Acquisition of shares from a trustee pursuant to rights acquired under an employee share scheme

Will a capital gain or loss made by a trustee pursuant to CGT event E5 in section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997), when a beneficiary becomes absolutely entitled to shares held by the trustee, be disregarded by section 130-90 of the ITAA 1997 if the rights to the shares had been previously acquired by the beneficiary under an employee share scheme?

No. Section 130-90 of the ITAA 1997 will not apply to disregard the capital gain or loss of the trustee.

An employer granted its employees rights to be provided with a stipulated number of shares. The rights were provided at a discount and were subject to certain employment conditions being satisfied.

The shares were held in a trust established by the employer. Each employee to whom rights had been granted by the employer became absolutely entitled to the shares as against the trustee when the employment conditions were satisfied.

Prior to becoming absolutely entitled as against the trustee to a specified number of shares, the employees had acquired rights to be provided with shares when certain employment conditions were satisfied. The rights were received by the employees in respect of their employment and had been provided to them at a discount. The rights were therefore acquired under an employee share scheme within the meaning of section 139C of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 139C(4) of the ITAA 1936 relevantly provides that a share is not acquired under an employee share scheme if the share is acquired as a result of the exercise of a right that was itself acquired under an employee share scheme. The exercise of a right does not necessarily require an action or activity by the owner of the right. A right will consequently have been exercised for the purposes of Division 13A of the ITAA 1936 where the right operates to give a share to the owner of the right upon the satisfaction of subject conditions. Any share acquired pursuant to a right that was itself acquired under an employee share scheme is not therefore acquired under an employee share scheme.

Subsection 130-90(3) of the ITAA 1997 provides that section 130-90 does not apply in relation to a share unless that share was acquired under an employee share scheme. As the shares were not acquired under an employee share scheme, section 130-90 has no application to the capital gain or loss made by the trustee when CGT event E5 happens pursuant to subsection 104-75(1) of the ITAA 1997.