Edited version of private advice

Authorisation Number: 1052377713112

Date of advice: 3 April 2025

Ruling

Subject: Employee share trust

Question 1

Will the irretrievable cash contributions that are made by the Company, or a subsidiary member of its tax consolidated group, to the Trustee of the Trust, to fund the subscription for, or acquisition of, shares in the Company for the Trust, be assessable income of the Trust pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 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 Plan become absolutely entitled to the shares in the Company that are held by the Trust (CGT event E5), be disregarded under section 130-90 of the Income Tax Assessment Act 1997, if the participants acquire the shares for the same or less than the cost base of the shares in the hands of the trustee?

Answer

Yes.

Question 3

To the extent the Company is a private company for the purposes of the Income Tax Assessment Act 1936 in a given income year, will the irretrievable cash contributions that are made by the Company, or a subsidiary member of its tax consolidated group, to the Trustee, to fund the acquisition of shares in the Company by the Trust for the purposes of the Plan in respect of rights granted to participants, be treated as a deemed dividend within the meaning of Division 7A of the Income Tax Assessment Act 1936?

Answer

No.

This ruling applies for the following periods:

The income years ending 30 June 20XX to 30 June 20YY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

The Company is an Australian company with its shares listed on the Australian Securities Exchange.

The Company is an Australian resident for tax purposes and is the head company of a tax consolidated group that carries on a business.

The Company is currently the only employer entity within the group but any one of the subsidiary members of the Company's tax consolidated group may also become an employer entity.

The Company operates an employee share plan as part of its remuneration and reward program for its employees (the Plan). The Plan is governed by the Plan Rules.

Under the Plan, participants are granted rights to acquire shares in the Company for no consideration. The rights are subject to vesting conditions until the relevant vesting date. Upon vesting, the shares to which the rights relate are held within the Trust on behalf of the participants until a participant directs the transfer of legal ownership of the shares to themselves.

The Trustee of the Trust is an independent third party.

The Company, or a subsidiary member of the consolidated group, will make cash contributions to the Trustee from time to time to fund the acquisition of shares in the Company. These contributions are irretrievable and non-refundable because the Company and its subsidiaries are not beneficiaries of the Trust and are not entitled to any part of the Trust fund (including shares held by the Trustee). The cash contributions form part of the corpus of the Trust.

On a particular date, the Trust Deed was amended and the amended Trust Deed took effect from that date onwards. The amended Trust Deed removed certain powers or duties that were considered not merely incidental to those activities described in paragraphs 130-85(4)(a) and (b) of the Income Tax Assessment Act 1997. The Trustee confirmed that up to the date of amendment, the Trustee had not undertaken any of the powers or duties that had been removed by the amended Trust Deed.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 130-90

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

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 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 contributions made by the Company, or a subsidiary member of the consolidated group, are capital receipts as they form part of the corpus of the Trust which the Trustee will use to subscribe for, or acquire, shares in the Company that will be held on trust for the benefit of participants of the Plan. Therefore, they are not assessable under section 6-5.

None of the provisions listed in section 10-5 are relevant in the present circumstances. The irretrievable cash contributions made by the Company, or a subsidiary member of the consolidated group, to the Trustee of the Trust will therefore not be included in the assessable income of the Trust under section 6-10.

As the irretrievable cash contributions are neither ordinary income nor statutory income, the contributions are not assessable income of the Trust. See 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

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

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 83-B or 83-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, and

•                     the Plan is a scheme under which participants are provided with rights in relation to their employment that provides them with a right to acquire shares in the Company.

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

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 rights are provided to participants of the Plan for no consideration, they are acquired by those participants at a discount and 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 rights arose because of an interest the participants hold in an employee share trust

The participants of the Plan are beneficiaries of the Trust as they have an interest in the shares that are held within 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 Trustee:

•                     acquires shares in the Company, and

•                     ensures those shares (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 or a subsidiary member of the group) by allocating those shares to the participants in accordance with the Trust Deed and the Plan Rules.

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).

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.

In the present case, the Trustee confirmed that up to the date of amendment, the Trustee had not undertaken any of the powers or duties that had been removed from the original Trust Deed by the amended Trust Deed (because they were not considered merely incidental to those activities described in paragraphs 130-85(4)(a) and (b) of the ITAA 1997). The amended Trust Deed contains only powers and duties that are merely incidental as required by paragraph 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 rights 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

However, subject to subsection 130-90(2), any capital gain or capital loss made by the trustee, 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

(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 shares held by the Trustee for the Plan because:

•                     CGT event E5 happens when the rights are granted to participants

•                     CGT event E5 happens in relation to shares in the Company

•                     participants of the Plan acquire a beneficial interest in those shares when they exercise their rights, and

•                     as explained earlier, Subdivision 83A-B or 83A-C would apply to those rights as they are acquired by participants of the Plan at a discount.

Conclusion

As the requirements under subsection 130-90(1) are met in relation to the shares held by the Trustee for the Plan, any capital gain or capital loss made by the Trustee 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 Trustee at the time the CGT event happens).

Question 3

Detailed reasoning

Division 7A of the ITAA 1936 treats certain amounts as dividends paid by a private company, making those amounts assessable income of the shareholder or associate under section 44 of the ITAA 1936.

Subsection 109C(1) of the ITAA 1936 states that a private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either:

(a)          the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or

(b)          a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time.

'Entity' is defined in section 109ZD of the ITAA 1936 as having the meaning given by section 960-100 of the ITAA 1997 and includes a trust and a trustee of a trust (subsections 960-100(1) and 960-100(2)).

However, Division 7A does not apply to a payment made to a shareholder, or an associate of a shareholder, in their capacity as an employee (as defined in the Fringe Benefits Tax Assessment Act 1986 (FBTAA)) or an associate of such an employee (subsection 109ZB(3) of the ITAA 1936).

An 'employee' is defined in subsection 136(1) of the FBTAA to mean a current employee (a person who receives, or is entitled to receive, salary or wages), a future employee (a person who will become a current employee), or a former employee (a person who has been a current employee).

'Associate' is defined in section 109ZD as having the meaning given by section 318 of the ITAA 1936. Under subsection 318(1), an associate of an entity that is a natural person (otherwise than in the capacity of trustee) includes a trustee of a trust where the entity benefits under the trust.

The irretrievable cash contributions that are made by the Company, or a subsidiary member of the group, to the Trustee would satisfy subsection 109C(1) if the Trustee held shares at the time the contributions are made.

However, the participants of the Plan are employees (as defined in subsection 136(1) of the FBTAA) and they receive rights in their capacity as employees. Upon the exercise of their rights, the participants become beneficiaries of the Trust. As the participants benefit under the Trust, the Trustee is considered an associate of the participants.

As the contributions that are paid to the Trustee from time to time as part of the Plan are made to the Trustee in its capacity as an associate of the participants, the contributions will fall within the exception under subsection 109ZB(3).

Accordingly, where the Company is a private company in a given income year, the irretrievable cash contributions it, or a subsidiary member of the group, makes to the Trustee will not be deemed to be dividends under Division 7A.