ATO Interpretative Decision

ATO ID 2002/847

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are the contributions made by Company A to a Plan Company to cover the Plan company's shortfall in the event that it is required to acquire the shares for more than their market value from the participants, in the event of forfeiture, deductible under Section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision

Yes. The contributions made by Company A to the Plan Company in respect of its employees, to cover the Plan Company's shortfall in the event that it is required to acquire the shares from the participants for more than their market value at the time, are deductible under Section 8-1 of the ITAA 1997.

Facts

Company A wish to establish an Employee Share Plan (ESP) as part of a broad remuneration strategy. To benefit under the ESP, participating employees are required to satisfy certain performance criteria.

Company A through its Human Resource Committee would provide selected employees with the opportunity to acquire shares in Company A. The Human Resource Committee will impose offer conditions on these shares based on performance and continued employment within Company A.

A Plan Company will be engaged to administer certain aspects of the ESP in accordance with the Plan Rules. The Plan Company will be a third party for Corporations Law reasons, it will not be controlled or owned by Company A.

The participants will fund the acquisition cost of shares by way of a loan provided by an associate of Company A. The loan provided is non-interest bearing and fully recourse in nature.

In the event that the Human Resource Committee determines that a participants shares are to be forfeited, such forfeiture will generally be effected by the Plan Company acquiring the shares for an amount being the greater of the market value of the shares or the amount of the participant's loan which ever is greater.

In these circumstances, if there are insufficient funds standing to the balance of the "Plan Account", Company A will make a payment to the Plan Company to cover the shortfall between the proceeds from the Plan Company's sale of the forfeited shares and the amount the Plan Company is required to pay to acquire the forfeited shares from the participant.

Reasons for Decision

Under Section 8-1 of ITAA 1997, a deduction can be claimed to the extent that it is incurred in gaining assessable income or is necessarily incurred in carrying on a business for the purpose of gaining assessable income provided that (amongst other things) the outgoing is not of a capital nature.

Payment by Company A to cover shortfalls represents a cost or outgoing to or in connection with the operation of the Plan which is designed to provide remuneration benefits to participants.

The expenditure is not considered to be of a capital nature, as the nature of the advantage sought is the continuing operation of the Plan.

It is considered that any contributions made by Company A to the Plan Company are on revenue account and should be deductible under section 8-1 of ITAA 1997.

Amendment History

Year of income:  Other/Substituted Accounting Period 2004

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Related ATO Interpretative Decisions
ATO ID 2002/849

Keywords
Employee share loan benefit
Deductions

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  23 August 2002
Date reviewed:  27 November 2017

ISSN: 1445-2782