Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051231333506

Date of advice: 16 June 2017

Ruling

Subject: Employee incentive plans

Issue 1

Question 1

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition on-market of the Company shares by the Trust?

Answer

Yes.

Question 2

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by the Company in relation to the implementation and on-going administration of the Trust?

Answer

Yes.

Question 3

Will irretrievable cash contributions made by the Company or any subsidiary to the Trustee, to fund the subscription for or acquisition on-market of the Company shares by the Trust, be deductible to the Company at a time determined by section 83A-210 of the ITAA 1997?

Answer

Yes

Question 4

If the Trust satisfies its obligation under the Plans by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under section 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (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 full, any deduction claimed by The Company in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition on-market of The Company shares by the Trust?

Answer

No

For questions 1 to 5 this ruling applies for the following periods:

Income year ending 30 June 2017

Income year ending 30 June 2018

Income year ending 30 June 2019

Income year ending 30 June 2020

Income year ending 30 June 2021

The scheme commences on

1 July 2016

Issue 2

Question 6

Will the provision of Rights or shares by the Company to its employees under the Plans be a 'fringe benefit’ within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

Question 7

Will the irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of shares in the Company, be treated as a 'fringe benefit’ within the meaning of section 136(1) of the FBTAA?

Answer

No

Question 8

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

Answer

No

For questions 6 to 8 applies this ruling applies for the following periods:

Year ending 31 March 2017

Year ending 31 March 2018

Year ending 31 March 2019

Year ending 31 March 2020

Year ending 31 March 2021

The scheme commences on:

1 April 2016

Relevant facts and circumstances

The Company is an Australian tax resident company listed on the Australian Stock Exchange (ASX).

The Company maintains two Employee Share Plans (Plans) for the benefit of its employees.

The Company has established an independent Trust to acquire ordinary shares in the Company and to allocate those shares to employees in order to satisfy Rights (being ESS interests) acquired by those employees under the Plans.

Employee Share Plans

Each Plan broadly operates to provide eligible employees with the opportunity to receive Rights for generally nil consideration. In order to receive shares, the participant must satisfy the vesting criteria outlined in the Plan Rules. Some rights are exercised automatically on vesting, while some rights are exercised automatically after a deferred period. On exercise of a Right, the participant will be entitled to one ordinary share in the Company for generally nil consideration.

Under one of the Plans, the Company’s Board has the discretion to satisfy the exercise of some Rights by shares, cash or a combination of both. The shares can be procured from an employee share trust.

Each Right issued under the either Plan is a Right to which Subdivision 83A-B of the ITAA 1997 or Subdivision 83A-C of the ITAA 1997 will apply.

Employee Share Trust

The Trust is an independent legal entity and not a part of the Company’s income tax consolidated group. It was established as a sole purpose trust to administer and maintain the Plans. The Company cannot be a beneficiary of the Trust and cannot receive any income or capital from the Trust.

The Trust Deed allows the Trustee to subscribe for, purchase or otherwise acquire shares of the Company for the purposes of administering the Plans, and to do things incidental to this activity. The Trust Deed does not allow the Trustee to provide any additional benefits other than those that arise from the relevant Plan Rules.

The Trust is funded by contributions from the Company, including for the acquisitions of shares in Company shares at market value either on-market or by a subscription for new shares. Shares will be held by the Trust on trust for the benefit of the participants of the Plans and employees generally, until they are allocated or transferred to an employee (on vesting and/or exercise of the relevant Rights). The Trust cannot exercise voting rights in relation to unallocated shares.

Contributions to the Trust

The Company does not intend to make cash contributions to the Trust prior to the issue of Rights to participants. The Company will make contributions to the Trust when Rights vest, or where it makes commercial sense to do so. For example, it may make cash contributions to the Trust prior to the vesting and/or exercise of the Rights to ensure the Trust has the cash necessary to acquire shares to satisfy the acquisition or subscription of shares related to those Rights.

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 136(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

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 section 20-20

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 83A-340

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

Income Tax Assessment Act 1997 section 701-1

Reasons for decision

All legislative references are to the ITAA 1997 unless stated otherwise.

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

The consolidation provisions 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 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’s income tax consolidated group are treated for income tax purposes as having been undertaken by The Company as the Australian head company of the Company’s tax consolidated group.

Questions 6 to 8

The SER in section 701-1 has no application to the FBTAA. Accordingly, the Commissioner has provided a ruling to the Company and each subsidiary member of the Company tax consolidated group in relation to questions 6 to 8.

Question 1

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition on-market of the Company shares by the Trust?

Summary

Yes, the Company will obtain an income tax deduction pursuant to section 8-1 in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition on-market of the Company shares by the Trust.

Detailed reasoning

The general deduction provision in section 8-1 states:

Loss or outgoing incurred

To claim a deduction under subsection 8-1(1), a contribution made to the Trustee by the Company must be irretrievable and non-refundable – that is, it must be a permanent loss or outgoing to which the Company has definitely committed itself (Federal Commissioner of Taxation v. James Flood Pty Ltd (1953) 88 CLR 492; (1953) 5 AITR 579; (1953) 10 ATD 240).

The Trustee must, on direction by the Board, acquire shares in the Company to enable the Company to satisfy its obligations under the terms of the relevant employee incentive plan. The Company must provide the Trustee with all the funds required to enable it to subscribe for, or acquire the Company shares. Under the Trust Deed, the Company must also provide sufficient funds to pay any tax, fees or other associated expenses of the acquisition, allocation, surrender or delivery of a participant’s allocated hares.

Relevantly, the Trust Deed provides that contributions made by the Company to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable to the Company. No other provisions of the Trust Deed contravene the relevant clause. Accordingly, the clause is prima facie evidence that a contribution made by the Company to the Trust would be an irretrievable and non-refundable outgoing at the time that the contribution is made.

In addition, upon termination of the Trust, the Trustee must distribute any consideration or shares in the Company that the Trust has been directed to provide to Participants. The Trustee must liquidate any remaining assets held by the Fund and proceed to pay all outstanding debts and liabilities of the Trust. Any surplus that remains must be distributed to either another share or option trust maintained for the benefit of the Company’s employees, or any charity nominated by the Trustee. The Trust Deed prohibits the Trustee distributing this surplus to any group company.

The terms of the Trust Deed when read together demonstrate that contributions made by the Company to the Trustee will be irretrievable and non-refundable. Accordingly, these contributions are considered to be a loss or outgoing incurred for the purpose of subsection 8-1(1).

Sufficient nexus

In order for a loss or outgoing to be deductible under subsection 8-1(1), it must either be 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 various principles to be applied in determining whether there is a sufficient nexus between a loss or outgoing and the assessable income of the business (see, eg, The Herald and Weekly Times Limited v. The Federal Commissioner of Taxation (1932) 48 CLR 113; Amalgamated Zinc (De Bavay's) Limited v. The Federal Commissioner of Taxation (1935) 54 CLR 295; W Nevill And Company Limited v. The Federal Commissioner of Taxation (1937) 56 CLR 290; Ronpibon Tin NL & Tongkah Compound NL v. The Federal Commissioner of Taxation (1949) 78 CLR 47; Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344).

In the present case, the benefits provided to employees under the Plans intend to reward, retain and motivate employees and to encourage participation by employees of the Company through share ownership. In this regard, the benefits form part of the overall remuneration of the employees. It follows that the contributions made by the Company to the Trustee are part of the overall employee remuneration costs of the Company.

The Trust Deed states that the Trust was established for the sole purpose of facilitating the Plans, including acquiring, holding and transferring shares in the Company under the Plans. In addition, the Trust Deed provides that the Trust will be managed and administered so that it meets the definition of 'employee share trust’ (EST) for the purposes of subsection 130-85(4):

Based on the preceding analysis, we consider that the irretrievable contributions to the Trust are part of the overall employee remuneration costs of the Company, which have a sufficient nexus with the business for the purposes of subsection 8-1(1). This is consistent with the position taken 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.

Whether capital or capital in nature

Notwithstanding that the positive limbs of subsection 8-1(1) have been satisfied, a deduction is not available if the relevant contribution to the Trust is capital or capital in nature under subsection 8-1(2). The leading authority on the distinction between revenue and capital expenditure is Sun Newspapers Ltd and Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; (1938) 1 AITR 403, where Dixon J stated (at CLR 363) that there are three main factors to be considered when deciding whether expenditure incurred is revenue or capital in nature. These are:

Generally, a contribution to the trustee of an EST will be 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.

Applying these considerations to the present case:

Based on the preceding analysis, we do not consider a contribution by the Company to the Trust to be capital or capital in nature. This conclusion is consistent with the decision in Spotlight Stores Pty Ltd v. Federal Commissioner of Taxation [2004] FCA 650; 2004 ATC 4674; (2004) 55 ATR 745, which was affirmed by the Full Federal Court in Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; (2004) 58 ATR 210. In these cases, payments by an employer company to an EST (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 subsections 8-1(1) and 8-1(2) 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 may be relevant where the Trustee uses contributions made by the Company to the Trustee for the administration of the Plans to subscribe for shares in the Company. Where a contribution is, ultimately and in substance, applied by the Trustee to subscribe for shares in the Company, the Company has also acquired an asset or advantage of an enduring nature.

Notwithstanding this, where a contribution secures for the employer advantages of both a revenue and capital nature, apportionment may not be required where the advantages of a capital nature are expected to be only small or trifling by comparison. In Draft Taxation Ruling TR 2017/D5 Income tax: employee remuneration trusts, the Commissioner considers (at paragraphs 15-16) that a capital advantage that is only small or trifling may disregarded.

In this case, it is considered that the advantages of a capital nature are expected to be very small or trifling by comparison. Therefore, apportionment is not required.

Private or domestic in nature

Nothing in the facts suggest that the irretrievable contributions made by the Company 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 Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997.

Conclusion

Irretrievable contributions the Company makes to the Trustee of the Trust to fund the acquisition of ordinary shares in the Company (in accordance with the Trust Deed and the Plans) will be an allowable deduction to the Company under section 8-1.

Question 2

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997 in respect of costs incurred by the Company in relation to the implementation and on-going administration of the Trust?

Summary

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

Detailed reasoning

The Company will incur costs associated with the establishment, implementation and on-going management of the Trust, including the costs that are associated with applying for this private ruling. The Company will also incur further costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust.

The Trust Deed provides that the Trustee is not entitled to receive from the Trust any fees, commission or remuneration in respect of its performance of its obligations as trustee of the Trust. The Company may pay to the Trustee any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as the Company and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement.

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

This conclusion 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.

Question 3

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

Summary

Yes, irretrievable cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of the Company shares by the Trust, may be deductible to the Company at a time determined by section 83A-210 if the contributions are made before the acquisition of the relevant ESS interest.

Detailed reasoning

Deductions for irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which the Company incurred the outgoing. However, in certain circumstances, the timing of the deduction is determined under section 83A-210. Section 83A-210 will apply in the present case where:

Where section 83A-210 applies, the contribution will only be deductible to the Company in the income year in which the relevant ESS interests are provided to Participants.

In order to establish whether section 83A-210 applies, it is necessary to consider the terms 'arrangement’, 'ESS interest’ and 'employee share scheme’.

Arrangement

At the time the contribution is made, it must be made 'under an arrangement’ (paragraph 83A-210(a)(i)). 'Arrangement’ is defined broadly in section 995-1.

In the present case, the adoption and implementation of the relevant Plan, the establishment of the Trust and the provision of a cash contribution by the Company to the Trustee constitutes an 'arrangement’ for the purposes of subparagraph 83A-210(a)(i).

ESS interest

An 'ESS interest’ in a company is defined as a beneficial interest in either:

In the present case, each Performance Right provided to a Participant when an offer is made under Plan A, and Right provided under Plan B is an ESS interest because it is (or may later become) a right to acquire a beneficial interest in a share in the Company.

Employee share scheme

'Employee share scheme’ is defined in subsection 83A-10(2) as:

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

Each Plan is an employee share scheme for the purposes of Division 83A because it is an arrangement to provide an ESS interest (a beneficial interest in a right to acquire a beneficial interest in a share) to a Participant in relation to their employment in the Company in accordance with the Trust Deed.

Additionally, a share in the Company acquired by the Trustee on exercise of a Right under either Plan provided to an employee, in relation to the employee’s employment, is itself acquired under the same employee share scheme. Accordingly, the acquisition of the share would also satisfy the definition of a payment for an ESS interest under an employee share scheme in relation to the ultimate beneficiary’s employment for the purposes of paragraph 83A-210(a)(ii).

Relevant connection between contribution and acquisition of ESS interest

Section 83A-210 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 employee’s employment and the contributions are made before the acquisition of the ESS interests.

The granting of Rights and the making of offers of Rights, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the shares in the Company by the Trustee and the allocation of the Company shares to Participants are all inter-related components of the Plans. 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. Accordingly, we consider that the provision of money to the Trustee is for the purpose of enabling Participants to acquire ESS interests.

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

Under one of the Plans, the Company’s Board has the discretion to satisfy the exercise of some Rights by shares, cash or a combination of both. Some Rights are indeterminate rights for the purposes of section 83A-340 because the Company’s Board has the discretion to satisfy the exercise of some Rights by shares, cash or a combination of both. In this regard, such Rights are not rights to acquire a beneficial interest in a share unless and until the Board determines the proportion of the Rights that will be satisfied by the provision of shares in the Company.

Once this is determined, section 83A-340 operates to treat such a Right as though it had always been a right to acquire a beneficial interest in the share.

If an irretrievable contribution is provided to the Trustee before such Rights are acquired (and the Rights subsequently do become ESS interests), section 83A-340 operates to deem the Rights to always have been ESS interests. Where this occurs, section 83A-210 will apply to modify the timing of the deduction claimed under section 8-1. In such a case, a deduction for the contribution will only be available to the Company in the income year in which the relevant participant acquires the Right.

Where an indeterminate Right does not become an ESS interest because it is ultimately satisfied in cash, the outgoing should not flow through the Trust. This is because the Trust would not satisfy the sole activities test for the purposes of subsection 130-85(4).

Question 4

If the Trust satisfies its obligation under the Plans by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under section 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997?

Summary

No, if the Trust satisfies its obligation under the Plans by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under either section 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997.

Detailed reasoning

Ordinary income

Section 6-5 provides that a taxpayer’s assessable income includes income according to ordinary concepts (ordinary income). In GP International Pipecoaters Proprietary Limited v. Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 at 7, 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. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not received in carrying on a business.

Under the Plans, the Trustee may subscribe to the Company for an issue of shares, paying the full subscription price for the shares. The Company will receive a contribution of share capital from the Trustee.

The character of the contribution of share capital received by the Company from the Trustee on subscription of new shares in the Company can be determined by the character of the right or thing disposed of in exchange for the receipt. Under this arrangement, the Company will issue the Trustee with a new ordinary share in itself. The character of the newly-issued share is one of capital. It follows that the receipt of subscription proceeds takes the character of share capital and is also of a capital nature.

Accordingly, subscription proceeds received by the Company from the Trustee for a subscription of new shares (where the Trustee has subscribed for the shares to satisfy obligations to Participants of the Plans) will not be revenue in nature, and will not be ordinary income under section 6-5.

Assessable recoupment

Subsection 20-20(2) provides that an amount received as a recoupment of a loss or outgoing will be assessable income if:

In the present case, there is no insurance contract, so subscription proceeds received by the Company from the Trustee for a subscription of new shares will not be received by way of insurance.

Further, the amount will not be received by way of 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.

Subsection 20-20(3) 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 listed in the table in section 20-30.

Subsection 20-25(1) defines 'recoupment’ to include:

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.

In the present case, the Company receives an amount in return for issuing shares to the Trustee of the Trust. It is not a recoupment of previously-deducted expenditure under section 8-1 or any other provision listed in the table in section 20-30.

Accordingly, the subscription proceeds received by the Company from the Trustee for a subscription of new shares will not be an assessable recoupment under section 20-20.

Capital Gains Tax

Under section 102-20, you make a capital gain or loss if and only if a CGT event happens. The relevant CGT events that are potentially applicable when subscription proceeds are received by the Company from the Trustee for a subscription of new shares are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset).

In relation to CGT event D1, paragraph 104-35(5)(c) 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) states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company.

In this case, the Company is issuing shares (being equity interests as defined in section 974-75) to the Trustee of the Trust. Accordingly, neither CGT event D1 nor CGT event H2 happen.

Question 5

Will the Commissioner seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition on-market of shares in the Company by the Trust?

Summary

No, 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 the Company in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition on-market of the Company shares by the Trust.

Detailed reasoning

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:

Based on 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 the Company for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, shares in the Company. In particular, there are clear commercial reasons for implementing and operating the Plans through a trust structure.

Issue 2

Question 6

Will the provision of Rights or shares by the Company to its employees under the Plans be a 'fringe benefit’ within the meaning of subsection 136(1) of the FBTAA?

Summary

No, the provision of Rights or shares by the Company to its employees under the Plans will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Detailed reasoning

The liability of an employer 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. Under the FBTAA, the calculation of the fringe benefits taxable amount is made by reference to the taxable value of each fringe benefit provided.

FBT is only payable if there is a 'fringe benefit’. Relevantly, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee.

The provision of Rights under the Plans

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

Relevantly, paragraph (f) of the definition of 'fringe benefit’ states that a fringe benefit does not include:

In addition, paragraph (h) of the definition of 'fringe benefit' states that a fringe benefit does not include:

An 'ESS interest’ in a company is defined in subsection 83A-10(1) as a beneficial interest in either:

In the present case, each Performance Right provided to a Participant when an offer is made under Plan A or a Right provided under the Plan B is an ESS interest as it is (or may later become) a right to acquire a beneficial interest in a share in the Company.

Accordingly, the Plans are employee share schemes, and that each Right provided under either Plan is an 'ESS interest’. We are advised that each Right issued under Plan B is a Right to which Subdivision 83A-B or Subdivision 83A-C will apply. It follows that the provision of a Right under either Plan will not be subject to FBT on either of the following bases:

The provision of shares in the Company upon vesting and/or exercise of a Right

A share granted to an employee upon vesting and/or automatic exercise of a Right is not an ESS interest acquired under an employee share scheme to which Subdivision 83A-B or 83A-C applies. That is because they are not provided 'in respect of employment’, in contrast to the right to receive shares (ie the Right itself). Accordingly, the provision of shares would not be specifically excluded from the definition of 'fringe benefit’ under paragraphs (f) or (h) of the definition.

As discussed above, '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.

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. The Full Federal Court stated (at FCR 410):

The situation in the present case 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. The Full Federal 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.

When an employee of the Company participates in one of the Plans, they obtain a Right (being a right to acquire a beneficial interest in a share in the Company) that constitutes an ESS interest. When this Right is subsequently exercised, any benefit received would be in respect of the exercise of the right, and not in respect of employment. This conclusion is consistent with 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.

Accordingly, the benefit gained by an employee upon the exercise of a vested Right under one of the Plans (being the provision of a share in the Company) will not give rise to a 'fringe benefit’ as defined in subsection 136(1) of the FBTAA because a benefit has not been provided 'in respect of’ the employee’s employment relationship.

Question 7

Will the irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of shares in the Company, be treated as a 'fringe benefit’ within the meaning of section 136(1) of the FBTAA?

Summary

No, the irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of the Company shares, will not be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA.

Detailed reasoning

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

In order to establish whether this exception applies, it is necessary to consider whether the Trust is an 'employee share trust’ as defined.

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

Subsection 130-85(4), in turn, states:

Based on the facts provided, paragraphs 130-85(4)(a) and (b) are satisfied because:

Paragraph 130-85(4)(c)

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) of the ITAA 1997 may require the Trustee to undertake incidental activities that are a function of managing the Plans.

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).

In the present case, the activities that the Trustee is permitted to undertake under the Trust Deed, in particular the Trustee’s general powers listed in the Trust Deed, are merely incidental to the primary purposes stated in paragraphs 130-85(4)(a) and (b). The Trust Deed also provides that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust’.

Provided that the Trustee administers the Trust according to the terms of the Trust Deed, the activities of the Trustee will satisfy the sole activities test. Accordingly, the Trust will be an 'employee share trust’.

Accordingly, contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of, the Company shares, will not constitute a fringe benefit by virtue of paragraph (ha) of the definition of 'fringe benefit’ in subsection 136(1) of the FBTAA.

Question 8

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

Summary

No, the Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to the Company by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of The Company shares.

Detailed reasoning

As discussed in the answer to question 5, Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) provides guidance on the application of Part IVA and other general anti-avoidance rules to an arrangement, including in a private ruling. The operation of section 67 of the FBTAA is explained at paragraphs 185-188.

The Commissioner will 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. In addition, paragraph 151 of PS LA 2005/24 states:

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 1986.

In the present case, the provision of benefits to the Trustee as irretrievable contributions to the Trust, and to Participants as Performance Rights under Plan A and Rights under Plan B (as well as shares in the Company received on the vesting of such Rights) are excluded from the definition of 'fringe benefit’ for the reasons given in response to questions 6 and 7 above. It follows that no FBT will be payable under the Trust arrangement. As no FBT is payable without the use of the Trust (and nor likely would FBT be payable under alternative remuneration plans), the FBT liability is not any less than it would have been but for the arrangement. In addition, our analysis in response to question 5 above does not suggest that Part IVA of the ITAA 1997 would apply in the circumstances. Accordingly, the Commissioner will not seek to make a determination that section 67 of the FBTAA.

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