Edited version of private ruling

Authorisation Number: 1011839060713

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Ruling

Subject: Fringe benefits tax

Question 1

Is the provision of options by the employer to Eligible Employees under the Plan a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer: No

Question 2

Will the non-refundable cash contributions made by the employer to the Trustee of the Employee Share Trust, to fund the subscription for or acquisition on-market of employer's shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer: No

Question 3

Will the Commissioner seek to make a determination that section 67 of the Fringe Benefits Tax Assessment Act 1986 applies to increase the fringe benefits taxable amount to the employer, by the amount of tax benefit gained from non-refundable cash contributions made by the employer to the Trustee of the EST, to fund the subscription for or acquisition on-market of the employer's shares?

Answer: No

This ruling applies for the following periods:

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

Year ended 31 March 2016

The scheme commences on:

August 2010

Relevant facts and circumstances

The employer is a company that wants to strengthen the link between remuneration and company performance.

The employer offers certain employees and executives both short term incentives and long term incentives.

The employer is considering the implementation of an employee share trust (EST) as part of its overall remuneration strategy. In summary, commercial benefits of using a Trust include:

· Providing the employer with capital management flexibility by being able to direct the Trustee of the EST to either buy shares on-market or to subscribe for new shares in the company.

· Providing a single vehicle for the administration of the Plan and any plans which the employer introduces in the future and for the convenient outsourcing of the administration to a third party administrator (the Trustee).

· Providing an arm's length vehicle (through the use of a third party Trustee) for acquiring shares in the company. This will assist it in meeting Corporations Law requirements regarding dealing in its own shares and management of potential insider trading issues.

Operation of the General Employee Share Option Plan (Plan)

The purpose of the Plan is to provide eligible employees with an opportunity to acquire a potential ownership interest in the company. Specifically, the Plan's purpose is to provide employees with an opportunity to share in the growth of the company, encourage them to improve longer term performance (e.g. returns to shareholders) and assist with recruitment, reward and retention of employees.

Broadly, the Plan operates as follows:

1. The Directors of the company may at their absolute discretion offer Options under the Plan to an Eligible Employee by issuing an Invitation and Application Form.

2. At the absolute discretion of the Directors, the terms upon which Options will be issued may include performance related factors.

3. Options are typically issued for nil consideration.

4. The Eligible Employee may exercise their Options during the Option Period by making payment of the full amount of the Exercise Price.

5. The employer permits all of an employee's Options to be exercised in the event of death or Permanent Disablement of an Eligible Employee.

6. The Exercise Price of each Option shall not be less than the Market Price of one Share at the date the Committee decides to invite the Participant to apply for the Option.

7. Where an Option holder ceases to be an Eligible Employee any time before exercise, the Options will automatically lapse unless the Board determines otherwise.

8. Further, if the Options are not exercised and an Eligible Employee acts fraudulently or dishonestly in any material respect, then the Options will be forfeited.

9. Within ten business days of an Eligible Employee exercising their Options, the company must direct the Trustee to subscribe for, acquire or allocate to the Eligible Employee one share for each option exercised and hold those shares in the EST on behalf of the Eligible Employee.

10. The Trust Deed requires the employer to provide funds to the Trustee in order to allow the Trustee to subscribe for / and or acquire shares to be held on behalf of the Eligible Employees under the Plan.

11. All shares allotted, transferred or allocated upon the exercise of Options will be of the same class and rank with other shares in the company.

12. The Board may determine a restriction period will apply to shares issued, transferred or allocated following exercise, up to a maximum of seven years. A Holder cannot dispose of or otherwise deal with any shares while the shares are restricted.

13. A Holder may submit a Withdrawal Notice to the company in respect of some or all of the shares the EST holds on behalf of the employee that are not restricted shares. At this point the employer must direct the Trustee to transfer legal title of the shares in accordance with the terms of the approved Withdrawal Notice.

14. On instruction by the employee, the Trust Deed allows the Trustee to sell the shares on behalf of the employee and provide the proceeds of sale less brokerage costs to the employee.

Employee Share Trust

The EST is intended to operate as follows:

1. The EST is being established for the sole purpose of obtaining shares for the benefit of employees of the employer pursuant to the Plan that is described in this ruling request.

2. The EST will be funded by contributions from the employer (i.e. for the purchase of shares in accordance with the Plan). In accordance with the intended operation of the Plan, contributions are likely to occur subsequent to the Participant's valid request to exercise their Options.

3. These funds will be used by the Trustee of the EST to acquire shares in the company either on-market or via a subscription for new shares, based on written instructions from the employer.

4. Shares acquired by the Trust will be immediately allocated to the relevant employees and held on their behalf.

5. The structure of the EST and the Plan are such that shares may be dealt with at any time after the Restrictive Period lapses, in the following manner:

· Shares allocated to each employee will generally be transferred into the name of the employee (i.e. legal title) upon a Withdrawal Notice being lodged with and approved by the Board; or

· The Trustee can sell shares on behalf of the employee, where permitted to do so by the employee, resulting in a cashless exercise for them. That is, the employee receives proceeds on sale of shares by the EST less the exercise price (if any) and any brokerage costs.

Another company is an external Trustee acting in an independent capacity on behalf of the beneficiaries of the EST.

The Trust Deed sets out the general powers of the Trustee.

The Trust Deed states that the company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of section 130-85(4) of the ITAA 1997.

The Trust Deed limits the scope of activities that can be undertaken by the Trustee.

The employer issued a number of Options under the Plan prior to 1 July 2009. A number of these Options are yet to vest or have vested but have not been exercised. When they vest and/or are exercised, shares will be issued or purchased on market for Eligible Employees through the EST.

It is not possible for the employer to definitively know which Participants have made an election under section 139E of the Income Tax Assessment Act 1936 to be taxed up front in relation to the Options issued prior to 1 July 2009, as it is not privy to the personal tax positions adopted by employees who participate in the Plan.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 67,

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1),

Income Tax Assessment Act 1997 Section 83A-10 and

Income Tax Assessment Act 1997 Subsection 130-85(4).

Reasons for decision

Question 1

Summary

The provision of options by the employer to eligible employees under the Plan are not fringe benefits under subsection 136(1) of the FBTAA as they are excluded from being so by paragraph (h) of the definition.

Detailed reasoning

A fringe benefit will arise under subsection 136(1) of the FBTAA where a benefit is provided by

· an employer

· an associate of an employer or

· a third party in an arrangement with an employer

to employees or associates of employees. The benefit must also be provided 'in respect of the employment of the employee'.

Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA, states that a fringe benefit does not include:

a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83A-B or 83A-C of that Act applies;

According to subsection 83A-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997), an ESS interest in a company is a beneficial interest in:

(a) a share in the company, or

(b) a right to acquire a beneficial interest in a share in the company.

The beneficial interest in Options to acquire shares in the company falls within the definition of an ESS interest.

The term 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as:

...a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of:

(a) the company; or

(b) subsidiaries of the company;

in relation to the employees' employment.

For the purposes of subsection 83A-10(2) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 defines the term 'scheme' as follows:

(a) any arrangement; or

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The purpose of the Plan is to provide eligible employees with an opportunity to acquire a potential interest in the company. It is a scheme under which ESS interests in the company are provided only to employees in relation to their employment.

The ESS interests in the company are provided at the time that the options are issued to the employees.

The benefit provided to the employees will fall within paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA, thus excluding it from being a fringe benefit.

Question 2

Summary

The non-refundable contributions made by the employer to the Trustee of the Trust to fund the subscription for or acquisition on-market of the company shares, are not fringe benefits as defined in subsection 136(1) of the FBTAA as they are excluded from being so by paragraph (ha) of that definition.

Detailed reasoning

A fringe benefit includes benefits provided to an associate of an employee in respect of an employee's employment.

The definition of an associate for FBT purposes is the definition in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). In accordance with that section a trustee of a trust is an associate of a natural person where the natural person '…benefits under the trust'.

A benefit includes any right, privilege, service or facility. The payment of money can constitute a property fringe benefit where it is not salary or wages.

However, a 'fringe benefit' does not include:

(ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997);

An 'employee share trust' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2) of the ITAA 1997) 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 right to acquire a beneficial interest in an employer share is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997.

An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees or associates of employees in relation to the employees' employment.

The Plan is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which either rights to acquire beneficial interests in shares in the company are provided to employees in relation to the employee's employment or beneficial interests in shares in the company are provided to employees in relation to the employee's employment.

Under the Plan, the employer has established the EST to obtain shares for the benefit of employees of the employer and to allocate those shares to its employees.

Some of the shares that the EST obtains may be in relation to options issued prior to 1 July 2009. According to the transitional provisions in Division 83A of the Income Tax (Transitional Provisions) Act 1997 the provisions of Division 13A of the ITAA 1936 continue to apply where an election has been made under section 139E of the ITAA. Notwithstanding this, a beneficial interest in such options fits within the definition of an ESS interest in subsection 83A-10(1) of the ITAA 1997.

Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

· the EST acquires the shares in the company and

· the EST ensures that the ESS interests being beneficial interests in those shares, are provided under an employee share scheme to the employees in accordance with the Trust Deed and relevant Rules of the Plan.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require that the Trustee undertake incidental activities that are a function of managing the Plan and administering the EST.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental include:

· the opening and operation of a bank account to facilitate the receipt and payment of money

· the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee

· the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme

· dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme

· the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares

· the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries, and

· receiving and immediately distributing shares under a demerger.

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 merely incidental.

The activities of the EST, as outlined in the Trust deed, are consistent with these activities. Further a clause has been included to ensure that the EST will be managed and administered so that it satisfies the definition of an employee share trust for the purposes of subsection 130-85(4) of the ITAA 1997.

Therefore the EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the EST from being a fringe benefit.

Accordingly the employer will not be required to pay FBT in respect of the non-refundable cash contributions it makes to the Trustee of the EST to fund the acquisition of company shares in accordance with the Trust Deed.

Question 3

Summary

The Commissioner will not seek to make a determination because the FBT liability is not any less than it would have been but for the arrangement.

Detailed reasoning

ATO Practice Statement Law Administration PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA of the ITAA 1936 or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 provide as follows:

145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

It is clear, therefore, that the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 under the heading
'Appendix, Question 18' where, on the application of section 67, the Commissioner states:

…As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement...

Further, paragraph 151 of PS LA 2005/24 provides:

151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

In the present case, the benefits provided to the Trustee by way of non-refundable contributions to the EST, and to Participants by way of the provision of options and shares under the Plan are excluded from the definition of a fringe benefit as explained above. Therefore, as these benefits have been excluded from the definition of a fringe benefit and as there is also no FBT currently payable under the Plan, the FBT liability is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of the employer in relation to a tax benefit obtained under the Plan from non-refundable cash contributions made by the employer to the Trustee of the EST to fund the acquisition of the company's shares in accordance with the Trust Deed.

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