Alert

Who does this affect?

Any person that operates employee equity programs through a trust and is undertaking a rights issue, share purchase plan, demerger or return of capital.

What do you need to do?

Review the terms of their employee share trust to determine whether employee shareholders may be disadvantaged vis-a-vis other shareholders.

Authors
Andrew Clements  
Partner

Kai-Chen Chang  
Solicitor

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Andrew Clements  
Partner
T +61 3 9643 4089

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Phillip Davies  
Partner
T +61 3 9643 4106

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A recent class ruling issued by the Commissioner of Taxation (CR 2008/61) has highlighted an important tax issue that may arise in relation to any rights issues, share purchase plans, demergers or returns of capital you are undertaking.

Specifically, if a company undertaking a transaction operates an employee share or option plan that is administered through a trust, and relevant employees participate in the transaction, then those employees may be worse off than other shareholders from an Australian tax perspective.

The Commissioner of Taxation recently issued a class ruling (CR 2008/61) regarding the tax implications of the return of capital undertaken by Centennial Coal Company Limited (Centennial Coal) for the participants in the Centennial Deferred Employee Share Plan.

This class ruling has highlighted an issue that may arise for companies undertaking certain capital raisings or restructures where the company also operates employee share or option plans through a trust structure.

Specifically, employees that have shares held on their behalf by a trust in connection with an employee share or option plan, and which participate in the relevant transaction, may derive assessable gains where shareholders generally should not realise taxable gains.

These issues arise in relation to the following types of transactions:

• rights issues and share purchase plans — there may be an acceleration of the taxing point and difficult withholding tax issues for employees which are able to participate in the rights issue through the trust, or

• demergers and returns of capital — employees may realise a capital gain on the receipt of the proceeds of the demerger or the return of capital.

In short, the employees who participate may be worse off than shareholders generally.

These issues may necessitate amendments to the relevant documents or, at the very least, clear disclosure in the relevant offering documents.

Rights issues and employee share trusts

Generally speaking, where an ordinary shareholder participates in a rights issue, the shareholder should not be assessed on the receipt of the rights and should generally be able to defer tax on the right until the share acquired on exercise of the right is disposed of.

The position may be different where shares are held through an employee share trust, and the employee can participate in the rights issue through the employee share trust. Depending on the terms of the employee share trust, a capital gain may arise when the trust distributes the shares acquired under the rights issue to the employee.

For employees which are residents of Australia, this effectively accelerates the taxing point for the rights issue vis-à-vis ordinary shareholders in the company.

For employees which are not residents of Australia, this may result in employees being subject to tax in Australia on the rights issue, where otherwise they would have been exempt under the non-resident capital gains tax exemption.

Demergers and returns of capital

There is a risk that a capital gain may arise for the employee where an employee receives a return of capital or demerger proceeds through an employee share trust.