Edited version of your private ruling

Authorisation Number: 1012480226833

Ruling

Subject: Employee share schemes

Question 1

Will the head company (the company) obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by it or a subsidiary member of the income tax consolidated group to the Trustee of the Employee Share Trust (EST) to fund the subscription for, or acquisition on-market of, the company's shares?

Answer

Yes

Question 2a

Are irretrievable contributions made by company, or a member of the income tax consolidated group, to the Trustee of the EST, to fund the subscription for or acquisition on-market of company's shares by the Trust to satisfy ESS interests, deductible to the company at a time determined by section 83A-210 of the ITAA 1997, in respect to those ESS interests which are subject to Division 83A of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes

Question 2b

Are irretrievable contributions made by company, or a member of the income tax consolidated group, to the Trustee of the EST, to fund the subscription or acquisition on-market of the company's shares by the Trust to satisfy ESS interests, deductible to head company under section 8-1 of the ITAA 1997 in the income year when the contributions are made, where the contribution is made after the acquisition of the relevant ESS interests?

Answer

Yes

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 apply to the arrangement where irretrievable contributions are made to the EST to fund the acquisition of the company's shares, where a share is a fully paid ordinary share in the capital of the company?

Answer

No

Issue 3 Fringe benefits tax

Question 4

Is the provision of Rights and shares by the company to employees or subsidiary member employees a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

Question 5

Will the irretrievable cash contributions made by the company or any other member of the income tax consolidated group to the Trustee of the EST, to fund the subscription for, or acquisition on-market of, its shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

The company is the parent entity of wholly-owned subsidiaries based in Australia and overseas. The company is the head company of an income tax consolidated group and its shares are listed on the Australian Securities Exchange.

Employee Share Trust

The company established an employee share trust (the EST) under the terms of the Trust Deed executed between the company and the Trustee in 200X.

The Trust Deed allows the Trustee to acquire, hold, and allocate shares to employees participating in employee share plans operated by the company from time to time (Participants). The EST was established to assist the company to administer its employee share plans, including facilitating the acquisition of market purchased shares to satisfy equity awards granted under the company's employee share plans.

The EST's sole purpose is to acquire and hold shares on behalf of beneficiaries who are participants in the company's employee share plans. The company has confirmed that the EST has been managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997.

The EST is an independent legal entity and is not part of the company's income tax consolidated group. The company (or any other entity in the group) cannot be a beneficiary of the Trust.

Employee share plans

The company operates Y employee share plans.

Each plan is governed by separate rules which together are known as the plan rules.

The original plan

Details of the original plan were set out in the company annual report in the year it was established. The original plan allowed the company to grant restricted shares to selected employees. During the restriction period, the employee does not receive dividends. After the last grant of restricted shares was made, the original plan was discontinued.

The EST currently holds sufficient shares to satisfy the grants of shares under the original plan.

The new plans

The new plans (Plan 1 and Plan 2) were described in the company annual report in the year they were established. The new plans allow the company to offer rights to employees. Rights are defined as rights to acquire fully paid shares in the company subject to the terms of the offer and the plan rules. Rights do not carry dividend or voting rights. The employee becomes a participant of the plan by accepting an invitation, made by the company, to participate. No consideration will be payable for the grant or conversion of a right.

The rights granted in prior years allow the company to transfer shares to participants on vesting of the rights. Previously, rights were satisfied using market purchased shares acquired by the Trustee prior to the date the rights vested.

Under the new plans, rights will only vest if certain conditions are satisfied. Under Plan 1, after a vesting date, the Board was required to procure the transfer of existing shares to the participant. Plan 2 allowed the Board to procure the transfer of existing shares or the issue of new shares to the participant after the vesting date.

Right vesting on change of control

Rights vest (in full or in part) upon a change of control. Change of control is defined for the purposes of the new plans, and includes where 'a takeover bid is announced for all of the shares and the bidder has acquired voting power in more than 50% of the shares'. If a change of control occurs (subject to Board discretion):

· Under the original plan, the restriction period ends and restricted shares vest subject to relevant requirements;

· Under Plan 1, any unvested rights will vest;

· Under Plan 2, the vesting conditions will be tested and the rights will vest to the extent that the vesting conditions are satisfied.

Takeover offer

The company received a conditional offer to acquire all the shares of the company. This offer may satisfy the change of control clauses in the employee share plans if the acquirer obtains voting power in more than 50% of the Shares.

The company received shareholder approval to secure flexibility to satisfy existing rights using new issue shares (in addition, or instead of satisfying rights using shares acquired on market). The terms of Plan 1 were amended to allow new issue shares to be used to satisfy rights granted under Plan1.

The company subsequently funded the Trust with an irretrievable cash contribution which was used by the Trustee to subscribe for newly issued shares.

Contributions to the EST

The company (and its subsidiaries) may make contributions to the Trust to allow the Trustee to acquire shares for the new plans. Historically, shares have only been acquired on market for the purpose of the employee share plans. Following shareholder approval, the company made irretrievable cash contribution which the Trustee used to subscribe for newly issued shares (sufficient to satisfy outstanding Rights). In relation to the timing of future contributions to the EST:

· where shares are to be acquired on-market, contributions may be made to the EST at any time to satisfy existing or future grants;

· where shares are to be newly issued, contributions will typically be made around the time rights vest (although the company will have flexibility to make contributions at any time as considered appropriate).

In addition, the company may make additional contributions to the Trust to satisfy rights granted to employees that are employed by foreign entities within the group. Where the company makes such a contribution in respect of overseas employee the foreign entities will be required to repay the company for amounts contributed to the EST on behalf of their employees.

Employing Entities

The head company and subsidiary members of the income tax consolidated group may make contributions to the EST in relation to their employees who participate in the employee share plans.

Allocating Shares for the new plans

The Trust Deed specifies the Trustee must acquire shares to satisfy rights granted under the employee share plans in accordance with written directions from the company. However, the Trustee is only required to satisfy vested rights with shares held by the EST to the extent that sufficient payment has been received to buy shares on market, and / or to the extent that sufficient shares are already held on trust.

Reasons for the establishment and use of the EST

As a company is unable to hold its own shares and using the EST allows the company to:

· warehouse shares in the EST (i.e., acquire and hold shares before they are to be allocated to participants);

· hedge the cost of satisfying rights by funding the acquisition of shares via the EST at the time rights are granted or at any appropriate time during the vesting period;

· recycle shares that are no longer required for rights that lapse under the new plans to satisfy other rights;

· subject shares to a restriction on dealing (for example, to enforce the company's share trading policy), for a specified period of time after vesting of rights, during which time they will be held in the rust (should the company decide to impose such restrictions);

· have greater choice in the source of the shares used to satisfy rights, e.g., market purchase, new issue or other transfer.

Additionally, the company is concerned that due to the takeover offer insufficient shares will be available for Trustee to acquire shares on market. Using the EST allows the EST to acquire (either on market or by new issue) and hold shares prior to vesting to ensure shares can be allocated to employees should a change of control event occur.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Fringe Benefits Tax Assessment Act 1986 Section 66

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(f)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(h)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(ha)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(s)

Income Tax Assessment Act 1997 Section 8-1

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

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Subsection 83A-20(2)

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Issue 1 Deduction of irretrievable contributions

Question 1

Will the head company (the company) obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by it or a subsidiary member of the income tax consolidated group to the Trustee of the Employee Share Trust (EST) to fund the subscription for, or acquisition on-market of, the company's shares?

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. Broadly, the provision provides an entitlement to a deduction from assessable income for any loss or outgoing, to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, subsection 8-1(2) of the ITAA 1997 prevents such a deduction to the extent that it is a loss or outgoing of capital or of a capital nature, is a loss or outgoing of a private or a domestic nature, is incurred in gaining or producing exempt income, or is prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

The company established an employee share trust (the EST) under the terms of the Trust Deed. The Trust Deed allows the Trustee to acquire, hold, and allocate shares to employees participating in employee share plans operated by the company from time to time (participants). The EST was established to assist the company to administer its employee share plans, including facilitating the acquisition of market purchased shares to satisfy equity awards granted under the company's employee equity plans.

The EST's purpose is to acquire and hold shares on behalf of participants in the company's employee share plans.

The company (and its subsidiaries) make contributions to the Trust to allow the Trustee to acquire shares on market and to issue new shares to allow rights under the employee share plans to be satisfied.

In Pridecraft Pty Ltd v. FC of T; FC of T v. Spotlight Stores Pty Ltd [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 209, the Court held that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature. This is consistent with the opinion expressed in ATO Interpretative Decision ATO ID 2002/1074: that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made to the trustee of its employee share scheme.

Thus, the provision of money to the trustee of an employee share trust by the employer for the purpose of remunerating its employees under an employee share scheme is an outgoing in carrying on the employer's business and is deductible under section 8-1 of the ITAA 1997.

Accordingly, the irretrievable contributions the company (and its subsidiaries) make to the EST, to fund the subscription for, or acquisition on-market of, the company's shares, are deductible by the company under section 8-1 of the ITAA 1997.

Question 2a

Are irretrievable contributions made by the company, or a member of the income tax consolidated group, to the Trustee of the EST, to fund the subscription for or acquisition on-market of the company's shares by the Trust to satisfy ESS interests, deductible to the company at a time determined by section 83A-210 of the ITAA 1997, in respect to those ESS interests which are subject to Division 83A of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

Detailed reasoning

The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.

Section 83A-210 of the ITAA 1997 provides that if:

(a) at a particular time, you provide another entity with money or other property:

(i) under an arrangement; and

(ii) for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and

(b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest;

then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time.

An ESS interest, in a company, is defined in subsection 83A-10(1) of the ITAA 1997 as either 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. An employee share scheme is a scheme under which the ESS interests in a company (or subsidiaries of the company) are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2) of ITAA 1997).

Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the trustee and the acquisition of ESS interests (directly or indirectly) by the employee under an employee share scheme in relation to the employee's employment.

As established in question 1, the company (and its subsidiaries) make irretrievable contributions to the EST and under the terms the Trust Deed, the Trustee is allowed to acquire, hold, and allocate shares to employees participating in employee share plans operated by the company.

The rules adopted under the original plan allowed the company to grant restricted shares to selected employees. The rules adopted for the new plans allow the company to offer employees rights to acquire fully paid shares subject to the terms of the offer and the plan rules. The restricted shares and the rights meet the definition of ESS interests (subsection 83A-10(1) of ITAA 1997) and the employee share plans meet the definition of employee share schemes (subsection 83A-10(2) of ITAA 1997).

The arrangement is constituted of the rules for the employee share plans, the creation of the EST under the Trust Deed and the provision of money to the Trustee of the EST to acquire and hold shares to satisfy the allocation of shares to participants under the employee share scheme. The granting of ESS interests, the provision of the money to the trustee under the arrangement, the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees are all interrelated components of the employee share scheme. All the components of the scheme must be carried out so that the scheme can operate as intended.

The provision of money by the company to the Trustee is considered to be for the purpose of enabling the participating employees, directly or indirectly, as part of the employee share scheme, to acquire the ESS interests. A deduction for the purchase of shares to satisfy the existing obligations arising from the grant of ESS interests is allowable to the company in the year in which the money was paid to the Trustee, under section 8-1 of the ITAA 1997. This accords with the ATO view, expressed in ATO Interpretative Decision ATO ID 2010/103, which considers the timing of deductions allowable to an employer in respect of money provided to the trustee of an employee share trust.

However, where the irretrievable contributions are made to by the company to the Trustee of the EST before the income year in which the ESS interests are granted to the employee, section 83A-210 will apply. Under section 83A-210 of ITAA 1997, if an amount of irretrievable contributions are made to the Trustee under the arrangement to purchase shares in excess of the obligations for the ESS interests already granted, the amount will be deductible in the income year in which the relevant ESS interests are granted to the participating employees, that is the income year in which the employee acquires the ESS interests.

Question 2b

Are irretrievable contributions made by company, or a member of the income tax consolidated group, to the Trustee of the EST, to fund the subscription or acquisition on-market of the company's shares by the Trust to satisfy ESS interests, deductible to head company under section 8-1 of the ITAA 1997 in the income year when the contributions are made, where the contribution is made after the acquisition of the relevant ESS interests?

Detailed reasoning

As discussed in the previous answer to question 2a, section 83A-210 of ITAA 1997 applies if, under an arrangement, an amount of irretrievable contributions are made to the Trustee to acquire shares to satisfy future obligations under the employee share plan that is before the grant of the ESS interests to participating employees.

Section 83A-210 of the ITAA 1997 will not apply where the company makes irretrievable contributions to the EST to fund the acquisition of the company's shares by the Trust to satisfy ESS interests, where the contribution is made after the acquisition of the relevant ESS interests.

In this situation, the irretrievable contribution by the company to the Trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which irretrievable contributions are made.

Issue 2 Part IVA

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 apply to the arrangement where irretrievable contributions are made to the EST to fund the acquisition of the company's shares, where a share is a fully paid ordinary share in the capital of the company?

Detailed reasoning

Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are:

· there must be a scheme within the meaning of section 177A of the ITAA 1936

· a tax benefit arises that was obtained or would be obtained in connection with the scheme but for Part IVA of the ITAA 1936 and

· having regard to the matters in paragraph 177D(b) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies.

The characteristics of the scheme, as described in the Facts establish that the substance of the scheme is the provision of remuneration in the form of shares to participants in the company's employee share plans.

There is nothing in this arrangement to suggest a dominant purpose of seeking to obtain a tax benefit in relation to a scheme. Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by the company in relation to the irretrievable contributions made to the EST to fund the acquisition of the company's shares under the scheme.

Issue 3 Fringe Benefits Tax

Question 4

Is the provision of Rights and shares by the company to employees or subsidiary member employees a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Detailed reasoning

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a fringe benefit is provided.

In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

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; or ….

The terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10 of the ITAA 1997 (as discussed in question 2a).

The Commissioner accepts that the employee share plans as described in this private ruling application are employee share schemes under which relevant ESS interests (being rights or restricted shares) are acquired by employees of the company (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to those employees' employment.

Therefore, the granting of restricted shares under the original plan and rights under the new plans to employees will not be subject to FBT on the basis that they are ESS interests acquired under an employee share scheme and are thereby excluded from the definition of 'fringe benefit' pursuant to subsection 136(1) of the FBTAA.

The vesting of rights to acquire shares are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 apply ( see subsection 83A-20(2) of the ITAA 1997 and paragraph 83A-105(1)(a) of the ITAA 1997). Therefore, the providing of these shares will not be specifically excluded from the definition of fringe benefits under paragraph (h) of the definition in subsection 136(1) of the FBTAA.

As stated above, a fringe benefit will only arise under subsection 136(1) of the FBTAA where the benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee.

The benefit (beneficial interest in a share) that arises upon the exercise of a right is considered to be provided as a result of the employee exercising rights (previously obtained). This issue is analogous to that in ATO Interpretative Decision ATO ID 2010/219 where it was considered that when the rights under an employee share scheme are exercised, the benefit that arises comes as a consequence of the employee exercising the rights previously obtained under the scheme, not in respect of employment.

In the present circumstances, when rights to acquire a beneficial interest in a share in the company are subsequently exercised, any benefit received would be in respect of the exercise of these rights, and therefore does not give rise to a fringe benefit as no benefit has been provided 'in respect of' the employment of the employee.

Question 5

Will the irretrievable cash contributions made by the company or any other member of the income tax consolidated group to the Trustee of the EST, to fund the subscription for, or acquisition on-market of, its shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Detailed reasoning

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

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 terms 'ESS interest' and 'employee share scheme' as defined in section 83A-10 of the ITAA 1997 were considered in question 2a and it is accepted the employee share plans are employee share schemes under which the ESS interests (being rights or restricted shares) are provided to employees, or associates of employees, of the company.

The company has established the EST and under the Trust Deed, the EST's sole activities are to acquire, hold and allocate shares to employees participating in employee share plans operated by the company. There are some incidental activities undertaken by the Trustee to manage and administer the EST, such as the operation of bank accounts.

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 irretrievable cash contributions the company ,or any other member of the company consolidated group, makes to the Trustee of the EST, to fund the subscription for, or acquisition on-market of, the company shares in accordance with the Trust Deed are not a fringe benefit under subsection 136(1) of the FBTAA .

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