Employee Share Scheme- Capital gains tax - liability of Trustee on forfeiture of shares or rights by employee

Will there be a CGT event under section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997) for the taxpayer, a Trustee of an employee share scheme trust, when an employee forfeits shares or rights that the Trustee held for the employees benefit but to which the employee now has no absolute entitlement?

No. There will not be a CGT event under section 104-75 of ITAA 1997 for the taxpayer, a Trustee of an employee share scheme trust, when an employee forfeits shares or rights that the Trustee held for the employees benefit but to which the employee now has no absolute entitlement.

The employer's employee share scheme complies with the provisions of Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936).

A Trustee is appointed to administer the scheme. The sole activities of the Trustee are obtaining shares or rights in the employer company or a holding company of the employer and providing those shares or rights to the employees. The employer contributes amounts to the Trustee each year and the Trustee uses those funds to purchase shares and rights in the employer or a holding company of the employer from fresh issues or the stock exchange. The shares or rights purchased are then registered in the name of the Trustee and held for the benefit of participating employees.

The Scheme Rules impose restrictions upon the employee disposing of the shares or rights, and imposes forfeiture conditions prior to the employee becoming absolutely entitled to them. In the event the employee forfeits the shares or rights under the scheme, the Trustee reallocates those shares or rights to other employees.

A CGT event happens when the employee becomes absolutely entitled to the shares or rights (CGT Event E5 section 104-75 ITAA 1997). The time of this event is when the beneficiary becomes absolutely entitled to the shares or rights (subsection 104-75(2) ITAA 1997). Under the Employee Share Scheme Rules forfeiture of the shares or rights by the employee occurs before the employee becomes absolutely entitled to the shares or rights. Forfeiture occurs while the employee has only a beneficial interest in the shares or rights held by the Trustee. The Trustee has legal ownership of the shares or rights both before and after forfeiture. Therefore no CGT event occurs at the time of forfeiture.