1 Will the irretrievable cash contributions by Company A, or any Subsidiary Employer Entity, to the Trustee as trustee of the Company A Limited Employee Share Trust (the Trust) to fund the subscription for, or acquisition on-market of, ordinary shares in Company A (Shares) for the purposes of the Company A Plan (Plan) be assessable income of the Trust under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No. Question 2(a) Will capital gains tax (CGT) event E5 happen at a time when the Participants become absolutely entitled to Shares held by the Trustee of the Trust under the Plan? Answer Yes. Question 2(b) If CGT event E5 does happen, will a capital gain or capital loss made by the Trustee as a result of CGT event E5 happening be disregarded under section 130-90 of the ITAA 1997 if the Participants acquire the Shares at a price that is the same as, or less than, the cost base of the Shares in the hands of the Trustee? Answer Yes. Question 2(c) Will CGT event E7 happen in respect of Shares held by the Trustee under the Plan when the Trustee transfers the Shares to the Participants in accordance with the Plan? Answer No - the specified scheme does not include any facts that give rise to CGT event E7 happening. This ruling applies for the following period : Income years ended 30 June 20XX to 30 June 20XX The scheme commenced on: 8 November 20XX
Background Company A is a Australian Public Company. Company A and its wholly owned Australian subsidiaries (including those subsidiaries who employ staff that participate in Company A's employee share plans (Subsidiary Employer Entities) have not elected to form an income tax consolidated group. The Plan The Plan commenced operation on [DATE] being the date of Shareholder approval. Company A established the Plan to assist in the reward, retention and motivation of Eligible Employees, link the reward of eligible employees to Shareholder value creation, and align the interest of Eligible Employees with shareholders by providing an opportunity to receive equity interests in Company A. Company A may, at its discretion, determine that an Eligible Employee may participate in the Plan, and grant or allocate to Eligible Employees the right to receive a number of Plan Shares, in the form of: • Performance Rights where one right entitles a Participant to one Plan Share, • Share Appreciation Rights where one right entitles a Participant to the number of Plan Shares as calculated under the Plan, or • a combination of both (collectively referred to as Awards) and
Subject to any Vesting Conditions, Performance Hurdles and/or Exercise Conditions (if any) being satisfied, waived by the Board or deemed to have been satisfied under the Plan rules. Offer Eligible Employees are issued an Invitation Letter by the Board to apply for a specified number of Awards, which will vest according to specified performance criteria. The terms and conditions of Awards offered or granted under the Plan will be set out in the Invitation Letter which will state the following: • the number and type of Award(s) • the Grant Date • the Fee (if any) • in the case of a Share Appreciation Right, the Initial Market Value, • the Exercise Conditions (if any), and the Exercise Period (if any). • the Term and Expiry Date (if applicable) • the Vesting Conditions (if any) and the Performance Hurdles (if any) • whether Exercised Awards, upon exercise and at the discretion of the Board will be settled as either: i. Equity Settled, or ii. Cash Settled, • any applicable disposal restrictions • any rights attaching to the Awards and or Plan Shares, and
• agreement with the Eligible Employee for the Company to supply details to third parties where required by law. An Eligible Employee, or Nominated Party, may accept the Offer by providing an Application within the time period specified in the Invitation to the person specified in the Invitation Letter. An Eligible Employee may only submit an Application in their own name, and not behalf of any other person or entity. If permitted in the Invitation Letter or the Board exercises its absolute discretion to provide its approval, the Eligible Employee may nominate a Nominated Party to be granted the Awards set out in their Invitation. Where no approval has been provided or such a nomination is not permitted in the Invitation, the Board may reject an Application submitted in the name of that Nominated Party. Following receipt of the completed Application, the Board may accept the Application in whole or in part and issue the relevant number of Awards to the Eligible Employee or Nominated Party and provide a Certificate. The Board will determine, and include in the Invitation letter, any Vesting Conditions, Performance Hurdles and/or Exercise Conditions attached to the Awards.
Awards granted cannot be assigned, transferred, encumbered with a security interest or otherwise disposed of by a Participant unless this occurs by law upon death of a Participant. Performance Rights Performance Rights will Vest once the Board has determined that the applicable Vesting Conditions and Performance Hurdles have been satisfied (or are waived by the Board) and Company A has issued the Vesting Notification to the Participants informing them that those Performance Rights have Vested. The Participant is deemed to have exercised the Performance Rights, once they have been issued a Vesting Notification, provided all Exercise Conditions specified by the Board in either the Invitation Letter or Vesting Notification have been satisfied. Once the Performance Rights have been exercised, within 10 business days Company A will issue, allot and/or transfer the Participant the number of Plan Shares to which they are entitled, or cash settled the Performance Rights where permitted by the Invitation letter.
Where the Board determines that any Performance Rights will be cash settled, the cash payment made to the Participant will be equal to the value of the Plan Shares that would have been issued to the Participants, less any funds required to be withheld for tax or super, and/or for the Exercise Price (if any) for the Performance Rights. Share Appreciation Rights Share Appreciation Rights will vest once the Board has determined that the applicable Vesting Conditions and Performance Hurdles have been satisfied (or are waived by the Board) and Company A has issued the Vesting Notification to the Participants informing them that those Share Appreciation Rights have vested. The Participant is deemed to have exercised the Share Appreciation Rights, once they have been issued a Vesting Notification, provided all Exercise Conditions specified by the Board in either the Invitation Letter or Vesting Notification have been satisfied.
Once the Share Appreciation Rights have been exercised, within 10 business days Company A will issue, allot and/or transfer the Participant the number of Plan Shares to which they are entitled, or cash settled the Performance Rights where permitted by the Invitation letter. Where the Board determines that any Share Appreciation Rights will be cash settled, the cash payment made to the Participant will be equal to the value of the Plan Shares that would have been issued to the Participants, less any funds required to be withheld for tax or super, and/or for the Exercise Price (if any) for the Share Appreciation Rights. Restrictions on disposal of shares The Board may determine, prior to the Invitation being made, whether there are any restrictions on the disposal of, the granting of any Security Interest in or over, or otherwise dealing with, Shares held by a Participant.
Where there are restrictions on shares, a Participant may not transfer, encumber or otherwise dispose of, or have a Security Interest granted over the Plan Shares unless all restrictions have been met, the Board has waived any restrictions, or consent has been obtained from the Board which may impose any new terms on transfer, encumbrance or disposal. Lapse or forfeiture of Rights Unvested Awards will lapse, unless otherwise determined by the Board, on the earlier of: the cessation of employment or office of a Participant the Board determining a Participant has acted fraudulently, dishonestly or wilfully breached their duties to Company A if a Participant is a Nominated Party, a change of control occurring without obtaining the prior written consent of from Company A the Vesting Conditions, Performance Hurdles and/or Exercise Conditions are not determined by the Board (acting reasonably) to be satisfied by the relevant time period (as provided for in either the Invitation Letter or otherwise determined under the Plan rules) the Board determines the Vesting Conditions, Performance Hurdles and/or Exercise Conditions have not been met and cannot be met prior to the Expiry Date, or
the Expiry Date, that is either the date 15 years from the Grant Date of any Awards or any other date determined by Board and as specified in the Invitation. Vested Awards that have not been exercised will lapse, unless otherwise determined by the Board, on the earlier of: for Vested but unexercised Awards if a Participant is a Bad Leaver. the Board determining a Participant has acted fraudulently, dishonestly or wilfully breached their duties to Company A if a Participant is a Nominated Party, a change of control occurring without obtaining the prior written consent of from Company A if any Exercise Conditions are not determined by the Board to be satisfied by the relevant time, or the expiry of the relevant Exercise Period. Trust On [DATE], Company A established the Trust under a deed entered into between Company A and the Trustee. The trustee is an independent third party. The recitals of the Trust Deed state that the sole activities of the Trust will be subscribing for, acquiring, holding and transferring Shares in connection with equity incentive plans established by Company A for the benefit of participants in those plans.
Trust Assets means cash (including the Settlement Sum), ESS Interests (as defined in section 83A-10 of the ITAA 1997), and income of the Trust and includes Accretions in respect of the relevant Trust Asset. The Trustee has the powers to do all things a trustee is permitted to do by law in respect to the Trust, Trust Shares and Trust Assets, including to: enter into and execute all agreements, deeds and documents subscribe for, acquire, hold, dispose or otherwise deal with Trust Assets for the purpose of, and as authorised under, the Trust Deed and to do all things incidental to these activities take and act upon any advice or opinion of any legal practitioner or any other professional advisor open and operate any bank account, retain on current or deposit account at any bank any money it considers proper borrow money for the purpose of acquiring Shares or rights in the Company, where no security is provided over the assets of the Trust and the interest payable on the loan is not more than arm's length commercial rates receive dividends in respect to Unallocated Shares and any interest from bank accounts and using those funds to:
- acquire additional shares for the purpose of a Plan - pay any necessary and incidental costs of administering the Trust in accordance with paragraphs 130-85(4)(a), (b) and (c) of the ITAA 1997, or - pay interest on loans provided to the Trust for the acquisition of Shares or rights to Shares in the Company. Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purpose of section 130-85(4) of the ITAA 1997. The Trustee's activities in its capacity as trustee will be limited to the relevant Plan Rules and relevant Terms of Participation. Acquisition and transfer of Shares The Board may instruct the Trustee by way of a Dealing Notice, and subject to the Trustee having or receiving sufficient funds or having sufficient capital, to: a) purchase or subscribe for the required number of Shares on behalf of the relevant Participant(s) b) allocate any Unallocated Shares to one or more Participants
The Trustee must hold all Trust Assets (including any Unallocated Shares) on trust in accordance with the Trust Deed. Nothing in the Trust Deed confers or intends to confer on Company A any charge, lien, or any other proprietary right or beneficial interest in the Trust Assets. Funding Company A (or any of the Subsidiary Employer Entities where such a direction has been provided by Company A) must provide, or cause the provision to the Trustee of any funds required by the Trustee to comply with its obligations to acquire Shares under the Trust Deed. All funds provided to the Trustee will constitute Accretions to the corpus of the Trust and are not repayable to the Company except otherwise as consideration for the subscription by the Trustee for Shares. The Trustee may recover from the Trust Assets (excluding Allocated Shares, Unallocated Shares and dividends from Allocated Shares) all reasonable disbursements actually incurred by the Trustee in performing its duties, or alternatively, may seek reimbursement from the Company of reasonable expenses incurred by the Trustee for managing the Trust.
Where Company A makes cash contributions to the Trustee on behalf of the Subsidiary Employer Entities (as employer of the relevant individual(s) who are or will be Participants to the Plan), those costs will be recharged to the relevant Subsidiary Employer Entities without any margin applied, and will be recognised as an expense in the relevant entities profit and loss statement. Company A will incur various costs in relation to the on-going administration of the Trust, including: employee plan record keeping production and dispatch of holding statements to employees provision of annual income tax return information for employees costs incurred in the acquisition of shares on market (e.g. brokerage costs and the allocation of such Shares to Participants) management of employee termination other trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust, and taxation fees associated with the drafting and lodgement of the private ruling application with the ATO.
In addition, Company A incurs costs relating to the establishment of, and tax affairs for, the Trust, and will recharge these amounts without a margin applied to the Subsidiary Employer Entities to the extent they relate to the Subsidiary Employer Entities' employees) (collectively referred to as Recharge Amounts). Recharge Amounts will be settled between Company A and the relevant Subsidiary Employer Entities via an interest-free intercompany loan with no mark-up being applied to the amounts being reimbursed. The Recharge Amounts relating to the ongoing administration, establishment, or tax affairs of the trust will be recognised as an expense in the relevant Subsidiary Employer Entities profit and loss statement. Allocation of Shares The Board may instruct the Trustee by way of Dealing Notice to allocate the specified number of Plan Shares to a specified Participant or Participants. The specified Participant(s) will become the beneficial owner of the Allocated Plan Shares.
Each Participant must not assign, transfer, sell, or grant an encumbrance over an interest in that Allocated Share of that Participant during any applicable Restriction Period. After the expiry of the Restriction Period and subject to the guidelines set by the Board, the relevant Plan Rules and the relevant Terms of Participation, a Participant may give the Trustee a Withdrawal Notice requiring the Trustee to transfer some or all of the Participant's Allocated Shares to the Participant (or their nominated third party). The Trustee must do all things required to transfer some or all of the Participant's Allocated Shares and pay any monies held on account for the Participant, subject to: a valid Withdrawal Notice being provided and approved by the Board requirement to do so by the relevant Plan Rules or Terms of Participation termination of the Trust, or if the Trustee determines so, following a written instruction from the Board. Unallocated Shares The Trustee must deal with Unallocated Shares in the manner set out in a Dealing Notice. In respect to the Unallocated Shares held by the Trustee, the Trustee must: if instructed by the Board:
if an Unallocated Share is a Forfeited Share, dispose of any Forfeited Share, or participate in a Rights Issue in respect to the Unallocated Shares. hold any bonus shares issued in respect of Unallocated Shares. The Trustee may also apply capital receipts, dividends or other distributions received from an Unallocated Share or Rights Issue in respect of that Unallocated Share to purchase further Shares to be held on trust for the purposes of the Trust. The Board may from time to time specify that certain Unallocated Shares be held by the Trustee for a particular Plan. Income and capital distributions Subject to Applicable Law, the relevant Plan Rules and relevant Terms of Participation, a Participant is presently entitled to so much of the Net Income of the Trust for a Year of Income which is attributable to: • the Participant's Allocated Shares • the proceeds of sales arising from the sale by the Trustee of rights under a Rights Issues relating to that Participant's Allocated Shares, and • transactions or events related to that Participant's Allocated Shares or property related to or arising from that Participant's Allocated Shares.
The only Trust Assets that may be disposed of or otherwise transferred to beneficiaries are Shares to Participants who are absolutely entitled to those Shares.
ITAA 1997 section 6-5 section 6-10 section 83A-10 section 83A-20 section 83A-340 section 102-20 section 104-75 section 106-50 division 128 section 130-85 section 130-90 ATO ID 2002/965 TD 2019/13 TR 2018/6
Question 1 Summary The irretrievable cash contributions made by Company A or any Subsidiary Employer Entity to the Trustee in accordance with the Plan and the Trust Deed to fund the subscription for, or acquisition on-market of, Shares will not be assessable income of the Trust under sections 6-5 or 6-10 of the ITAA 1997. Detailed reasoning Irretrievable cash contributions It must be determined as a conclusion of fact whether the contributions made by Company A or a Subsidiary Employer Entity to the Trustee are irretrievable cash contributions. The Trust Deed provides that the Trustee holds the Trust Fund on trust for all beneficiaries, in the manner required by the Plan. The Trustee must comply with any direction of the Board to acquire Shares on behalf of a Participant in accordance with the relevant Plan and must apply any amount paid to it by Company A or a Participant, in accordance with the Plan and any such direction of the Board. The Trust Deed enables the Trustee to discharge its obligations under the Trust Deed and Plan and for no other purpose. Accordingly, a refund of any contributions by the Trustee would be in breach of the powers of the Trustee under the Trust Deed.
The Trust Deed states that Company A and each Group Company are not beneficiaries of the Trust and have no entitlement to any Shares forming part of the Trust Fund at any time. Accordingly, a contribution made to the Trust will not be refundable or retrievable by Company A Companies (other than as consideration for Shares under the terms of the Trust Deed). In conclusion, the above terms support the conclusion that the cash contributions made by Company A or Subsidiary Employer Entities to the Trustee are irretrievable. Assessable income of the Trust under section 6-5 or 6-10 The total assessable income of a trust estate is calculated as if the trustee were a resident taxpayer in respect of that income (subsection 95(1) of the Income Tax Assessment Act 1936 ( ITAA 1936 ) ). Subsection 6(1) of the ITAA 1936 states that 'assessable income' has the meaning given by subsection 995-1(1), which relevantly has the meaning given by sections 6-5 and 6-10. The assessable income of a taxpayer includes income under ordinary concepts (section 6-5) or statutory income (section 6-10).
Section 10-5 contains a summary list of the provisions for statutory income. None of the provisions listed in section 10-5 are relevant in the present circumstances. Therefore, the non-refundable cash contributions made by Company A or a Subsidiary Employer Entity to the Trustee of the Trust will not be assessable income under section 6-10. The contributions will only be included in the calculation of the net income of the Trust under section 95 if they are assessable as income according to ordinary concepts under section 6-5. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In ATO Interpretative Decision ATO ID 2002/965 Income Tax - Trustee not assessable on employer contributions made to it under the employer's employee share scheme , the Commissioner expresses the view that funds provided to the trustee of an employee share scheme (ESS) for the sole purpose of providing shares under an ESS will constitute capital receipts to the trustee, and are not assessable under sections 6-5 or 6-10.
An ESS is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2)). An ESS interest is a beneficial interest in a share in a company or a right to acquire a beneficial interest in a share in a company (subsection 83A-10(1)). A Share Appreciation Right or a Performance Right provided under the Plan are indeterminate rights for the purposes of section 83A-340. That is the case because the Awards can be settled by either Shares or by making a payment of a cash equivalent amount in lieu of a Share, to be determined at a future time at the discretion of the employer. Therefore, an Award of Share Appreciation Rights or Performance Rights under the Plan is not a right to acquire a beneficial interest in shares unless and until the time when it is determined by the Board that they will be satisfied by the provision of Shares.
Although the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate right will, under section 83A-340, be treated as if it had always been an ESS interest. Subject to the Board's discretion to make a cash payment in lieu of allocating Share, under the Plan, each Participant will acquire a Share Appreciation Right or Performance Right (as the case may be), with each being a beneficial interest in a share in a company or a right to acquire a beneficial interest in a Share. Therefore, the Plan is an 'employee share scheme' within the meaning of subsection 83A-10(2) because it is a scheme under which beneficial interests in shares and rights to acquire beneficial interests in shares are provided to employees in relation to their employment.
The irretrievable cash contributions made by Company A or a Subsidiary Employer Entity to the Trustee under the terms of the Plan and the Trust Deed are to be used for the sole purpose of acquiring, holding and transferring Shares for the benefit of Participants. Accordingly, the irretrievable cash contributions constitute capital receipts to the Trustee and will not be assessable income of the Trustee under sections 6-5 or 6-10. Given that the irretrievable cash contributions made by Company A or a Subsidiary Employer Entity to the Trustee are neither ordinary nor statutory income under sections 6-5 or 6-10, they will not be included in the net income of the Trust and cannot be assessed to the Trustee under section 95 in Division 6. Question 2(a) Summary CGT event E5 will happen to the Trustee in relation to Shares held by the Trustee under the Plan at a time when a Participant becomes absolutely entitled to those Shares under the terms of the Plan. Detailed reasoning Under section 102-20, an entity can make a capital gain or loss if, and only if, a CGT event happens. Participants become absolutely entitled to a Share under the Plan - CGT event E5
Under subsection 104-75(1), 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 applies) as against the trustee. The time of the event is when a beneficiary becomes absolutely entitled to the asset (subsection 104-75(2)). If CGT event E5 happens, the trustee may make a capital gain or loss if the market value of the asset, at the time of the event, is more than its cost base or less than the asset's reduced cost base respectively (subsection 104-75(3)). In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 applies. Subsection 130-85(2) treats a beneficiary as absolutely entitled to the relevant share from the time of acquisition of the ESS interest until they no longer have the ESS interest in the share. Subsection 130-85(2) only applies if the following requirements under subsection 130-85(1) are satisfied: a) the beneficiary acquires an ESS interest under an ESS b) Subdivision 83A-B or 83A-C applies to the ESS interest, and c) the ESS interest is, or arises because of, an interest the beneficiary holds in an employee share trust (EST)
Participants acquire ESS interest under an ESS (paragraph 130-85(1)(a)) As stated in response to Question 1, as Participants are granted Awards under the Plan in relation to their employment, which provide them with a beneficial interest in Shares or the right to acquire a beneficial interest in Shares, they will be taken to have acquired ESS interests under an ESS and paragraph 130-85(1)(a) will be satisfied. Subdivision 83A-B or 83A-C applies to the Shares Appreciation Rights or Performance Rights (paragraph 130-85(1)(b)) Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states: This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount. Under the Plan, Awards may be acquired for no consideration or at a discount. As Participants may acquire Shares Appreciation Rights or Performance Rights under the Plan at a discount or for nil consideration (i.e. at a discount), Subdivision 83A-B will apply to those Shares Appreciation Rights or Performance Rights (unless Subdivision 83A-C applies instead). Therefore, paragraph 130 85(1)(b) is satisfied.
The ESS interest arose because of an interest the Participants hold in an EST (paragraph 130-85(1)(c)) The Awards granted to Participants under the Plan provide Participants with an interest in the Company A Shares held in the Trust. Subsection 130-85(4) provides that an EST for an ESS (having the meaning given by subsection 83A-10(2)) 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 beneficial interest in a share and the right to acquire a share and the beneficial interest in the share that is acquired on the exercise of a right or option are both ESS interests within the meaning of subsection 83A-10(1).
An 'employee share scheme' is defined in subsection 83A-10(2) 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. As stated in response to Question 1, the Plan is an ESS within the meaning of subsection 83A-10(2) because it is a scheme under which rights to acquire beneficial interests in Shares are provided to employees in relation to their employment. Company A has established the Trust to facilitate the Plan by acquiring Shares and allocating those Shares to Participants, in order to satisfy the Awards acquired under the ESS. The beneficial interest in the Share is itself provided under the same Plan under which Awards to acquire Shares are provided to Participants in relation to the Participants' employment, being an ESS as defined in subsection 83A-10(2). Therefore, paragraph 130-85(4)(a) and (b) of the definition of an EST are satisfied because: a) the Trustee acquires Shares
b) the Trustee ensures that Awards, which are ESS interests, are provided under an ESS by allocating those shares to the Participants in accordance with the Trust Deed and the Plan. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the Trust. Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean: 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.
The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'?). Whether the Trust is an employee share trust for the purposes of subsection 130 85(4) requires an analysis of what the Trustee actually does, not only the powers and duties that are prescribed in the Trust Deed. 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 to be merely incidental. In the present case, the Trust Deed supports the conclusion that the Trustee may only use cash contributions received from Company A and Subsidiary Employer Entities to acquire Shares for Participants in accordance with the Plan. All other duties and general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with Shares to be acquired for Participants and paragraph 130-85(4)(c) is satisfied.
Therefore, the Commissioner considers the Trust to be an EST based on the terms of the Trust Deed and paragraph 130-85(1)(c) is satisfied. As all of the conditions in subsection 130-85(1) are satisfied, CGT event E5 is the CGT event that will apply under the terms of the Plan at the time that Participant becomes absolutely entitled to the Shares as against the Trustee. Question 2(b) Summary A capital gain or loss that arises to the Trustee at the time when CGT event E5 happens in relation to Shares held by the Trustee under the Plan will be disregarded under section 130-90 if the Participants acquire the Shares for the same or less than the cost base of the shares in the hands of the Trustee. Detailed reasoning Exemptions under section 130-90 Any capital gain or capital loss that the Trustee makes, if CGT event E5 happens, is disregarded if section 130-90 applies. Shares held to satisfy the future exercise of rights acquired under employee share schemes: subsection 130-90(1) Subsection 130-90(1) applies to disregard any capital gain or loss made by an employee share trust if all of the following apply: a) the CGT event is CGT event E5 or E7 (paragraph 130-90(1)(a))
b) the CGT event happens in relation to a share (paragraph 130-90(1)(b)) c) the beneficiary had acquired a beneficial interest in the share by exercising a right (paragraph 130-90(1)(c)) 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 (paragraph 130-90(1)(d)). As stated above, CGT event E5 will apply under the terms of the Plan when the Participant becomes absolutely entitled to Plan Shares as against the Trustee. Under subsection 130-85(2), Participants are taken to be absolutely entitled to the Plan Shares held by the Trustee from the time they were granted the Share Appreciation Right or Performance Right under the terms of the Plan. Therefore, paragraph 130-90(1)(a) will be satisfied. Paragraph 130 90(1)(b) is satisfied as CGT event E5 happens in relation to a share, being a Share in the capital of Company A held by the Trustee to which a Participant is absolutely entitled upon the vesting (or exercise if applicable) of a Share Appreciation Right or a Performance Right granted the Plan.
Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in a Share on vesting of an Share Appreciation Right or Performance Right, and if applicable, by exercising an Award after vesting, in accordance with the Plan. Paragraph 130-90(1)(d) is satisfied because as stated above: a) the Plan is an ESS for the purpose of Division 83A as it is an arrangement under which an ESS interest is provided to a Participant in relation to their employment b) Subdivision 83A-B or 83A-C will apply, as Participants may acquire Share Appreciation Rights or Performance Rights under the Plan at a discount. Accordingly, all the conditions in subsection 130-90(1) have been satisfied. As all of the conditions in subsection 130-90(1) are satisfied, any capital gain or capital loss that arises for the Trust at the time when CGT event E5 happens will be disregarded if the Shares are acquired by the employee for the same or less than the cost base of the Shares in the hands of the Trust. Question 2(c) Summary
CGT event E7 will not happen in respect of Shares held by the Trustee when the Trustee transfers the Shares to the Participants in accordance with the Plan and the Trust Deed. The specified scheme does not include any facts that result in CGT event E7 happening. Detailed reasoning Subsection 104-85(1) provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 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. However, CGT event E7 will not happen to the extent the beneficiaries are already absolutely entitled to the CGT assets as against the trustee (section 106-50). Based on the specified scheme, as described in the 'Relevant facts and circumstances' section above, CGT event E7 does not happen. This is because the scheme does not include any facts which give rise to CGT event E7 happening.