Class Ruling

CR 2001/28

Income tax: capital gains: employee share scheme: Telstra Corporation Limited

• Please note that the PDF version is the authorised version of this ruling.

FOI status:

may be releasedFOI number: I 1023552

Preamble

What this Class Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the 'tax law(s)' identified below apply to the defined class of persons, who take part in the arrangement to which this Ruling relates.

Tax law(s)

2. The tax law(s) dealt with in this Ruling are:

•

Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936);

•

Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997); and

•

Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997).

Class of persons

3. The class of persons to whom this Ruling applies are all Australian residents who participated in either or both of the Telstra Employee Share Ownership Plan No. I (TESOP I), and the Telstra Employee Share Ownership Plan No. II (TESOP II).

4. This Ruling only applies to those employees who made an election under section 139E of ITAA 1936 to be assessed on the discount given in relation to shares in the year in which they were acquired by the employee for the purposes of Division 13A of ITAA 1936.

Qualifications

5. The Commissioner makes this Ruling based on the precise arrangement identified in this Ruling.

6. The class of persons defined in this Ruling may rely on its contents provided the arrangement described below at paragraphs 10 to 23 is carried out in accordance with the details of the arrangement provided in this Ruling.

7. If the arrangement described in this Ruling is materially different from the arrangement that is actually carried out:

(a)

this Ruling has no binding effect on the Commissioner because the arrangement entered into is not the arrangement on which the Commissioner has ruled; and

(b)

this Ruling may be withdrawn or modified.

8. A Class Ruling may only be reproduced in its entirety. Extracts may not be reproduced. Because each Class Ruling is subject to copyright, except for any use permitted under the Copyright Act 1968 no Class Ruling may be reproduced by any process without prior written permission from the Commonwealth. Requests and enquiries concerning reproduction and rights should be sent to:

The Manager

Legislative Services, AusInfo

GPO Box 1920

CANBERRA ACT 2601.

Date of effect

9. This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Arrangement

10. The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the arrangement are:

•

the Telstra Employee Share Ownership Plan 1997 offer document;

•

the Telstra Employee Share Ownership Plan Loan Scheme rules;

•

the Telstra Employee Share Ownership Plan Trust Deed;

•

the Telstra Employee Share Ownership Plan 1999 offer document;

•

the Telstra Employee Share Ownership Plan II Loan Scheme rules;

•

the Telstra Employee Share Ownership Plan II Trust Deed; and

•

the application for the Class Ruling dated 1 June 2001.

The schemes

11. The Commonwealth of Australia made share offers to Telstra (and related company) employees in November 1997 and October 1999 under two employee share schemes (as defined in Division 13A of the ITAA 1936). These schemes are the:

•

Telstra Employee Share Ownership Plan No. I ("TESOP I"); and

•

Telstra Employee Share Ownership Plan No. II ("TESOP II").

12. Shares (other than Loyalty Shares) were allocated to employees under TESOP I and TESOP II on the following dates:

•

15 November 1997 for TESOP I; and

•

16 October 1999 for TESOP II.

Key aspects of TESOP I AND TESOP II

Provision of shares without cost to Telstra employees

13. Both TESOP I and TESOP II provided extra shares to employees (without cost to the employee) where the employees acquired shares in Telstra in accordance with the relevant terms of TESOP I and TESOP II.

14. In the case of TESOP I, these extra shares were referred to as "Extra Loan Shares" or "Extra Non-Loan Shares" depending upon whether the employee acquired shares in Telstra using a loan provided by Telstra or their own funds.

15. In the case of TESOP II, these extra shares were referred to as "Extra Shares" and were based on the number of shares the employee acquired in Telstra under the allocation of shares in Telstra which was guaranteed by the Commonwealth of Australia ("Guaranteed Allocation").

16. Extra Loan Shares, Extra Non-Loan Shares and Extra Shares are/were all held in trust by Telstra ESOP Trustee Pty Ltd (the "Trustee") (see explanation below for details).

Provision of interest free loan to Telstra employees

17. Both TESOP I and TESOP II provided for loans to employees by Telstra to assist those employees to acquire shares in Telstra. These shares were referred to as "Loan Shares". The maximum number of shares employees could acquire using the loan provided by Telstra was:

(i)

under TESOP I - 2000 shares; and

(ii)

under TESOP II - 400 shares.

Loan Shares are/were held in trust by the Trustee.

18. The Loan Shares were provided to the employees at a nominal discount to their market value (as determined under Division 13A of the ITAA 1936).

19. TESOP I also permitted an employee to acquire shares using their own funds if they did not wish to borrow an amount which Telstra offered to provide to the employee. These are/were referred to as "Non-Loan Shares". Non-Loan Shares are not held in trust - they are owned by the employee.

Provision of Loyalty Shares

20. Both TESOP I and TESOP II provided additional shares ("Loyalty Shares") to eligible employees of the Telstra group who:

(iii)

acquired shares in Telstra in accordance with the relevant terms of TESOP I and TESOP II; and

(iv)

retained the shares for 12 months after the date of acquiring those shares.

21. The Loyalty Shares when provided under TESOP II are/were held in trust by the Trustee. These shares are referred to as "TESOP II Loyalty Shares". The Loyalty Shares acquired under TESOP I were not held in trust.

Restriction periods under TESOP I and TESOP II

22. Under both TESOP I and TESOP II an employee is prevented from dealing with or disposing of the shares before a particular time ('the restriction period'). The table below sets out when the restriction period in relation to the relevant TESOP I and TESOP II shares expires.

23. There is no restriction period for the Non-Loan Shares or the Loyalty Shares acquired under TESOP I. There is also no restriction period for the shares the employee acquired under the Guaranteed Allocation in connection with TESOP II .

Ruling

24. Where an employee of Telstra (or a related group company) made an election under section 139E of the ITAA 1936 for the year in which Loan Shares, Extra Loan Shares, Extra Non-Loan Shares or Extra Shares were acquired by the Trustee on the employee's behalf (and in the case of TESOP II Loyalty Shares, when the right to acquire the TESOP II Loyalty Shares was acquired by the employee), the employee is taken to have acquired the relevant shares for capital gains tax purposes at the time the employee becomes absolutely entitled to the shares as against the Trustee (as set out in the table following paragraph 30).

25. Where an employee of Telstra (or a related group company) made an election under section 139E of the ITAA 1936, the date of acquisition as determined in paragraph 24 above is also the relevant date to determine the employee's cost base of the relevant shares under section 130-80(2) of the ITAA 1997.

26. Where an employee made an election under section 139E of the ITAA 1936, the date of acquisition as referred to in paragraph 24 above is also the relevant date for the commencement of the 12 month holding period required under section 115-25 of the ITAA 1997 for the employee to be eligible for a discount capital gain on disposal of the relevant shares.

Explanations

27. The implications for the employee in relation to the relevant shares acquired by the employee under TESOP I and TESOP II as detailed below are only relevant to those employees who made an election under section 139E of the ITAA 1936 for the year in which the relevant shares were acquired by the Trustee (or the rights acquired by the employee in the case of TESOP II Loyalty Shares). Further, the analysis below applies only to shares which were allocated under TESOP I and TESOP II prior to 28 February 2001.

28. This Class Ruling and the following analysis do not apply to an employee who acquired shares under TESOP I or TESOP II and did not make an election under section 139E of the ITAA 1936 in respect of those shares.

Time of Acquisition by the Employee

29. Under subsection 109-5(2) of the ITAA 1997, the employee is taken to 'acquire' the shares for capital gains tax purposes at the time the employee becomes absolutely entitled to the shares as against the Trustee in accordance with CGT event E5 and subsection 104-75(2) of the ITAA 1997.

30. CGT event E5 happens when a person becomes absolutely entitled to a capital gains tax asset of a trust as against the trustee. The table below sets out precisely when, under TESOP I and TESOP II, the employees become absolutely entitled to the Loan Shares, Extra Loan Shares, Extra Non-Loan Shares, Extra Shares or TESOP II Loyalty Shares as against the Trustee and therefore when CGT event E5 happens in relation to the relevant shares.

Absolute Entitlement under TESOP I and TESOP II

31. The time at which employees become absolutely entitled to the Loan Shares, Extra Loan Shares, Extra Non-Loan Shares, Extra Shares and TESOP II Loyalty Shares is described in more detail below.

TESOP I - Loan Shares and Extra Loan Shares

For employees who remain with the Telstra group

32. While:

(i)

the relevant employment continues with the Telstra Group; and

(ii)

either an amount is outstanding against the Share Loan or 3 years have not expired from the date of acquisition of the relevant shares;

the Loan Shares and Extra Loan Shares are held by the Trustee on the employee's behalf.

When both:

(i)

3 years have expired from the date of acquisition of the relevant shares and

(ii)

the Share Loan has been repaid in full;

the Trustee must transfer the Loan Shares and Extra Loan Shares to the employee.

33. When:

(i)

3 years have expired from the date of acquisition of the relevant shares; but

(ii)

the Share Loan has not been repaid in full;

the employee may either pay back the loan with cash (and have the Loan Shares and Extra Loan Shares transferred to them) or arrange through the Trustee to sell the Loan Shares and/ or Extra Loan Shares on the employee's behalf.

For employees whose relevant employment with the Telstra group ceases

34. If:

(i)

the relevant employment with the Telstra Group ceases; but

(ii)

the Share Loan has not been repaid in full;

the employee can either pay back the loan with cash (and have the Loan Shares and Extra Loan Shares transferred to them) or arrange with the Trustee to sell the Loan Shares and Extra Loan Shares on the employee's behalf.

35. If the employee does not arrange with the Trustee to sell the Loan Shares and Extra Loan Shares on the employee's behalf within the specified times under TESOP I, the Trustee is obligated to sell the Loan Shares and Extra Loan Shares on the employee's behalf in accordance with the terms of TESOP I.

36. If:

(i)

the relevant employment with the Telstra Group ceases; and

(ii)

the Share Loan has been repaid in full after the due date for payment of the final instalment on the shares;

the Trustee is obligated to transfer the Loan Shares to the employee.

Absolute entitlement to TESOP I Loan Shares and Extra Loan Shares

37. The employee becomes absolutely entitled as against the Trustee to the Loan Shares and Extra Loan Shares acquired under TESOP I:

•

when both the relevant employee's Share Loan is repaid in full and 3 years have expired from the date of acquisition of the relevant shares. At this time the Trustee must transfer the Loan Shares and Extra Loan Shares to the employee;

•

where 3 years have expired from the date of acquisition of the relevant shares but the Share Loan has not been repaid in full, at the earlier of the following points in time:

(i)

when the employee repays the Share Loan in full; or

(ii)

immediately prior to when the Trustee disposes of the shares on the employee's behalf;

•

where the relevant employment with the Telstra Group ceases and the Share Loan has been repaid in full after the due date for payment of the final instalment on the shares, at the point in time when the relevant employment with the Telstra group ceases. At this time the Trustee must transfer the Loan Shares and Extra Loan Shares to the employee; or

•

where the relevant employment with the Telstra Group ceases and the Share Loan has not been repaid in full, at the earlier of the following points in time:

(i)

when the employee repays the Share Loan in full; or

(ii)

immediately prior to when the Trustee disposes of the shares on the employee's behalf.

TESOP I - Extra Non-Loan Shares

38. The Trustee is obligated to transfer the Extra Non-Loan Shares to the employee at the earlier of:

(i)

the time when the relevant employment with the Telstra Group ceases; or

(ii)

the time when 3 years have expired from the date when the Extra Non-Loan Shares were acquired.

Absolute entitlement to TESOP I Extra Non-Loan Shares

39. The employee becomes absolutely entitled as against the Trustee to the Extra Non-Loan Shares at the earlier of:

(i)

the time when the relevant employment with the Telstra Group ceases; or

(ii)

the time when 3 years have expired from the date when the Extra Non-Loan Shares were acquired.

TESOP II - Extra Shares and Loyalty Shares

40. The employee may instruct the Trustee to sell the Extra Shares and/ or Loyalty Shares on behalf of the employee at the earlier of:

(i)

the time when the relevant employment with the Telstra Group ceases; or

(ii)

the time when 3 years have expired from the date when the relevant Extra shares were acquired.

41. The Trustee must (unless the employee has previously instructed it to deal with the shares) transfer the Extra Shares and/ or Loyalty Shares to the employee in accordance with TESOP II.

Absolute entitlement to TESOP II Extra Shares and Loyalty Shares

42. The employee becomes absolutely entitled as against the Trustee to the Extra Shares and/ or Loyalty Shares at the earlier of:

(i)

the time when the relevant employment with the Telstra Group ceases; or

(ii)

the time when 3 years have expired from the date when the relevant shares were acquired.

TESOP II - Loan Shares

For employees who remain with the Telstra group

43. While:

(i)

the relevant employment with the Telstra Group continues; and

(ii)

either an amount is outstanding against the Share Loan or 3 years have not expired from the date of the acquisition of the relevant shares;

the Loan Shares are held by the Trustee on the employee's behalf.

44. When both:

(i)

3 years have expired from the date of acquisition of the Loan Shares; and

(ii)

the Share Loan has been repaid in full;

the Trustee is obligated to transfer the Loan Shares to the employee at the later of the time when the 3 year period expired or the Share Loan was repaid in full.

If 3 years expire or for employees whose relevant employment with the Telstra group ceases

45. Where:

(i)

3 years have expired from the date of acquisition of the Loan Shares;

or

(ii)

the relevant employment with the Telstra group ceases;

and

(iii)

the Share Loan has not been repaid in full;

the employee may repay the amount on the Share Loan (and have the Loan Shares transferred to him) or arrange with the Trustee to sell the Loan Shares where the proceeds of the sale will be used to repay the amount outstanding on the Share Loan. If the employee does not repay the Share Loan or arrange with the Trustee to sell the Loan Shares within the specified time limits the Trustee may dispose of the Loan Shares.

Absolute entitlement to TESOP II Loan Shares

46. The employee becomes absolutely entitled as against the Trustee to the Loan Shares under TESOP II:

•

when both:

(i)

the relevant employee's Share Loan is repaid in full; and

(ii)

either 3 years have expired from the date of acquisition of the loan shares or when the relevant employment with the Telstra group ceases.

At this time the Trustee is obligated to transfer the Loan Shares to the employee;

•

Where 3 years have expired from the date of acquisition of the Loan Shares or the relevant employment with the Telstra group ceases and the Share Loan has not been repaid in full, at the earlier of the point in time at which:

(i)

the employee repays the Share Loan; or

(ii)

immediately prior to when the Trustee disposes of the shares on the employee's behalf.

Cost base of the shares for the employee

47. Under section 130-80 of the ITAA 1997 where an employee made an election under section 139E of the ITAA 1936 to be assessed on any discount in the year the relevant shares were acquired by the Trustee on the employee's behalf, the first element of the cost base of the relevant shares acquired by the employee will be the market value (as determined under section 139FA of the ITAA 1936) on the day the employee acquired the relevant shares for capital gains tax purposes. As discussed above, the day the employee acquired the relevant shares for capital gains tax purposes is the day the employee becomes absolutely entitled to the relevant shares.

Commencement of the 12 month holding period

48. Where the shares are disposed of after 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999, the employee will be entitled to the 50% capital gains tax discount where the requirements of Subdivision 115-A of the ITAA 1997 are satisfied. Section 115-25 of the ITAA 1997 states that, to be eligible for the discount capital gain, the employee must hold the shares for at least 12 months from the date the employee acquires the shares. As indicated above, the date of acquisition for capital gains tax purposes is when the employee becomes absolutely entitled to the shares. Therefore, to be eligible for the discount capital gain, the employee must hold the relevant shares for at least 12 months from the date they become absolutely entitled to the shares.

Detailed contents list

49. Below is a detailed contents list for this Class Ruling:

Commissioner of Taxation
18 July 2001

References

ATO references:
NO T2001/012032

Related Rulings/Determinations:

CR 2001/1
TR 92/1
TR 92/20
TR 97/16

Subject References:
acquisition of shares
assignment of rights and entitlements
capital assets
capital gains
capital gains tax
CGT cost base
CGT indexed cost base
cost base
dismissal of employees
disposal of shares
employee related issues
employee share ownership
employee share schemes and options
employees
employer/employee relationship
interposed trusts
multiple sub trusts
resignation of employees
share discounts on employee share
shareholders
shares
trust assets
trust deeds
trust distributions
trust income
trusts
trustees

Legislative References:
ITAA 1936 Div 13A
ITAA 1936 Div 13 of Part III
ITAA 1936 139E
ITAA 1936 139FA
ITAA 1997 3-1
ITAA 1997 3-3
ITAA 1997 130-80
ITAA 1997 130-80(2)
ITAA 1997 104-75(2)
ITAA 1997 109-5(2)
ITAA 1997 115-25
ITAA 1997 115-A