on the terms of the Trust Deed and paragraph 130-85(1)(c) is satisfied.

As all of the conditions in subsection 130-85(1) are satisfied, CGT event E5 is the CGT event that will apply under the terms of the Plan at the time that Participant becomes absolutely entitled to the Shares as against the Trustee.

Question 2b

Summary

A capital gain or loss that arises to the Trustee at the time when CGT event E5 happens in relation to Shares held by the Trustee under the Plan will be disregarded under section 130-90 if the Participants acquire the Shares for the same or less than the cost base of the shares in the hands of the Trustee.

Detailed reasoning

Exemptions under section 130-90

Subject to subsection 130-90(2), any capital gain or loss that the Trustee makes if CGT event E5 happens, is disregarded if subsection 130-90 applies.

Shares held to satisfy the future exercise of rights acquired under employee share schemes (subsection 130-90(1))

Subsection 130-90(1) applies to disregard any capital gain or loss made by an employee share trust if all of the following apply:

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

(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 (paragraph 130-90(1)(d))

As stated above in response to Question 2(a), the CGT event E5 happens under the terms of the Plan when the Participant becomes absolutely entitled to a Share as against the Trustee. Under subsection 130-85(2), Participants are taken to be absolutely entitled to the Shares held by the Trustee from the time they were granted the Performance Right under the terms of the Plan. Therefore, paragraph 130-90(1)(a) will be satisfied.

Paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a Share (as defined in section 995-1), being a share in the capital of Company A held by the Trustee to which a Participant is absolutely entitled to upon the vesting (or exercise if applicable) of a Performance Rights granted under the Plan.

Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a Share on the vesting of a Performance Right, and if applicable, by exercising a vested Performance Right, in accordance with the Plan.

Paragraph 130-90(1(d) is satisfied because as stated above:

• the Plan is an 'employee share scheme' for the purpose of Division 83A under which ESS interests are provided to Participants in relation to their employment
• Subdivision 83A-B or 83A-C will apply, as Participants may acquire Performance Rights under the Plan at a discount.

Accordingly, all the conditions in subsection 130-90(1) have been satisfied.

As all the conditions in subsection 130-90(1) are satisfied, any capital gain or loss that arises for the Trust at the time when CGT event E5 happens will be disregarded if the Shares are acquired by the Participant for the same or less than the cost base of the Shares in the hands of the Trust.