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Ruling

Subject: Employee Share Scheme - FBT

Question 1

Will the irretrievable contribution made by the Employers to the Trustee of the Trust, to fund the subscription for shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA?

Answer:

No

Question 2

Will the following constitute a 'fringe benefit' as defined in subsection 136(1) of the FBTAA:

(a) the acquisition of shares by the Trustee which are to be provided by the Trustee to the employee; and

(b) the allocation of a fixed interest in the Trust to an employee, represented by shares held by the Trustee for the benefit of the employee?

Answer:

(a) No

(b) No

Question 3

(a) Where a put option is granted with the shares to a participant, would the grant of the put option constitute a fringe benefit as defined in subsection 136(1) of the FBTAA?

(b) If the granting of the put option does constitute a fringe benefit, would the taxable value be reduced to nil by virtue of the recipients' contributions?

Answer:

(a) No

(b) Yes

Question 4

Will the loan provided to an employee for the purpose making an up-front tax liability payment constitute a 'loan fringe benefit' provided by a wholly owned subsidiary to the employee under section 16 of the FBTAA?

Answer:

Yes

Question 5

Where the shares are disposed of by the employee for cash, will that exchange constitute a 'fringe benefit' provided by the Trustee to the employee as defined in subsection 136(1) of the FBTAA?

Answer:

No

Question 6

Where the market value of the shares is less than the loan balances repayable at the time the shares are disposed of by the employee, and the market value of the shares at that time is applied against the loan balances, such that, the loans will be treated as fully discharged, will the discharge of the loans constitute a 'fringe benefit' to the employee as defined in subsection 136(1) of the FBTAA?

Answer:

No

Question 7

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies, such that, the amount of tax benefit gained from irretrievable contribution made to the Trustee of the Trust to fund the subscription for shares be considered a taxable fringe benefit?

Answer:

No

This ruling applies for the following periods:

Period 1 July 2011 to 31 March 2012

Year ending 31 March 2013

Year ending 31 March 2014

Year ending 31 March 2015

Year ending 31 March 2016

Year ending 31 March 2017

Year ending 31 March 2018

Year ending 31 March 2019

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The scheme the subject of this Ruling has been ascertained from the following documents:

· Application for private ruling

· Plan rules

· Trust deed of the Trust

· Shareholders agreement

· Offer documents

· Loan agreement

· Constitution

· Management agreement

Relevant legislative provisions

Income Tax Assessment Act 1997 - subsection 995-1(1)

Income Tax Assessment Act 1997 - subsection 130-85(4)

Fringe Benefits Tax Assessment Act 1986 - paragraph 136(1)(ha)

Fringe Benefits Tax Assessment Act 1986 - subsection 136(1)

Income Tax Assessment Act 1997 - section 83A-10

Fringe Benefits Tax Assessment Act 1986 - subsection 16(1)

Fringe Benefits Tax Assessment Act 1986 - section 67

Reasons for decision

Question 1

Summary

The Trust 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 Trust from being a fringe benefit.

Accordingly, the Employers will not be required to pay fringe benefits tax in respect of the irretrievable cash contributions it makes to the Trustee of the Trust to fund the acquisition of shares.

Detailed reasoning

Subsection 136(1) of the FBTAA defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, and paragraph (ha) of that definition excludes:

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:

Meaning of employee share trust

130-85(4) an employee share trust, for an employee share scheme, 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 (including past or prospective employees) in relation to the employees' employment.

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

The head company of the Employers has also established the Trust to acquire shares in the head company and to allocate those shares to employees of its subsidiaries. Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

· the Trust acquires shares in the head company; and

· the Trust 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 Plan Rules.

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 Trust. The incidental activities are covered by paragraph 130-85(4)(c) of ITAA 1997.

The Trust 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 Trust from being a fringe benefit.

Accordingly, the Employer will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the Trust to fund the acquisition of shares in accordance with the Trust Deed.

Question 2

Summary

The acquisition and allocation of shares to employees of the Employers under the Plan are not fringe benefits within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

Where the Participant acquires the beneficial interest in the shares at a discount, or below market price, a benefit will have been provided to the Participant.

However, paragraph (h) of the definition of a fringe benefit contained in subsection 136(1) of the FBTAA specifically excludes from the definition of a fringe benefit:

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;

An ESS interest in a company is a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company (subsection 83A-10(1) of the ITAA 1997). An employee share scheme is a scheme under which ESS interests in the company are provided to employees (or associates of employees) of the company or subsidiaries of the company, in relation to the employee's employment. (Subsection 83A-10(2) of the ITAA 1997)

Employees of the Employers will receive beneficial interests in shares in respect of their employment, upon acceptance, in accordance with the Plan.

The Commissioner accepts that the scheme described in the facts is an employee share scheme under which relevant ESS interests (being beneficial interests in shares) are acquired by employees (or 'associates of those employees') of the Employers, and the acquisition of those ESS interests are in relation to the employment of those employees. Therefore, the provision of those interests will not be subject to fringe benefits tax because they are specifically excluded from the definition of fringe benefit.

Question 3

Summary

The grant of a put option does not constitute a fringe benefit as it is provided by reason of the participants' shareholding.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

It is considered that the put options are granted due to the participants' position as shareholders, and therefore the definition of fringe benefit is not met.

Question 4

Summary

The loans provided to employees of the Employers will constitute loan fringe benefits.

Detailed reasoning

A loan fringe benefit means a fringe benefit that is a loan benefit. Subsection 16(1) of the FBTAA provides that a 'loan benefit' arises where a person (the 'provider') makes a loan to another person (the 'recipient') and the recipient is under an obligation to repay the whole or any part of the loan.

It is therefore considered that the loan provided to the employee constitutes a benefit under subsection 16(1) of the FBTAA, as the employees are under an obligation to repay the whole or any part of the loan under the Plan Rules.

The loan provided forms part of the scheme implemented by the Employers to confer benefits on employees 'in respect of' their employment.

The expression 'in respect of' is defined in subsection 136(1) as including 'by reason of, by virtue of, or for or in relation directly or indirectly'.

In J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 it was noted that the term 'in respect of employment', includes benefits where '… there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment…'

It is considered that the loan provided to each employee has a sufficient or material connection with their employment. The loan benefit therefore constitutes a fringe benefit under subsection 136(1) of the FBTAA.

Question 5

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

There is no 'benefit' that arises to an employee upon the exchange of their shares for cash.

Question 6

Summary

The discharge of an employee's loan for the market value of the shares will not constitute a fringe benefit provided to the employee where the market value of the shares is less than the loan balance repayable.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

When the relevant employees surrender their Shares to the Trustee in full satisfaction of a limited recourse loan, and the value of the Shares allocated is less than the balance of the outstanding loan, a benefit is considered to arise to the Participant.

However, for a benefit to be a fringe benefit it must be provided in 'respect of' employment. The term 'in respect of' has been considered by the courts in various statutory context on numerous occasions.

Whilst an employee's employment may explain their selection to receive a benefit, in order to find that a benefit is provided 'in respect of' employment, there needs to be a sufficient or material, rather than a causal connection or relationship to employment. Refer J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22.

The benefit that arises upon the discharge of the loan is considered to be provided as a result of the employee exercising rights (previously obtained) as a debtor under the loan agreement.

The situation is considered to be analogous to that in FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901. McArdle was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump-sum payment. The Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.

In this case, under the terms of the Plan Rules, the employee obtains the right to fully settle their repayment obligation under the loan with the payment of an amount equal to the fair value of the shares, where this fair value is less than the balance of the loan. If this right is subsequently exercised, any benefit would be in respect of the exercise of this right, and not in respect of employment.

Thus, the benefit that arises to an employee upon surrender of their interests in the shares does not give rise to a fringe benefit as the benefit is not provided to them 'in respect of' their employment relationship.

Question 7

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 this case, benefits provided are considered either not to be fringe benefits as that term is defined in the FBTAA, or the benefits are considered fringe benefits and will be taxed accordingly under the FBTAA, for the reasons given in the questions above.

Therefore the FBT liability is not any less than it would have been but for the arrangement.

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