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Edited version of your written advice

Authorisation Number: 1013036528530

Date of advice: 29 June 2016

Ruling

Subject: Employee Share Schemes

Question 1

Will Company A Limited (Company A), as head entity of the Company A income tax consolidated group, be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made by Company A or any subsidiary member of the Company A tax consolidated group to Company B (Trustee), as trustee of the trust (Trust) established by the Company A Employee Share Trust Deed (Trust Deed), to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee to satisfy ESS interests issued pursuant to the Incentive Right Plan (IRP)?

Answer

Yes.

Question 2

Will Company A as head entity of the Company A income tax consolidated group be entitled to deduct an amount under section 8-1 of the ITAA 1997, in respect of costs incurred by Company A or any subsidiary member of the Company A income tax consolidated group, in relation to the implementation and on-going administration of the Trust?

Answer

Yes.

Question 3

Will irretrievable cash contributions made by Company A, or any subsidiary member of the Company A income tax consolidated group to the Trustee, to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee, be deductible to Company A at a time determined by section 83A- 210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes.

Question 4

If the Trustee satisfies its obligations under the Trust Deed and IRP by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A under sections 6-5 or 20-20 of the ITAA 1997, or trigger a CGT event under Division 104 of the ITAA 1997?

Answer

No.

Question 5

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company A as head entity of the income tax consolidated group in respect of the irretrievable cash contributions made by Company A, or any subsidiary member of the income tax consolidated group, to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee?

Answer

No.

The rulings for questions 1 to 5 inclusive each apply for the following periods:

Income tax year ended 31 December 2016

Income tax year ended 31 December 2017

Income tax year ended 31 December 2018

Income tax year ended 31 December 2019

Income tax year ended 31 December 2020

Question 6

Will the provision of Incentive Rights by Company A to employees of Company A, or any subsidiary of Company A, under the IRP be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No.

Question 7

Will the irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares constitute a fringe benefit in relation to Company A, or any subsidiary of Company A, within the meaning of section 136(1) of the FBTAA 1986?

Answer

No.

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits taxable amount of Company A, or any subsidiary of Company A, by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for, or acquisition on-market of, Company A shares?

Answer

No.

The rulings for questions 6 to 8 inclusive each apply for the following periods:

Fringe benefits tax year ended 31 March 2017

Fringe benefits tax year ended 31 March 2018

Fringe benefits tax year ended 31 March 2019

Fringe benefits tax year ended 31 March 2020

Fringe benefits tax year ended 31 March 2021

Relevant facts and circumstances

Background

Company A is an Australian listed company which provides services to the mining, and related sectors. Company A specialises in sustaining capital works and the provision of shutdown, construction and maintenance services.

As part of its overall remuneration strategy, in addition to fixed remuneration, Company A offers certain employees and Directors' payments of shares upon satisfaction of certain performance conditions through the Incentive Right Plan.

Incentive Right Plan

The Incentive Right Plan (IRP) is governed by rules contained in the Company A Incentive Right Plan which was issued by the board of Company A (IRP Rules).

Rule 20 of the IRP Rules defines the following relevant terms:

Acceptance Form means a form to accept Incentive Rights Offered under the Plan substantially in the form annexed to these Rules as Annexure A with any amendment or modification determined from time to time by the Board;

Change of Control Event means any of the following:

    (a) if a person acquires voting power (within the meaning of section 610 of the Corporations Act) in more than 50% of the Shares in the Company as a result of a takeover bid;

Eligible Employee means a person who:

Expiry Date means, subject to the Rules, the expiry date of Incentive Rights, being the earlier of:

Incentive Right Holder means the holder of an Incentive Right issued under the Plan

Offer means an offer in writing made by the Board to an Eligible Employee to take up Incentive Rights under the Plan made in accordance with Rule 6;

(a) receive a Share by transfer, allocation or allotment; or

(b) be paid a cash amount determined under these Rules,

Vesting Conditions means one or more conditions (if any) as determined by the Board to

apply to an Incentive Right as set out under the Offer which are conditions of the Incentive

Rule 5.1 of the IRP Rules states that Incentive Rights:

Rule 5.3 of the IRP Rules states that the issue of an Incentive Right does not confer any right or interest in any Share until the Vesting Conditions in respect of the Incentive Right have been satisfied or waived by the Board at its discretion or the Incentive Right has otherwise become exercisable in accordance with the IRP Rules.

Rules 5.4 of the IRP Rules states that:

Rule 5.5 of the IRP Rules states that where the Board has determined that an Incentive Right will be Equity Settled then, on exercise of the Incentive Right, Company A must issue or procure the transfer to the Incentive Right Holder, or instruct the Trustee to either subscribe for, acquire and/or allocate for the benefit of the Incentive Right Holder, the numbers of shares in respect of the exercised Incentive Right.

Rule 5.6 of the IRP Rules states that where the Board has determined that an Incentive Right will be Cash Settled then, on exercise of the Incentive Right, Company A must make a cash payment to the Incentive Right Holder equal to the sum of the Market Price of an ordinary share in Company A at the date of exercise multiplied by the number of validly exercised Incentive Rights that will be Cash Settled (less any taxes and superannuation required to be withheld under applicable law).

Rule 5.7 of the IRP Rules states that an Offer to an Eligible Employee may specify that the Incentive Rights that are subject of that Offer have a Cashless Exercise Facility. The Cashless Exercise Facility allows the Eligible Employee to, on exercise of the relevant Incentive Rights, elect to pay the Exercise Price per Incentive Right by setting off the total Exercise Price against the number of shares they are entitled to receive upon exercise of the Incentive Rights (calculated by reference to a formula).

Rule 5.10 of the IRP Rules states that the Board may in its absolute discretion make offers of Incentive Rights to Eligible Employees.

Rule 5.12 of the IRP Rules states that Incentive Rights must be issued in compliance with the terms of the IRP Rules, Corporations Act 2001, Listing Rules, ITAA 1997 and any additional terms as considered appropriate by the Board.

Rule 6.1 of the IRP Rules states that:

Rule 6.2 of the IRP Rules states that to accept an Offer made by the Board the Eligible Employee must send a completed Acceptance Form to Company A.

Rule 6.4 of the IRP Rules states that upon receipt of a completed and signed Acceptance Form which is accepted by the Board, Company A will issue to the Eligible Employee:

Rule 7 of the IRP Rules states that the Board shall not Offer or issue Incentive Rights to any Eligible Employee in accordance with the IRP Rules if it would cause Company A to exceed any thresholds set out in ASIC Class Order 14/1000 (or any class order or law which supersedes it) or the Listing Rules if Company A is Listed.

Rule 8.1 of the IRP Rules states that an Incentive Right will lapse and be forfeited if:

Rule 10 of the IRP Rules states that in the event of inconsistency between the terms and conditions of the IRP Rules and the Listing Rules then the Listing Rules will prevail.

Rule 12 of the IRP Rules states that where there is a Change of Control Event the Vesting Conditions of the Incentive Rights are deemed to have been satisfied or waived by the Board and the Incentive Rights may be exercised immediately.

Company A Share Trust (the Trust)

Company A has established a trust (Trust) under the Company A Employee Share Trust Deed (Trust Deed) which will be used to administer the IRP. Company B has been appointed under the Trust Deed as the Initial Trustee (Trustee). Company A will incur various costs in relation to the implementation and on-going administration of the Trust including, but not limited to:

Clause 1 of the Trust Deed defines the following relevant terms:

Clause A of the Recitals of the Trust Deed states that the Trust was established for the purpose of acquiring, holding and transferring Shares in connection with equity incentive plans established by Company A for the benefit of participants in those plans.

Clause 3.1 of the Trust Deed states that the Trustee must hold a Participant's Allocated Shares, the proceeds arising from any sale by the Trustee of rights under a Rights Issue relating to a Participant's Allocated Shares and all other benefits and privileges related to or arising from a Participant's Allocated Shares on trust for and on behalf of the Participant under the terms of the Trust Deed.

Clause 4.3 of the Trust Deed states that the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration for operating or administering the Trust. However, clause 4.3 of the Trust Deed recognises that Company A must pay to the Trustee from Company A's own resources any such fees, commission or other remuneration and may reimburse such expenses incurred by the Trustee as agreed from time to time by Company A and the Trustee. Clause 4.3 of the Trust Deed recognises that the Trustee is entitled to retain for its own benefit any such fees, commission, remuneration or reimbursement.

Clause 4.9 of the Trust Deed states that Company A 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 subsection 130-85(4) of the ITAA 1997.

Clause 5.1 of the Trust Deed states that the Board:

Clause 5.2 of the Trust Deed states that if the Trustee on receiving a Dealing Notice has received sufficient funds or has sufficient capital then it must:

Clause 5.3 of the Trust Deed states that:

Clause 7.4 of the Trust Deed states that if the Trustee subscribes for Shares, on behalf of a Participant, the Trustee must hold those Shares as Allocated Shares for that Participant.

Clause 9.3 of the Trust Deed states that the Trustee must do all things required by it to transfer some or all of a Participant's Allocated Shares to the relevant recipient and pay to the Participant any other monies held on the account for the Participant:

Clause 10 of the Trust Deed states that upon the sale of any Allocated Shares the Trustee must apply the proceeds of sale:

Clause 13 of the Trust Deed states that Company A indemnifies the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in the execution or purported execution of powers, authorities or discretions vested in the Trustee under the Trust Deed. Clause 13 of the Trust Deed also states that if the Trustee does not have sufficient available funds then Company A indemnifies the Trustee in respect of any tax payables in respect of Unallocated Shares.

Clause 15.2 of the Trust Deed states that, amongst other things, in the event that the Trust is terminated then any surplus assets of the Trust must be applied in whole or in part for the benefit of either one or both of the following beneficiaries as the Trustee thinks fit:

Clause 15.3 of the Trust Deed states that the Trustee must not pay any of the surplus assets under clause 15.2 to any Group Company.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 67(1)

Fringe Benefits Tax Assessment Act 1986 subsection 67(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

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

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

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1936 subsection 177F(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 8-1(1)

Income Tax Assessment Act 1997 subsection 8-1(2)

Income Tax Assessment Act 1997 paragraph 8-1(2)(a)

Income Tax Assessment Act 1997 Division 20

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 subsection 20-20(2)

Income Tax Assessment Act 1997 section 20-30

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 subsection 83A-10(1)

Income Tax Assessment Act 1997 subsection 83A-10(2)

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 paragraph 104-35(5)(c)

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

Income Tax Assessment Act 1997 paragraph 130-85(4)(a)

Income Tax Assessment Act 1997 paragraph 130-85(4)(c)

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 section 974-75

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

Reasons for decision

Questions 1 to 5 - application of the single entity rule in section 701-1 of the ITAA 1997

The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 of the ITAA 1997 the subsidiary members of a consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period they are members of the consolidated group with the head company of the group being the only entity recognised for income tax purposes.

The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997. As a consequence, the actions and transactions of the subsidiary members of the Company A tax consolidated group are treated for income tax purposes as having been undertaken by Company A as the Australian head company of the Company A tax consolidated group.

Questions 6 to 8

The SER in section 701-1 of the ITAA 1997 has no application to the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986). Accordingly the Commissioner has provided a ruling to Company A and each subsidiary member of the Company A consolidated group in relation to questions 6 to 8.

Question 1

The general deduction provision is section 8-1 of the ITAA 1997 which states:

Losses or outgoings

To claim a deduction under subsection 8-1(1) of the ITAA 1997 contributions made to the Trustee by Company A must be irretrievable and non-refundable.

Clause 5.1 of the Trust Deed provides that Company A must provide sufficient funds to the Trustee to pay any costs incurred by the Trustee in connection with any Dealing Notice under clause of the Trust Deed.

Pursuant to Clause 5.2 of the Trust Deed, Company A will issue Company A shares to the Trustee or direct the Trustee to acquire Company A shares on market. The Trustee holds those Company A shares as Allocated Shares on behalf of each Participant which includes each Incentive Rights Holder for the purposes of the IRP Rules.

Clause 5.3 of the Trust Deed provides that Company A must provide the Trustee with all funds required by the Trustee to enable it to subscribe for or acquire Company A shares that it is directed to subscribe for or acquire by the Board. The funds provided constitute accretions to the corpus of the trust and will not be repayable by the Trustee unless they are provided by way of loan.

Clause 13 of the Trust Deed provides that Company A indemnifies the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in the execution or purported execution of powers, authorities or discretions vested in the Trustee under the Trust Deed. Clause 13 of the Trust Deed also provides that if the Trustee does not have sufficient available funds then Company A indemnifies the Trustee in respect of any tax payables in respect of Unallocated Shares.

Clause 15.2 of the Trust Deed provides that, amongst other things, in the event that the Trust is terminated then any surplus assets of the Trust must be applied in whole or in part for the benefit of either one or both of the following beneficiaries as the Trustee thinks fit:

Clause 15.3 of the Trust Deed provides that the Trustee must not pay any of the surplus assets under clause 15.2 to Company A or any Group Company.

The terms of the Trust Deed when considered together demonstrate that contributions made by Company A to the Trustee, being those contributions which are not made by way of loan, will be irretrievable and non-refundable and therefore these contributions are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997.

Sufficient nexus

In order for a loss or outgoing to be deductible under subsection 8-1(1) of the ITAA 1997 it must be either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. A line of authorities has established that there will be a link between a loss or outgoing and the derivation of income where there is a sufficient nexus (The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169, Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288, W. Nevill And Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin No Liability v The Federal Commissioner of Taxation (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147).

The contributions made by Company A to the Trustee of the Trust are part of the overall employee remuneration costs of Company A. The benefits provided to Directors and employees of the Group under the IRP are to encourage them to remain with the Group, improve longer-term performance of the Group and to recognise the contribution of the Directors and employees to the success of the Group.

A sufficient nexus exists between the outgoings (being the irretrievable contributions made by Company A to the Trustee of the Trust) and the derivation of assessable income for the purposes of subsection 8-1(1) of the ITAA 1997.

Capital or revenue?

Company A will make periodic contributions to the Trustee of the Trust in order to operate the IRP for the purpose of enabling the Trustee to acquire or subscribe for ordinary shares in Company A.

In ATO ID 2002/1074 Income Tax - deductibility - irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme, the view is expressed that a company will be entitled to a deduction for irretrievable contributions made to the trustee of its employee share scheme under section 8-1 of the ITAA 1997.

In Spotlight Stores Pty Ltd v Federal Commissioner of Taxation (2004) 55 ATR 745 and Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 58 ATR 210 payments by an employer company to an employee share trust, established to provide incentive payments to employees, were held to be on revenue account and were not capital or of a capital nature.

Apportionment

The combined operation of subsection 8-1(1) and subsection 8-1(2) of the ITAA 1997 may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a different nature. This would be relevant in the circumstances where the Trustee of the Trust uses contributions received from Company A to subscribe for shares in Company A for the purposes of administering the IRP.

A contribution to the trustee of an employee share trust is capital or of a capital nature where the contribution secures for the employer an asset or advantage of an enduring or lasting nature that is independent of the year to year benefits that the employer derives from a loyal and contented workforce.

Where the trustee of an employee share trust, ultimately and in substance, uses a contribution from the employer to subscribe for equity interests in the employer (for example shares), the employer has also acquired an asset or advantage of an enduring nature.

Where a contribution secures for the employer advantages of both a revenue and capital nature, but the expected advantages of a capital nature are very small or trifling by comparison, apportionment may not be required.

In this case, the outgoings incurred by Company A by way of the irretrievable contributions it makes to the Trustee of the Trust in order to carry on its business are either not capital in nature or any capital component is considered to be sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction.

Private or domestic in nature

Nothing in the facts suggest that the irretrievable contributions made by Company A to the Trustee of the Trust are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1936 or ITAA 1997.

Conclusion

The irretrievable contributions Company A makes to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Company A shares in accordance with the Trust Deed and the IRP Rules will be an allowable deduction to Company A under section 8-1 of the ITAA 1997.

Question 2

Company A will incur costs in relation to the implementation and ongoing administration of the Trust including, but not limited to:

Clause 4.3 of the Trust Deed provides that the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration for operating or administering the Trust. However, Company A may pay to the Trustee from Company A's own resources any such fees, commission or other remuneration and may reimburse such expenses incurred by the Trustee as agreed from time to time by Company A and the Trustee. The Trustee is entitled to retain for its own benefit any such fees, commission, remuneration or reimbursement.

The costs incurred by Company A in relation to the implementation and on-going administration of the Trust are deductible under section 8-1 of the ITAA 1997 as either:

The view that the costs incurred by Company A are deductible under section 8-1 of the ITAA 1997 is consistent with ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer. Consistent with the detailed reasoning above in question 1, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. The costs are therefore not excluded from being deductible under paragraph 8-1(2)(a) of the ITAA 1997.

Company A is entitled to an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the Trust.

Question 3

The deduction for the irretrievable cash contributions under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which Company A incurred the outgoing. However, 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:

Section 83A-210 of the ITAA 1997 applies under an arrangement where there is a relevant connection between the irretrievable cash contributions, provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme, in relation to the employee's employment and the contributions are made before the acquisition of the ESS interests.

Arrangement

The implementation of the IRP, establishment of the Trust and provision of money by Company A to the Trustee, are considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i) of the ITAA 1997.

ESS interest

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.

Under the IRP, each right provided to a Eligible Employee when an offer is made under the IRP Rules is an ESS interests as it is (or may later become) a right to acquire a beneficial interest in a share in a company (Company A).

Employee share scheme

Subsection 83A-10(2) of the ITAA 1997 defines 'employee share scheme' as:

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:

The IRP is an employee share scheme for the purposes of Division 83A of the ITAA 1997 as it is an arrangement which provides an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a share) to an Eligible Employee in relation to their employment in Company A in accordance with the Trust Deed. A Company A share acquired by the Trustee to satisfy a right provided under the ESIRP, to an employee in relation to the employee's employment with Company A, is itself acquired under the same employee share scheme, being the IRP.

Relevant connection

The making of offers under the IRP Rules, the provision of irretrievable cash contributions to the Trustee of the Trust, the acquisition and holding of the Company A shares by the Trustee of the Trust and the allocation of Company A shares to Eligible Employees are all interrelated components of the IRP. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed. The provision of money to the Trustee to acquire Company A shares is for the purpose of enabling Eligible Employees, indirectly as part of the IRP, to acquire relevant rights (that is ESS interests).

If Company A provides irretrievable contributions before an Eligible Employee acquires the relevant ESS interests, then section 83A-210 of the ITAA 1997 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1 of the ITAA 1997. In this instance, the contribution will only be deductible to Company A in the income year when the relevant rights (ESS interests) are provided to an Eligible Employees. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

Indeterminate rights

Incentive Rights provided under the IRP Rules may be indeterminate rights for the purposes of section 83A-340 of the ITAA 1997. That is because, depending on the conditions attaching to an Incentive Right, it may be uncertain at the time of issue whether it will be satisfied by delivery of a Company A share or the payment of a cash equivalent. In those instances an Incentive Right will not be a right to acquire a beneficial interest in a share unless and until the time when the Board determines that the Incentive Right will be satisfied by the provision of a fully paid ordinary share in Company A. Once that is determined, section 83A-340 of the ITAA 1997 will operate to treat such an Incentive Right as though they had always been rights to acquire beneficial interests in shares.

If irretrievable contributions are provided to the Trustee before an Incentive Right is acquired and the Incentive Right subsequently becomes an ESS interest then section 83A-340 of the ITAA 1997 operates to deem the Incentive Right to always have been ESS interest. In such a situation section 83A-210 of the ITAA 1997 will apply retrospectively to modify the timing of the deduction claimed under section 8-1 of the ITAA 1997. In such a case, a deduction to fund the exercise of the Incentive Right would be available to Company A in the income year in which Eligible Employee acquired the Incentive Right.

Note

Where the Incentive Rights do not become ESS interests because they are ultimately satisfied in cash the outgoing should not flow through the Trust. That is because the Trust would not be satisfying the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997.

As discussed in the analysis above, section 83A-210 of the ITAA 1997 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme in relation to the employees employment and the contributions are made before the acquisition of the ESS interests.

Section 83A-210 of the ITAA 1997 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Company A shares where the contribution is made after the acquisition of the relevant rights. In such a situation the irretrievable contributions made by Company A to the Trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which the irretrievable contributions are made where relevant rights are ultimately satisfied by the provision of a fully paid ordinary share in Company A.

Question 4

Ordinary Income

Section 6-5 of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. Jordan CJ considered the definition of 'income' in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219; 3 ATD 142 at 144-145 where his Honour said:

A leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that:

In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that:

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In an employee share scheme, the trustee subscribes to the company for an issue of shares, it pays the full subscription price for the shares and the company receives a contribution of share capital from the trustee.

The character of the right or thing disposed of in exchange for the receipt can determine the character of the contribution received by Company A from the Trustee. Under this arrangement, Company A issues the Trustee with a new share in itself. The character of the newly issued share is one of capital. Therefore, the receipt, being the subscription proceeds, takes the character of share capital, and, accordingly, is of a capital nature. This is consistent with the ATO view expressed in ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee.

Subscription proceeds received by Company A from the Trustee of the Trust where the Trustee has subscribed for new shares in Company A to satisfy obligations to Interest Rights Holders under the IRP are a capital receipt. That is, subscription proceeds will not be received on revenue account and will not be ordinary income under section 6-5 of the ITAA 1997.

Section 20-20 of the ITAA 1997

Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year.

Company A will receive an amount when the Trustee of the Trust subscribes for shares in Company A. There is no insurance contract in this case, so the amount received is not received by way of insurance.

Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. The amount is not received by way of indemnity.

Subsection 20-20(3) of the ITAA 1997 makes assessable a recoupment of a loss or outgoing that is deductible in the current income year, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30 of the ITAA 1997.

Subsection 20-25(1) of the ITAA 1997 defines a recoupment as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing.

The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing.

To the extent section 8-1 of the ITAA 1997 allows a deduction for bad debts or rates or taxes, section 20-30 of the ITAA 1997 will apply such that if there were a recoupment of that deduction any amount received will be assessable. The amount received by Company A is received in return for issuing shares to the Trustee of the Trust and not as a recoupment of previously deducted expenditure under section 8-1 of the ITAA 1997 regarding bad debts or rates and taxes that could be subject to section 20-30 of the ITAA 1997.

The subscription proceeds received by Company A when the Trustee of the Trust subscribes for shares in Company A will therefore not be an assessable recoupment under section 20-20 of the ITAA 1997.

Capital Gains Tax (CGT)

Under section 102-20 of the ITAA 1997 you make a capital gain or loss if, and only if, a CGT event happens.

The relevant CGT events that may be applicable when the subscription proceeds are received by Company A from the trustee of the Trust when it subscribes for shares in Company A are CGT event D1 (creating a contractual or other rights) and CGT event H2 (receipt for event relating to a CGT asset).

Paragraph 104-35(5)(c) of the ITAA 1997 states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company.

In relation to CGT event H2, paragraph 104-155(5)(c) also states that CGT event H2 does not and CGT event H2 do not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, Company A is issuing shares, being equity interests as defined in section 974-75 of the ITAA 1997, to the Trustee of the Trust. CGT event D1 and H2 therefore do not happen.

As no CGT event happens, there is no amount assessable as a capital gain to Company A.

If the Trustee of the Trust satisfies its obligations under the Trust Deed by subscribing for new shares in Company A, then the subscription proceeds received by Company A will not be included in the assessable income of Company A under section 6-5 of the ITAA 1997 or section 20-20 of the ITAA 1997, and nor will a CGT event happen under Division 104 of the ITAA 1997.

Question 5

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (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 his discretion to make a determination in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met:

On the basis of an analysis of these three requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by Company A for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, shares in Company A.

Question 6

The liability of an employer to fringe benefits tax (FBT) arises under section 66 of the FBTAA 1986 which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. Under the FBTAA 1986, the calculation of the fringe benefits taxable amount is made by reference to the taxable value of each fringe benefit provided.

Without the provision of a 'fringe benefit' no amount will be subject to FBT.

In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee.

The provision of rights

Certain benefits however are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA 1986.

Paragraph (f) of the definition of 'fringe benefit' relevantly states that a fringe benefit does not include:

Paragraph (h) of the definition of 'fringe benefit' relevantly states that a fringe benefit does not include:

The Commissioner accepts that the IRP is an employee share scheme, that the Incentive Rights provided under the IRP are, or may later become in the case of Incentive Rights that are indeterminate, ESS interests and that Subdivision 83A-B or 83A-C will apply to those ESS interests.

Accordingly, the provision of Incentive Rights pursuant to the IRP will not be subject to fringe benefits tax because they are either:

The provision of Company A shares

As mentioned above, in general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee.

The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. Heerey, Merkel and Finkelstein JJ at page 410 stated:

The situation is similar to that which existed in Federal Commissioner of Taxation v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. Davies, Gummow and Lee JJ 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.

When an employee of Company A or one of its subsidiaries participates in the IRP, they obtain an Incentive Right (being a right to acquire a beneficial interest in a share in Company A) and this right constitutes an ESS interest. When the Incentive Right is subsequently exercised, any benefit received would be in respect of the exercise of the right, and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

The benefit that arises to an employee upon the exercise of a vested Incentive Right under the IRP (being the provision of a ordinary share in Company A) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee but, rather, in respect of the Incentive Right.

Question 7

Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 states that a fringe benefit does not include:

Subsection 995-1(1) of the ITAA 1997 states that the expression an 'employee share trust' has the same meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 states:

Paragraphs 130-85(4)(a) and (b) of the ITAA 1997

The beneficial interest in a share received by an Eligible Employee when an ordinary share in Company A is provided to them under the terms of the IRP Rules is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997.

Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as being 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 IRP is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which rights to acquire ordinary shares in Company A (being ESS interests) are provided to employees in relation to the employee's employment.

Company A has established the Trust to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests acquired by those employees under the IRP Rules. The beneficial interest in the Company A share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights are provided to employees in relation to their employment.

Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are therefore satisfied because:

Paragraph 130-85(4)(c) of the ITAA 1997

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

ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities sets out a number of activities which are considered to be merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997:

Clause 4.9 of the Trust Deed states that Company A 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 subsection 130-85(4) of the ITAA 1997.

Paragraph 130-85(4)(c) of the ITAA 1997 is satisfied as all other activities undertaken by the Trustee are merely incidental to managing the IRP.

Conclusion

The Trust satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 as:

Paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 therefore excludes the contributions made to the Trustee of the Trust by Company A from being a fringe benefit.

The irretrievable contributions made by Company A or any subsidiary member of the Company A tax consolidated group to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, ordinary shares in Company A, will not constitute a fringe benefit within the meaning of section 136(1) of the FBTAA 1986.

Question 8

As mentioned in the answer to question 5, PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains the operation of section 67 of the FBTAA 1986. Notably, paragraphs 145 - 148 of PS LA 2005/24 state:

The Commissioner would only seek to make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 Fringe Benefits Tax-Response to questions by major rural organisation under the heading "Appendix, Question 18" where, on the application of section 67 of the FBTAA 1986, the Commissioner states:

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

The provision of benefits to the Trustee of the Trust in the form of irretrievable contributions to the Trust and to Eligible Employees as Incentive Rights under the IRP Rules (including Company A shares received by Eligible Employees on the vesting of Incentive Rights) are excluded from the definition of a fringe benefit for the reasons given above in questions 6 and 7. As these benefits have been excluded from the definition of a fringe benefit, no fringe benefit arises and no fringe benefits tax will be payable under the arrangement which includes the Trust. As there would be no fringe benefits tax payable without the use of the Trust (and nor is it likely fringe benefits tax would be payable under alternative remuneration plans), the fringe benefits tax liability is not any less than it would have been but for entering into the arrangement.

The Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount of Company A, or any subsidiary member of the Company A tax consolidated group, by the amount of the tax benefit gained from the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, shares in Company A.

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