ATO Interpretative Decision

ATO ID 2010/108

Income Tax

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Issue

Is a trust an employee share trust, within the meaning of subsection 130-85(4) of the Income Tax Assessment Act 1997 (ITAA 1997), where that trust obtains shares in a company to satisfy the exercise of rights acquired under an employee share scheme and on exercise allocates and holds those shares for the benefit of employees of the company.

Decision

Yes. A trust that obtains shares in a company to satisfy the exercise of rights acquired under an employee share scheme and on exercise allocates and holds those shares for the benefit of employees of the company, is an employee share trust within the meaning of subsection 130-85(4) of the ITAA 1997, providing the condition in paragraph 130-85(4)(c) of the ITAA 1997 is also met.

Facts

An employer establishes a remuneration scheme under which it provides rights to acquire shares in the employer to employees in relation to the employees' employment. The employees do not pay anything to acquire the rights.

The governing documents of the scheme provide for a trust established by the employer:

•

to acquire shares in the employer on market or via new share issues; and

•

to allocate shares for the benefit of an employee in satisfaction of their rights when exercised; and

•

to hold those shares for the benefit of the employee until the shares are able to be withdrawn from the trust.

The employer makes periodic payments to the trustee to carry out those activities. The payments are accumulated in the trust's bank account and periodically applied to acquire shares.

On application to withdraw shares from the trust, employees may request that the trustee:

•

transfer the shares to them; or

•

sell the shares on their behalf and give them the proceeds net of selling costs.

Dividends or other distributions paid in respect of shares allocated to employees and held by the trustee on their behalf are distributed to the employee as soon as possible after receipt.

Dividends or other distributions paid on unallocated shares are accumulated in the trust and applied towards acquiring further shares for the purposes of the remuneration scheme.

The trust does not engage in:

•

activities unrelated to obtaining shares and providing those shares to employees; or

•

activities which result in employees being provided with additional benefits.

Reasons for Decision

An 'employee share trust' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2) of the ITAA 1997) 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).

The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997.

An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment.

The remuneration scheme is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which rights to acquire shares in the company are provided to employees in relation to the employee's employment.

Under the remuneration scheme, the employer has also established a trust to acquire shares in the company and to allocate those shares to employees to satisfy the rights acquired under the scheme. The beneficial interest in the share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights to acquire the shares are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997.

Therefore, paragraph 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

•

the trust acquires shares in the company,

•

the trust ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the governing documents of the scheme.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require a trustee to undertake incidental activities that are a function of managing the employee share scheme and administering the trust.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental include:

•

the opening and operation of a bank account to facilitate the receipt and payment of money;

•

the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee;

•

the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme;

•

dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme;

•

the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares;

•

the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and

•

receiving and immediately distributing shares under a demerger.

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 merely incidental.

Therefore, the trust is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Year of income:  Year ended 30 June 2010

Legislative References:
Income Tax Assessment Act 1997
   subsection 83A-10(1)
   subsection 83A-10(2)
   subsection 130-85(4)
   paragraph 130-85(4)(a)
   paragraph 130-85(4)(b)
   paragraph 130-85(4)(c)
   subsection 995-1(1)

Keywords
Employee share schemes & options

Siebel/TDMS Reference Number:  1-1UCAYLP; 1-5VR4IKE; 1-CGE5Q5O

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  7 May 2010
Date reviewed:  4 September 2017

ISSN: 1445-2782