1011571835265 | Legal database

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Authorisation Number: 1011571835265

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Ruling

Subject: Employee Share Scheme

Issue 1:

Question:

Will irretrievable contributions of money to the trustee of the X Co executive incentive plan trust (EST) be included in the assessable income of the EST?

Advice/Answers:

No.

Issue 2:

Question:

For the purposes of section 130-90 of the Income Tax Assessment Act 1997 (ITAA 1997);

a) are any unrestricted shares or restricted shares acquired by employees under the executive incentive plan (EIP) a beneficial interest in a share acquired by exercising a right?; and

b) is the EIP participant's beneficial interest in the right an ESS interest to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies?

Advice/Answers:

(a) Yes.

(b) Yes.

Issue 3:

Question:

Where shares are acquired by the trustee of the EST (either on market or via subscription) and a participant in the EIP becomes absolutely entitled to those shares at a later point in time, will any capital gain or capital loss made by

· the trustee of the EST; or

· a beneficiary of the EST (being a participant in the EIP),

that arises as a result of CGT event E5 (section 104-75 of the ITAA 1997) or CGT event E7 (section 104-85 of the ITAA 1997) be disregarded under section 130-90 of the ITAA 1997?

Advice/Answers:

Yes.

Issue 4:

Question:

Is the trustee of the EST capable of making a capital gain or capital loss as a result of CGT event E5 (section 104-75 of the ITAA 1997) at the time a participant becomes absolutely entitled to shares in X Co under the X Co employee share plan (ESP) pursuant to section 130-85 of the ITAA 1997?

Advice/Answers:

Yes. The trustee of the EST is capable of making a capital gain or capital loss as a result of CGT event E5.

This ruling applies for the following period<s>:

Year ending 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

X Co is an Australian resident company.

To attract and retain high quality employees X Co provides employees with an opportunity to acquire an equity interest in X Co and earn significant rewards based on creating shareholder value.

X Co has implemented two equity based compensation plans which are currently in use, being the employee share plan (ESP) and the executive incentive plan (EIP), together the 'X Co equity plans'.

The ESP

The key features of the ESP are as follows:

All full time and permanent part-time employees (eligible employees) of the X Co group (which includes X Co and its wholly owned subsidiaries), excluding directors, are eligible to participate in the plan.

Eligible employees are invited to apply to acquire $Y or $Z worth of shares per annum through a reduction to their salary and wages (that is, under a salary sacrifice arrangement).

Shares with a market value up to the amount of the reduction in the salary or wages of the relevant employee will be issued to the relevant employee every three months. Under the ESP rules, each participant will have a legal and beneficial interest in the shares allocated to them. However the shares can not be disposed of until they vest.

Vesting occurs in the following circumstances:

(i) three years after the shares are issued to the employee;

(ii) at the time the employee ceases employment; or

(iii) where the board determines that there has been significant change to X Co's structure or control.

Until the shares have vested, employees will be restricted from disposing of their shares. However, participants will have the same voting and dividend rights in respect of shares under the ESP as any other shareholder.

The EIP

The EIP was introduced to incentivise, retain and reward key employees.

X Co established the X Co executive incentive plan trust (EST) to facilitate the provision of shares in X Co under the EIP to Australian employees and directors of X Co (and certain other entities that form part of the X Co tax consolidated group).

The trust deed appointed the trustee, an unrelated entity, as trustee of the EST.

Under the EIP, senior executives were entitled to an award calculated over a performance period (performance period), subject to a maximum dollar limit.

At the end of the performance period, subject to certain performance conditions being satisfied, the award is calculated (earned award).

The vesting of the earned award is subject to certain conditions and is payable in equal instalments over an X year period (service period).

If the relevant conditions are satisfied during the service period, payments will be made on pre-determined dates (each a payment date). The vesting of the earned award is subject to:

· the participant's continuous employment with the X Co group through to the end of the performance period and the service period except in certain situations as provided in the EIP; and

· meeting a minimum specified annual performance rating during the service period

The amount of a participant's earned award may be paid in (i) cash, (ii) ordinary shares (unrestricted shares) or (iii) restricted shares at the discretion of the remuneration committee of the X Co board of directors (committee).

If any portion of the amount payable on a payment date is to be paid in unrestricted shares, the number of whole shares issued shall be determined on the basis of the fair market value of ordinary shares on such payment date.

Assumptions

Each X Co equity plan and the EST are administered in accordance with their terms.

X Co has elected to form a tax consolidated group prior to the establishment of the EST.

At the 'pre-Division 83A time' (the time occurring just before Schedule 1 to the Tax Laws Amendment (2009 Budget Measures No 2) Act 2009 commenced), no participant under the EIP had made an election under the former section 139E of the Income Tax Assessment Act 1936 (ITAA 1936) (so that subsection 139B(3) of the ITAA 1936 applied in relation to the interest, being the rights of each participant under the EIP).

The cessation time mentioned in subsection 139B(3) of the ITAA 1936, as in force at the pre-Division 83A time, for the interest constituted by the rights of participants under the EIP did not occur before 1 July 2009.

Awards under the ESP that are contemplated in the ruling will all occur on or after 1 July 2009.

If the trustee of the EST acquires shares and allocates them to participants under an amended version of the ESP, the relevant 'ESS interest' under subsection 83A-10(1) of the ITAA 1997 will be a beneficial interest in the X Co shares.

Each of the participants in an amended version of the ESP will be a beneficiary of the EST.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division13A

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Subsection 139B(3)

Income Tax Assessment Act 1936 Section 139E

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-2

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Subsection 6-10(1)

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subsection 83A-10(1)

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Subsection102-25(1)

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Subsection 104-75(1)

Income Tax Assessment Act 1997 Subsection 104-75(2)

Income Tax Assessment Act 1997 Section 104-85

Income Tax Assessment Act 1997 Subsection 104-85(1)

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Section 130-85

Income Tax Assessment Act 1997 Subsection 130-85(1)

Income Tax Assessment Act 1997 Paragraph 130-85(1)(a)

Income Tax Assessment Act 1997 Paragraph 130-85(1)(b)

Income Tax Assessment Act 1997 Paragraph 130-85(1)(c)

Income Tax Assessment Act 1997 Subsection 130-85(2)

Income Tax Assessment Act 1997 Subsection 130-85(4)

Income Tax Assessment Act 1997 Section 130-90

Income Tax Assessment Act 1997 Subsection130-90(1)

Income Tax Assessment Act 1997 Paragraph130-90(1)(a)

Income Tax Assessment Act 1997 Paragraph130-90(1)(b)

Income Tax Assessment Act 1997 Paragraph130-90(1)(c)

Income Tax Assessment Act 1997 Paragraph130-90(1)(d)

Income Tax Assessment Act 1997 Subsection130-90(2)

Income Tax (Transitional provision) 1997 Paragraph 83A-5(2)(a)

Income Tax (Transitional provision) 1997 Subsection 83A-10(2)

Income Tax (Transitional provision) 1997 Section 83A-15

Income Tax (Transitional provision) 1997 Subsection 83A-15(2)

Income Tax (Transitional provision) 1997 Paragraph 83A-15(2)(a)

Taxation Administration Act 1953 Section 357-110 of Schedule 1

Tax Laws Amendment (2009 Budget Measures No 2) Act 2009 Schedule 1

Reasons for decision

Question 1:

Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) defines net income in relation to a trust as follows, insofar as it is relevant:

"net income , in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions …"

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states:

"Your assessable income includes income according to ordinary concepts, which is called ordinary income."

and subsection 6-10(1) of the ITAA 1997 states:

"Your assessable income also includes some amounts that are not ordinary income.

Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5."

None of the provisions listed in section 10-5 of the ITAA 1997 are relevant in this situation. Therefore irretrievable contributions made by X Co to the EST will not be assessable income under section 6-10 of the ITAA 1997. They will only be included in the calculation of the net income of the trust under section 95 of the ITAA 1936 if they are assessable as income according to ordinary concepts under section 6-5 of the ITAA 1997.

Pursuant to the trust deed the trustee must, when directed by the board, acquire X Co shares on behalf of participating employees and use the contributions made by X Co to do so. To this end, the contributions received from X Co must therefore only be used to acquire shares in accordance with the terms of the trust deed and the EIP rules and ESP rules.

Accordingly, the irretrievable contributions made by X Co to the trustee to acquire X Co shares will not be assessable income under section 6-5 of the ITAA 1997 but constitute capital receipts of the trustee.

Therefore, the irretrievable cash contributions made by X Co to the trustee of the EST to fund the acquisition of X Co shares by the trustee in accordance with the trust deed of the EST will not be assessable income of the EST pursuant to sections 6-5 or 6-10 of the ITAA 1997. In coming to our decision, we have taken into consideration ATO Interpretative Decision ATO ID 2002/965.

Question 2:

Part A

Under the EIP, employees receive an award (earned award) which provides the employees with a right to receive a certain amount in cash, unrestricted shares or restricted shares, subject to satisfying certain performance criteria.

Where an employee receives unrestricted shares or restricted shares on a payment date, the indeterminate rights provision in section 83A-15 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) will apply. The indeterminate rights provision applies because the employee acquired a beneficial interest in a right (that is, the earned award under the EIP) before 1 July 2009 and on or after 1 July 2009, the right became a right to acquire a beneficial interest in a share (that is, an unrestricted share or a restricted share).

Pursuant to subsection 83A-15(2) of the IT(TP)A 1997, where the EIP award is paid in unrestricted shares or restricted shares, Division 13A of Part III of the ITAA 1936 is taken to have applied as if the EIP award had always been a right to acquire the beneficial interest in the shares.

Subsection 83A-10(2) of the IT(TP)A 1997 confirms that Division 13A, in spite of its repeal, continues to apply to a share or right where Division 13A applied in relation to the share or right (within the meaning of former Division 13A) prior to 1 July 2009.

Based on the terms of the EIP, for the purposes of section 130-90 of the ITAA 1997, where an employee acquires unrestricted shares or restricted shares under the EIP, these shares are considered to be acquired by exercising a right to acquire a beneficial interest in those shares.

Part B

Under section 83A-15 of the IT(TP)A 1997, if:

(a) you acquired a beneficial interest in a right before 1 July 2009; and

(b) on or after 1 July 2009, the right becomes a right to acquire a beneficial interest in a share,

Division 13A of Part III of the ITAA 1936 is taken to have applied as if the right had always been a right to acquire the beneficial interest in the share.

At your request, and pursuant to section 357-110 of Schedule 1 to the Taxation Administration Act 1953, the Commissioner makes this ruling on the basis of the following assumptions:

(i) at the "pre-Division 83A time" (the time occurring just before Schedule 1 to the Tax Laws Amendment (2009 Budget Measures No 2) Act 2009 commenced), no participant under the EIP had made an election under section 139E of the Income Tax Assessment Act 1936 (ITAA 1936) (so that subsection 139B(3) of the ITAA 1936 applied in relation to the interest, being the rights of each participant under the EIP);

(ii) the cessation time mentioned in subsection 139B(3) of the ITAA 1936, as in force at the pre-Division 83A time, for the interest (being the rights of each participant under the EIP) did not occur before 1 July 2009.

We have also concluded that the interest (being the rights of each participant under the EIP) was acquired (within the meaning of former Division 13A of Part III of the ITAA 1936) before 1 July 2009.

Therefore, for the purposes of section 130-90 of the ITAA 1997 and pursuant to paragraph 83A-5(2)(a) of the IT(TP)A 1997, Subdivision 83A-C of the ITAA 1997 applies in relation to the ESS interest constituted by a participant's beneficial interest in their rights to acquire shares under the EIP.

Question 3:

In relation to restricted shares issued at the beginning of the restriction period, the answer to this question proceeds on the basis that the EIP rules will be amended so that restricted shares issued at the beginning of the restriction period will not be 'registered in the name of the holder to whom such restricted shares shall have been awarded', but rather the trustee of the EST will hold those restricted shares.

This is because, under the current wording of EIP rules, the trustee of the EST does not hold legal title to the restricted shares issued at the beginning of the restriction period, and therefore could never make a capital gain or capital loss in respect of those shares which could then be disregarded under section 130-90 of the ITAA 1997.

On the basis of the assumption that the EST will be administered in accordance with its terms, the EST will be an 'employee share trust' (as defined in subsection 130-85(4) of the ITAA 1997).

Subsection 130-90(1) of the ITAA 1997 states:

Disregard any *capital gain or *capital loss made by an *employee share trust, or a beneficiary of the trust, to the extent that it results from a *CGT event, if:

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

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

(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.

CGT event E5

Under subsection 104-75(1) of the ITAA 1997, 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 of the ITAA 1997 applies) as against the trustee (disregarding any legal disability the beneficiary is under). Under subsection 104-75(2) of the ITAA 1997, the time of CGT event E5 is when the beneficiary becomes absolutely entitled to the asset.

Where unrestricted plan shares forming part of the earned award, or restricted shares forming part of the earned award, are acquired by the trustee of the EST (either on market or via subscription) and a participant in the EIP becomes absolutely entitled to those shares at a later point in time, CGT event E5 will happen.

· The EST is a trust. It is not a unit trust or a trust to which Division 128 of the ITAA 1997 applies.

· Each of the unrestricted plan shares and restricted shares owned by the trustee of the EST is a CGT asset of a trust.

· Each of the participants in the EIP is a beneficiary of the EST.

· For the purposes of this question, under the EIP rules a participant in the EIP must become absolutely entitled to the unrestricted plan shares and/or restricted shares as against the trustee.

Paragraph 130-90(1)(a) of the ITAA 1997 will be satisfied.

For the purposes of this question, a participant must become absolutely entitled to the unrestricted plan shares and/or restricted shares. Therefore, CGT event E5 will happen in relation to a share.

Paragraph 130-90(1)(b) of the ITAA 1997 will be satisfied.

Under the EIP, a participant will acquire the unrestricted plan shares and/or restricted shares by exercising a right to receive the shares when they satisfy the conditions of the EIP. Therefore, the beneficiary (being a participant) will acquire a beneficial interest in the unrestricted plan shares and/or restricted shares by exercising a right.

Paragraph 130-90(1)(c) of the ITAA 1997 will be satisfied.

It has been established that the beneficiary's beneficial interest in the right (the exercise of which resulted in the beneficiary acquiring a beneficial interest in the unrestricted plan shares and/or restricted shares) was an ESS interest to which Subdivision 83A-B or 83A-C of the ITAA 1997 applied.

Paragraph 130-90(1)(d) of the ITAA 1997 will be satisfied.

All of the requirements of subsection 130-90(1) of the ITAA 1997 are satisfied.

Under subsection 130-90(2) of the ITAA 1997, subsection 130-90(1) of the ITAA 1997

does not apply if the beneficiary acquired the beneficial interest in the *share for more than its *cost base in the hands of the *employee share trust at the time the *CGT event happens.

Subsection 130-90(2) of the ITAA 1997 is not relevant, because the beneficiary (being a participant in the EIP) acquired the beneficial interest in the unrestricted plan shares and/or restricted shares for no consideration.

Accordingly, where shares are acquired by the trustee of the EST (either on market or via subscription) and a participant in the EIP becomes absolutely entitled to those shares at a later point in time, any capital gain or capital loss made by

· the trustee of the EST; or

· a beneficiary of the EST (being a participant in the EIP),

· that arises as a result of CGT event E5 (section 104-75 of the ITAA 1997) will be disregarded under section 130-90 of the ITAA 1997.

CGT event E7

Under subsection 104-85(1) of the ITAA 1997, CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. Under subsection 104-85(2) of the ITAA 1997, the time of CGT event E7 is when the disposal occurs.

· the EST is a trust. It is not a unit trust or a trust to which Division 128 of the ITAA 1997 applies

· each of the unrestricted plan shares and restricted shares owned by the trustee of the EST is a CGT asset of a trust

· each of the participants in the EIP is a beneficiary of the EST

· the trust capital of the EST consists of the assets (such as unrestricted plan shares and restricted shares in X Co) held by the trustee under the terms of the EST and the relevant plan for certain individuals. Each participant in the EIP has an interest in the trust capital, being those assets held by the trustee to which the participant is potentially entitled, subject to the relevant plan, and

· for the purposes of this question, under the EIP general rules a participant in the EIP must become absolutely entitled to the unrestricted plan shares and/or restricted shares as against the trustee. When this happens, this may amount to the trustee disposing of a CGT asset of the trust (each unrestricted plan share and restricted share) to a beneficiary in satisfaction of all or part of the beneficiary's interest in the trust capital.

If CGT event E7 happens, paragraph 130-90(1)(a) of the ITAA 1997 will be satisfied. It should be noted that if CGT event E5 and CGT event E7 can both happen, subsection 102-25(1) of the ITAA 1997 requires that you use the CGT event 'that is the most specific to your situation.'

For the purposes of this question, a participant must become absolutely entitled to the unrestricted plan shares and/or restricted shares. When a participant becomes absolutely entitled, the trustee of the EST may dispose of unrestricted plan shares and/or restricted shares to a participant in the EIP in satisfaction of all or part of the participant's interest in the trust capital. If so, CGT event E7 will happen in relation to a share.

Paragraph 130-90(1)(b) of the ITAA 1997 will be satisfied.

Paragraph 130-90(1)(c) of the ITAA 1997 will be satisfied.

Paragraph 130-90(1)(d) of the ITAA 1997 will be satisfied.

All of the requirements of subsection 130-90(1) of the ITAA 1997 are satisfied.

Under subsection 130-90(2) of the ITAA 1997, subsection 130-90(1) of the ITAA 1997

does not apply if the beneficiary acquired the beneficial interest in the *share for more than its *cost base in the hands of the *employee share trust at the time the *CGT event happens.

· the trustee of the EST; or

· a beneficiary of the EST (being a participant in the EIP),

that arises as a result of CGT event E7 (section 104-85 of the ITAA 1997) - if it happens - will be disregarded under section 130-90 of the ITAA 1997.

Question 4:

The answer to this question proceeds on the basis that

· the general share scheme will be amended so that the trustee of the EST will acquire shares and allocate them to participants; and

· the role of the trustee under the general share scheme will be based on, or consistent with, the current wording of the trust deed.

This is because, at the present time, the trustee of the EST has no role in the operation of the general share scheme. Shares are issued directly to a participant every few months, by X Co, in consideration for their payment of the acquisition price (either through a contribution plan involving salary sacrifice or some other payment method).

You have advised us that, even if the trustee of the EST acquires shares and allocates them to participants under an amended version of the general share scheme, the relevant 'ESS interest' under subsection 83A-10(1) of the ITAA 1997 will be a beneficial interest in the shares in X Co. This question is answered on the basis of your assertion.

Under subsection 130-85(1) of the ITAA 1997, section 130-85 of the ITAA 1997 applies if:

(a) you *acquire an *ESS interest under an *employee share scheme; and

(b) Subdivision 83A-B or 83A-C applies to the ESS interest; and

The 'you' in paragraph 130-85(1)(a) of the ITAA 1997 is a participant in the general share scheme. For the purposes of this question, it is assumed that if the trustee of the EST acquires shares and allocates them to participants under an amended version of the general share scheme, each participant will acquire an ESS interest (as defined in subsection 83A-10(1) of the ITAA 1997) under an employee share scheme (as defined in subsection 83A-10(2) of the ITAA 1997).

Paragraph 130-85(1)(a) of the ITAA 1997 will be satisfied.

Subdivision 83A-B or Subdivision 83A-C of the ITAA 1997 will apply to the ESS interest.

Paragraph 130-85(1)(b) of the ITAA 1997 will be satisfied.

The 'you' in paragraph 130-85(1)(c) of the ITAA 1997 is a participant in the general share scheme. On the basis of the assumption that the EST will be administered in accordance with its terms, the ESS interest will be, or will arise because of, an interest a participant holds in the EST, which is an employee share trust (as defined in subsection 130-85(4) of the ITAA 1997). The employee will receive their shares under the general share scheme through the EST. They will have an interest in the EST that entitles them to receive a certain number of shares under the general share scheme.

Paragraph 130-85(1)(c) of the ITAA 1997 will be satisfied.

For these reasons, all of the requirements of subsection 130-85(1) of the ITAA 1997 will be satisfied. Therefore, section 130-85 of the ITAA 1997 will apply.

Under subsection 130-85(2) of the ITAA 1997, Division 83A, Part 3-1 and Part 3-3 of the ITAA 1997 apply as if you were absolutely entitled to the relevant *share or right:

(a) from the time of acquisition of the *ESS interest; and

(b) until you no longer have an ESS interest in the share or right.

The 'you' in subsection 130-85(2) of the ITAA 1997 is a participant in the general share scheme. As a result of subsection 130-85(2), CGT event E5 will happen in respect of the X Co share or right at the time of a participant's acquisition of the ESS interest.

On the basis that the general share scheme will be amended so that the trustee of the EST will acquire shares and allocate them to participants, a participant will acquire the ESS interest when the trustee allocates it to the participant.

By satisfying paragraph 130-85(1)(a) of the ITAA 1997 as described above, a participant in the general share scheme will acquire an ESS interest (as defined in subsection 83A-10(1) of the ITAA 1997). As a result, subsection 130-85(2) of the ITAA 1997 means that, inter alia, Part 3-1 of the ITAA 1997 applies as if a participant was absolutely entitled to the relevant share or right from the time of acquisition of the ESS interest. Part 3-1 includes all of the CGT events.

On the basis that the general share scheme will be amended so that the trustee of the EST will acquire shares and allocate them to participants, CGT event E5 will happen.

· The EST is a trust. It is not a unit trust or a trust to which Division 128 of the ITAA 1997 applies.

· Each of the shares owned by the trustee of the EST is a CGT asset of a trust.

· It is assumed that each of the participants in an amended version of the general share scheme will be a beneficiary of the EST.

· Subsection 130-85(2) of the ITAA 1997 deems a participant to be absolutely entitled to the relevant share or right from the time of acquisition of the ESS interest.

Therefore, CGT event E5 will happen.

Under CGT event E5, the trustee of the EST can make a capital gain or a capital loss as a result of CGT event E5 (section 104-75 of the ITAA 1997) at the time a participant becomes absolutely entitled to shares in X Co under the general share scheme.

Whether the trustee makes a capital gain or capital loss will depend on the market value of the share (at the time of CGT event E5) to which a participant becomes absolutely entitled, and the cost base or reduced cost base of the share acquired by the trustee.

On the basis that the general share scheme will be amended so that the trustee of the EST will acquire shares and allocate them to participants, if the trustee acquires a share and immediately thereafter allocates it to a participant (at which point the participant would become absolutely entitled to the share and CGT event E5 would happen), the market value of the share and the trustee's cost base or reduced cost base may be equal. If this is the case, the trustee will not make a capital gain or capital loss from CGT event E5.

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