Edited version of private advice

Authorisation Number: 1052334533174

Date of advice: 21 November 2024

Ruling

Subject: Employee share trust

Question 1

Will the irretrievable cash contributions by Company X to the Trustee to fund subscription for, or on-market acquisition of, Shares by the Trustee 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 2

Will a capital gain or capital loss that arises for the Trustee at the time when the Participants of the Plans become absolutely entitled to the Shares in Company X be disregarded under section 130-90 of the ITAA 1997, if the Participants 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 periods:

Income years ending 30 June 20XX to 30 June 20YY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

Company X

1.    Company X is the head company of an income tax consolidated group (Group).

2.    Company X is an employer that makes contributions to the Company X Employee Share Plan Trust (Trust) for its employees who participate in employee shares schemes (ESS).

ESS

3.    Company X established a number of ESS plans (Plans).

4.    For the purposes of this Ruling, shares in Company X are referred to as 'Shares'.

5.    The Plans provides eligible employees with rights to acquire Shares (Rights), options to acquire Shares (Options) and Shares that are subject to dealing restrictions (Restricted Shares) (collectively, Awards).

6.    The Rights and Options granted under the Plans are either for nil consideration or subject to deferred taxation under Subdivision 83A-C of the ITAA 1997.

7.    Some Rights and Options offered under the Plans may be satisfied in cash instead of Shares.

8.    The Restrictive Shares granted under the Plans are for nil consideration.

9.    Eligible employees are invited to participate in the relevant Plans via an invitation letter setting out the terms and conditions of the offer (Invitation Letter).

10.    For the purposes of this Ruling, an eligible employee or participant who has been granted one or more Awards under the Plans is referred to as aParticipant.

Trust

11.    The Trust was established by Company X and trustee of the Trust (Trustee)

12.    The Trust was established for the sole purpose of subscribing for, acquiring, holding and transferring Shares in connection with ESS plans established by Company X for the benefit of the Participants in those plans.

Trust Deed and related matters

13.    The Trust operates under the terms of the trust deed executed on XX XX 20XX (Trust Deed) as described below.

14.    The Trustee must hold a Participant's allocated Shares on trust of, and on behalf of, that Participant.

15.    Each Participant will be the beneficial owner of and absolutely entitled to their allocated Shares and all benefits and privileges attached to, or resulting from holding, those allocated Shares.

16.    The Trustee must hold all other Trust assets (including unallocated Shares), on trust of, and on behalf of, certain Participants and employees of Company X generally.

17.    Nothing in the Trust Deed confers or is intended to confer on Company X any charge, lien or any other proprietary right or proprietary or beneficial interest in the Trust assets.

18.    Subject to the Trust Deed, the applicable law (including in relation to subsection 130-85(4) of the ITAA 1997, and statements or guidance of the Commissioner of Taxation) and certain other conditions, the Trustee in its reasonable discretion has the power to do all things a trustee is permitted to do by law in respect of the Trust and the Trust assets, including, amongst other things, the following:

•                     to enter into and execute all contracts, deeds and other documents and do all acts, matters or things it in its discretion considers necessary to give effect to and carry out the trusts, authorities, rights, powers and discretions conferred on the Trustee under the Trust Deed;

•                     to enter into and give undertakings;

•                     to acquire, hold, dispose or otherwise deal with on any terms any Trust assets for the purposes of the Trust Deed;

•                     to subscribe for, purchase or otherwise acquire Trust assets or rights which the Trustee is authorised by the Trust Deed to acquire, and (where relevant) on such terms and conditions as it thinks fit, and do all things incidental to this activity;

•                     to sell or otherwise dispose of Trust assets or rights which the Trustee is authorised by the Trust Deed to dispose of, and (where relevant) on such terms and conditions as directed by the relevant Participant, and do all things incidental to this activity; and

•                     to receive dividends or distributions in relation to the trust shares and to apply those amounts under the Trust Deed.

19.    Despite any other provision of the Trust Deed, the Trustee:

•                     in its capacity as trustee of the Trust, may only carry out activities that constitute the management of one or more Plans;

•                     is not permitted to offer, issue, transfer or acquire any Share or any right to any Share if to do so would contravene any applicable law and is not obliged to offer, issue, transfer or acquire any Share or any right to any Share where compliance with any applicable law would in the opinion of the Trustee or the board be unduly onerous or impractical;

•                     is not permitted to carry out activities in its capacity as trustee of the Trust that are not matters or things which are necessary or expedient to administer and maintain the Trust and the Trust assets or for the purpose of giving effect to, and carrying out, the trusts, authorities, powers and discretions conferred on the Trustee by the Trust Deed or the law;

•                     is not permitted to carry out activities which result in the Participants being provided with additional benefits other than the benefits that arise from the Trust Deed, rules of the relevant Plan and the relevant terms of participation; and

•                     may not use any Trust assets as security.

20.    The Trustee is not entitled to be paid, whether from the Trust assets or any Participant, any fees or charges for administering the Trust. The Trustee may recover from the Trust assets (excluding from allocated shares, unallocated shares and dividends from allocated shares) all reasonable disbursements actually incurred by the Trustee in performing its duties pursuant to the Trust Deed.

21.    The Trustee may charge Company X any fees, charges, commission and other remuneration (which Company X and the Trustee agree from time to time) and may also seek reimbursements of reasonable disbursements incurred by the Trustee for managing the Trust if not recovered from the Trust assets.

22.    The Trust will be managed and administered so that it satisfies the definition of 'employee share trust' (EST) for the purposes of subsection 130-85(4) of the ITAA 1997.

23.    The Trustee will not hold other securities (which are not Shares).

24.    If the Trustee has received a dealing notice, subject to the Trustee receiving sufficient funds or having sufficient capital as required by that dealing notice and satisfying certain other conditions, the Trustee must:

•                     subscribe for, or purchase the requisite number of Shares on behalf of the relevant Participants or beneficiaries of the Trust generally;

•                     allocate any unallocated Shares to one or more Participants; or

•                     effect a combination of the above.

25.    All funds provided to the Trustee by Company X will constitute accretions to the corpus of the Trust and will not be payable or repayable by the Trustee to Company X or any other entities, other than being paid to Company X as consideration for the subscription of Shares provided such Shares are held under the terms of the Trust Deed.

26.    At the end of the disposal restriction period and subject to certain matters, a Participant may give to the Trustee a withdrawal notice. Upon receipt of a valid withdrawal notice and subject to Company X's approval of that withdrawal notice, the Trustee must transfer the requisite number of allocated Shares into the name of the Participant or any third party as directed by the Participant.

27.    Company X will indemnify the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in performing its duties or in the execution or purported execution of any of its powers, authorities or discretions vested in the Trustee.

28.    Company X will indemnify the Trustee in respect of any tax payable by the Trustee in respect of any unallocated Shares unless the Trustee has sufficient available funds to pay the tax.

29.    Upon the termination of the Trust, all Trust assets are to be distributed in a particular order. If there are any remaining assets (Surplus Assets), the Trustee will transfer the Surplus Assets to an EST established and maintained for the employees or any charity that the Trustee thinks fit.

30.    The Trustee must not pay any of the Surplus Assets to Company X or the Group.

Establishment and on-going administration costs of the Trust

31.    Company X incurred or will incur various costs for the implementation and establishment of the Trust.

32.    Company X will incur various on-going administration costs in respect of the on-going administration and management of the Trust, for services including but not limited to:

a)            employee plan record keeping;

b)            production and dispatch of holding statements to employees;

c)            acquisition of Shares on market, such as brokerage and the allocation of such Shares to Participants;

d)            annual audit of the financial statements; and

e)            preparation of the annual income tax return of the Trust.

Contributions to the Trust

33.    Generally, Company X will wait until the Rights or Options vest before providing the Trust with the irretrievable cash necessary to acquire Shares to satisfy the acquisition or subscription of Shares related to those Awards. In the event that Restricted Shares are granted, Company X will also typically wait until the grant of Restricted Shares to make related contributions to the Trust.

34.    Where it makes commercial sense to do so, Company X may make cash contributions to the Trust prior to the Awards being issued or granted to the Participants.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 95(1)

Income Tax Assessment Act 1936 Section 6-5

Income Tax Assessment Act 1936 Section 6-10

Income Tax Assessment Act 1936 Section 10-5

Income Tax Assessment Act 1936 Subsection 83A-10(1)

Income Tax Assessment Act 1936 Subsection 83A-10(2)

Income Tax Assessment Act 1936 Subsection 83A-20(1)

Income Tax Assessment Act 1936 Subsection 83A-105(1)

Income Tax Assessment Act 1936 Section 83A-340

Income Tax Assessment Act 1936 Subdivision 83A-B

Income Tax Assessment Act 1936 Subdivision 83A

Income Tax Assessment Act 1936 Subsection 102-5(1)

Income Tax Assessment Act 1936 Section 102-20

Income Tax Assessment Act 1936 Subsection 104-75(1)

Income Tax Assessment Act 1936 Subsection 104-75(2)

Income Tax Assessment Act 1936 Subsection 104-75(3)

Income Tax Assessment Act 1936 Subsection 104-75(4)

Income Tax Assessment Act 1936 Division 128

Income Tax Assessment Act 1936 Subsection 130-85(1)

Income Tax Assessment Act 1936 Paragraph 130-85(1)(a)

Income Tax Assessment Act 1936 Paragraph 130-85(1)(b)

Income Tax Assessment Act 1936 Paragraph 130-85(1)(c)

Income Tax Assessment Act 1936 Subsection 130-85(2)

Income Tax Assessment Act 1936 Subsection 130-85(4)

Income Tax Assessment Act 1936 Paragraph 130-85(4)(a)

Income Tax Assessment Act 1936 Paragraph 130-85(4)(b)

Income Tax Assessment Act 1936 Paragraph 130-85(4)(c)

Income Tax Assessment Act 1936 Section 130-90

Income Tax Assessment Act 1936 Subsection 130-90(1)

Income Tax Assessment Act 1936 Subsection 130-90(1A)

Income Tax Assessment Act 1936 Subsection 130-90(2)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

Question 1

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 Income Tax Assessment Act 1936 (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 provides a list of provisions that include in your assessable income amounts that are statutory income.

The irretrievable cash contributions that the Trustee receives from Company X are capital receipts as they form the corpus of the Trust which the Trustee will use to subscribe for, or acquire, Shares that will be held by the Trust on behalf and for the benefit of the Participants under the Plans.

None of the provisions listed in section 10-5 are relevant in the present circumstances.

Accordingly, the irretrievable cash contributions received by the Trustee from Company X is not ordinary income under section 6-5 or statutory income under section 6-10, and therefore not assessable income of the Trust (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

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 (except a unit trust or a trust to which Division 128 applies) 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)).

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

If CGT event E5 happens, the trustee makes a capital gain or capital 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)). However, any capital gain or capital loss the trustee makes is disregarded for employee share trusts (Note in subsection 104-75(4)).

Absolutely entitled in accordance with subsection 130-85(2)

Subsection 130-85(2) treats a beneficiary as absolutely entitled to the relevant share or right from the time of acquisition of the ESS interest until they no longer have the ESS interest in the share or right. 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 EST.

Participants acquire ESS interests under the Plans which are ESS

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.

Some Rights and Options offered under the Plans may be satisfied in cash instead of Shares, and are therefore indeterminate rights.

Paragraph 130-85(1)(a) is satisfied because:

•                     the Participants are beneficiaries of the Trust, which was established for the sole purpose of subscribing for, acquiring and holding Shares in connection with the Plans;

•                     if the Awards are Options or Rights:

-              which are not indeterminate rights, the relevant Plans are ESS under which Participants are provided with rights to acquire beneficial interests in Shares (i.e. ESS interests) in relation to their employment and as employees of Company X;

-              which are indeterminate rights, they are not rights to acquire beneficial interests in shares (i.e. they are not ESS interests at the time they are granted). However, where those indeterminate rights are ultimately satisfied with Shares instead of cash, section 83A-340 will operate to treat those Options or Rights to have always been ESS interests within the meaning of subsection 83A-10(1); and

•                     if the Awards are Restricted Shares, the relevant Plan is an ESS under which Participants are provided with beneficial interests in Shares (i.e. ESS interests) in relation to their employment and as employees of Company X.

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 ESS at a discount.

Paragraph 130-85(1)(b) is satisfied because:

•                     if Options or Rights granted under the Plans are either for nil consideration (i.e. they are acquired at a discount) or subject to deferred taxation under Subdivision 83A-C of the ITAA 1997, and those Options or Rights are not indeterminate rights, they are ESS interests to which Subdivision 83A-B or 83A-C will apply;

•                     the Restrictive Shares granted under the Plans are for nil consideration (i.e. they are acquired at a discount), and are ESS interests to which Subdivision 83A-B will apply, unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C will apply; and

•                     if Options or Rights granted under the Plans are for nil consideration (i.e. they are acquired at a discount), and those Options or Rights are indeterminate rights, where those indeterminate rights are ultimately satisfied with Shares instead of cash, section 83A-340 will operate to treat those Options or Rights to have always been ESS interests within the meaning of subsection 83A-10(1).Hence, they are ESS interests to which Subdivision 83A-B will apply, unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C will apply.

The Awards arose because of an interest the Participants hold in an EST

As outlined earlier, the Participants of the Plans are beneficiaries of the Trust as they have an interest in the Shares that are held in the Trust.

Subsection 995-1(1) defines 'employee share trust' as having the meaning given by Subsection 130-85(4).

Subsection 130-85(4) defines an EST 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 EST are satisfied because the Trust:

a)            acquires Shares in a company, namely Company X; and

b)            ensures that ESS interests (being the Awards that are granted under the Plans which are settled with Shares (i.e. not settled with cash) and the Restricted Shares granted) are provided under the ESS (established by the Plans) by allocating Shares to Participants in accordance with the Trust Deed, the Plans and the Invitation Letters.

Paragraph 130-85(4)(c) of the definition of an EST provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The Commissioner's view 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 a trust is an 'employee share trust' for the purposes of subsection 130-85(4) requires an analysis of what the trustee actually does, not only the powers and duties that are prescribed in the trust's deed.

Having regard to the scheme as set out in the 'Relevant facts and circumstances', it is our view that the Trust is an 'employee share trust' for the purposes of subsection 130-85(4). Hence, paragraph 130-85(1)(c) is satisfied.

Absolutely entitled and CGT event E5

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 allocated the Awards (which are ultimately satisfied with Shares) under the Plans, pursuant to subsection 130-85(2), and CGT event E5 will happen at the time.

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

Subsection 130-90(1A) applies to shares held for future acquisition under ESS, while subsection 130-90(1) applies in respect of shares held to satisfy the future exercise of rights acquired under ESS.

Subject to subsection 130-90(2), any capital gain or capital loss made by an EST, to the extent that it results from CGT event E5, is disregarded if either subsection 130-90(1A) or subsection 130-90(1) applies.

Subsection 130-90(1A) applies to the Restricted Shares

Subsection 130-90(1A) states that any capital gain or capital loss made by an EST to the extent that it results from CGT event E5 is disregarded if:

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

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

c)            Subdivision 83A-B or 83A-C applies to the ESS interest.

Subsection 130-90(1A) applies to the Restricted Shares because:

a)            the Restricted Shares (which are 'ESS interests' under subsection 83A-10(1)) are CGT assets of the Trust (shares are CGT assets pursuant to subsection 100-25(2));

b)            CGT event E5 happens to those Restricted Shares once Participants under the relevant Plan become absolutely entitled to them pursuant to subsection 130-85(2) when they are allocated the relevant Shares by the Trustee; and

c)            as mentioned earlier, Subdivision 83A-B or 83A-C would apply to the Restricted Shares.

Subsection 130-90(1) applies to the Rights and Options to acquire Shares

Subsection 130-90(1) states that any capital gain or capital loss made an EST to the extent that it results from a CGT event is disregarded if:

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

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

c)            the beneficiary had acquired a beneficial interest in the share by exercising a right; and

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

Subsection 130-90(1) applies to the relevant Options or Rights to acquire Shares because:

a)            as mentioned earlier, at the time the Participant becomes absolutely entitled to the Shares as against the Trustee, CGT event E5 will happen. 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 relevant Rights or Options under the Plans;

b)            CGT event E5 happens in relation to the Shares;

c)            the Participants had acquired beneficial interests in the Shares upon the vesting or exercise of relevant Options or Rights under the Plans (except for where the Options and Rights which are settled by cash instead of Shares); and

d)            as mentioned earlier, the Awards granted under the Plans are ESS interests to which either Subdivision 83A-B or 83A-C applies (including where the Options and Rights which are indeterminate rights to which section 83A-340 may apply and which are satisfied with Shares instead of cash).

Conclusion

Subsection 130-90(2) requires that the employee does not acquire the beneficial interest in the share for more than its cost base in the hands of the EST at the time that CGT event E5 happens.

As such, any capital gain or capital loss that arises for the Trust established pursuant to the Trust Deed at the time when CGT event E5 happens 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 Trust.

For completeness, 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 give rise to CGT event E7 happening.