Many employee share incentive schemes involve the use of trusts to house the shares until such time as they vest in the employees. Often the planning of the scheme focus on the application of section 8C, which taxes the gains on the shares in the hands of the employees. BPR259 reminds planners of a further aspect to be considered, namely the tax implications of the vesting of the shares for the trust.

Section 8C of the Income Tax Act deals with the tax implications of equity instruments acquired by persons by virtue of their employment. The planning of many incentive plans focus on this provision. Binding Private Ruling 259 (BPR259) reminds planners about another aspect that does often not receive the same attention as section 8C, but that can have a significant impact on the scheme, namely the capital gains tax (CGT) implications when the shares housed in a trust vest in the employees. Even though the ruling is of limited use for other taxpayers as it only applicable to the applicant's scheme and the rationale for the ruling is not clearly set out, it is submitted that its contents highlight important considerations for other taxpayers to be aware of.

The proposed transaction

The ruling applies to an arrangement that a public company, the applicant, intends to set up to incentivise qualifying employees employed by various subsidiary companies of the applicant (parent company). Qualifying employees will not be required to make any contribution to participate in the scheme.

The parent company will issue shares to a trust. A mechanism will be implemented whereby the relevant subsidiary companies that employ the par ticipants to the scheme will settle the subscription price of the shares issued to the trust. A qualifying employee will acquire participation units in the trust that give the employee the right to trust income over a five year period, the underlying shares if the person is still employed by the group as well as voting rights attached to the shares conferred by the units.

The ruling confirms that the trust will not realise a capital gain or loss on the disposal of the shares when it vests in the employee. This is important as such a gain or loss in the trust would have added to the cost of the scheme for the employer that operates the trust. Unfortunately the ruling does not explain that basis for this outcome; however, insights may be gained from the heading of the ruling and an earlier ruling, BPR174.


Authority exists for the view that gains made by a share scheme trust that holds assets without a profit-making motive should generally not be taxed as income and/or trading stock. As such, the potential exposure would be to capital gains tax (CGT). When an asset vests in a trust beneficiary this triggers a disposal of the asset for capital gains tax purposes. The disposal to a connected person (beneficiary of a trust) gives rise to deemed proceeds equal to the market value of the asset. A 2014 amendment results in any capital gain on vesting of an equity instrument under section 8C remaining taxable in the hands of the trust, as opposed to flowing through to the beneficiary. A reading of the combination of BPR174 and BPR259 would suggest that in certain instances an uplift of the base cost of the shares may take place in the hands of the trust upon vesting of the shares. This would presumably be the reason for the ruling that no capital gain or loss arising in the hands of the trust upon vesting of the trust assets.

Broader relevance

While it only provides certainty to the applicant, the ruling reminds taxpayers planning any form of share incentive scheme that includes a trust that holds shares for a period of time to consider the impact of that vehicle and the potential tax cost that may arise from its involvement in the structure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.