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Edited version of your written advice

Authorisation Number: 1051408149912

Date of advice: 2 August 2018

Ruling

Subject: Employee Incentive Plan - Employee Share Trust

Question 1

Will Company A, as the head entity of the income tax consolidated group, be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) for irretrievable cash contributions made by Company A to the Trustee of the Company A Employee Share Trust (the Trust) to fund the subscription for, or acquisition on-market of, ordinary shares in Company A (Shares) to satisfy Employee Share Scheme (ESS) interests issued pursuant to the Plan?

Answer

Yes

Question 2

Will the irretrievable cash contributions made by Company A to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares by the Trustee to satisfy ESS interests issued pursuant to the Plan, be deductible to Company A under section 8-1 of the ITAA 1997 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 by the ultimate beneficiaries?

Answer

Yes

Question 3

Will the irretrievable contributions made by Company A, to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares by the Trustee to satisfy ESS interests issued pursuant to the Plan, be deductible to Company A under section 8-1 of the ITAA 1997 in the income year when the contributions are made, if the contributions are made after the acquisition of the relevant ESS interests by the ultimate beneficiaries?

Answer

Yes

Question 4

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company A for the irretrievable cash contributions made to the Trust to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plan?

Answer

No

Question 5

Will the provision of ESS interests to employees of Company A under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (Cth) (FBTAA)?

Answer

No

Question 6

Will the irretrievable cash contributions made by Company A, to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares pursuant to the Plan, constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No

Relevant facts and circumstances

Company A and the Group

Company A Long Term Incentive Plan (the Plan)

Employee Share Trust

Establishment of the Trust

Contributions to the Trust

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Section 83A-210

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

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

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.

Pursuant to the Trust Deed, Company A or any other Group companies must make irretrievable contributions to the Trust to fund the subscription for, or acquisition of, Shares for the benefit of Participants. The Trustee will use such contributions (in addition to exercise prices in the case of Options) to acquire Shares in the ordinary course of trading on the ASX, or to subscribe for new Shares issued by Company A for the benefit of Participants. The sole activities of the Trustee under the Trust Deed are to acquire and hold Shares for the purpose of providing them to Participants of the Plan on vesting and exercise of Awards (as applicable). Further, the Trust is managed and administered so that it satisfies the sole activities test for the purpose of subsection 130-85 of the ITAA 1997.

The contributions made to the Trustee by Company A will be irretrievable and non-refundable to Company A because:

On this basis, these irretrievable contributions are losses or outgoings for the purpose of subsection 8-1(1) of the ITAA 1997.

Nexus

The purpose of establishing and making irretrievable contributions to the trustee of the Trust for the purposes of the Company A Long Term Incentive Plan (the Plan) is to provide benefits to employees in the form of Shares.

Company A makes irrevocable cash contributions to the Trust as part of the overall employee remuneration costs of Company A and other Group companies. Pursuant to the Plan, the benefits provided to employees under the Plan are designed to encourage and reward high performance, and the contributions made by Company A to the Trustee of the Trust are part of the overall employee remuneration costs of Company A.

Accordingly, there is a sufficient nexus between the outgoings to the Trust (that is, any direct contribution made by Company A or any contributions made by other companies within the Company A Group and the derivation of their assessable income (Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay's) Ltd v FCT (1935) 54 CLR 295;(1935) 3 ATD 288, W Nevill & Co Ltd v FC of T (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin NL v FCT (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147).

Capital or revenue

The contributions by Company A (or its subsidiary members) will be recurring and made from time to time as and when Shares are to be subscribed for or acquired pursuant to the Plan. The contributions are not capital in nature, but rather outgoings incurred by Company A in carrying on its businesses.

In support of this conclusion, the Court held in Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745 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. It should be noted that although the Court held that the payments were deductible under subsection 51(1) of the ITAA 1936, it found that subsection 177F(1) of Part IVA of the ITAA 1936 applied to cancel the tax benefit arising from the deduction.

This confirms the view expressed 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 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.

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 acquisition of Shares in Company A, in accordance with the Trust Deed and the Plan, will be an allowable deduction to Company A under section 8-1 of the ITAA 1997.

Question 2

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, which states:

Under an arrangement

An ‘arrangement’ is defined in section 995-1 of the ITAA 1997 as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

The implementation of the Plan, establishment of the associated Trust and provision of contributions by Company A to the Trustee of the Trust constitute an arrangement for the purposes of paragraph 83A-210(a)(i) of the ITAA 1997.

Acquiring an ESS interest ‘…directly or indirectly...’

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

An ESS interest is a beneficial interest in a share in a company or a right to acquire a beneficial interest in a share in a company (subsection 83A-10(1) of the ITAA 1997).

Awards

Awards granted to an employee under the Plan will be ESS interests as each of these rights represents a right to acquire a beneficial interest in a share in a company. These ESS interests will also be granted under an employee share scheme as they are granted in relation to the employee’s employment. A Share acquired by the Trustee to satisfy a right to acquire a Share, granted under the employee share scheme to an employee in relation to the employee’s employment, is itself provided under the same scheme.

The granting of the beneficial interests in the Awards, the provision of the money to the Trustee under the arrangement (the Plan), 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 Plan. All the components of the scheme 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.

Accordingly, the provision of money to the Trustee to acquire Shares is considered to be for the purpose of enabling the participating employees employed by Company A to acquire ESS interests.

Timing – acquisition time

The deductibility of money provided to employee share trusts is considered in ATO ID 2010/103 Income tax – Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust. The facts described in ATO ID 2010/103 are comparable to the present ESS and therefore, the reasoning in it is relevant as explained immediately below.

Contribution to Trustee made in an income year prior to the income year that Awards are acquired by Participant

The acquisition time for the purposes of paragraph 83A-210(b) of the ITAA 1997 will occur when the Awards are granted to Participants. Accordingly, when Company A (or a subsidiary member of the Company A income tax consolidated group) makes a cash contribution to the Trustee to acquire Shares in an income year before the income year in which the Awards are acquired by the Participant, the timing of the deduction allowable to Company A as the head entity of the income tax consolidate group under section 8-1 of the ITAA 1997 will be determined by section 83A-210 of the ITAA 1997 as being the later income year in which these ESS interests (Awards) are granted to the Participant.

Question 3

As discussed in the reasoning for question 2 above, section 83A-210 of the ITAA 1997 will not apply if a cash contribution is made by Company A, in an income year that is later than the income year in which the Awards are granted. In this case, the cash contribution will be deductible to Company A as the head entity of the consolidated income tax group, under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is incurred, being the later income year.

Question 4

Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision.

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.

Part IVA gives the Commissioner the power to cancel a ‘tax benefit’ that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This power is found in subsection 177F(1) 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:

Regard must be had to the individual circumstances of each case in making a determination under section 177F to cancel a tax benefit.

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 they respectively make to the Trustee of the Trust to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plan.

Question 5

A liability of an employer to fringe benefits tax (FBT) arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (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.

Without the provision of a ‘fringe benefit’, no amount will be subject to FBT.

Section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), defines a fringe benefit 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 Awards

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.

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

The Commissioner accepts that the Plan is an employee share scheme, the Awards provided under the Plan are ESS interests and that Division 83A of the ITAA 1997 applies to those ESS interests.

Accordingly, the provision of the Awards pursuant to the Plan will not be subject to FBT on the basis that they are acquired by Participants under an employee share scheme (to which Subdivision 83A-B or 83A-C will apply) and are excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

The provision of the shares in Company A

As mentioned above, 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. 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 the income tax consolidated group or the economic group of Company A accepts to participate in the Plan, they obtain a right to acquire a beneficial interest in a Share. This right 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 (refer ATO ID 2010/219 Fringe Benefits Tax- Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

Therefore, the benefit that arises to an employee upon the exercise of an Option or a right, or upon vesting of the RSUs under the Plan (that is, the provision of a Share) will not give rise to a fringe benefit, as a benefit has not been provided in respect of the employment of the employee.

Question 6

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

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

Employee share trust (EST)

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

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

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 undertake incidental activities that are a function of managing the Plan.

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

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental.

For the purpose of the EST the powers of the Trustee are set out under the Trust Deed. As stated in the Recitals of the Trust Deed, Company A established the Trust for the purpose of enabling the acquisition of Shares for the benefit of Employees as a component of remuneration; and the Trustee of the Trust agreed to receive funds from Company A from time to time and to apply those funds in accordance with the Trust Deed. Further, the sole activities of the Trustee are to acquire and hold shares for the purpose of providing them to Participants of the Plan on vesting and exercise of Awards (as applicable), and the administration of the Trust. The Trust is managed and administered so that it satisfies the sole activities test for the purpose of subsection 130-85 of the ITAA 1997. These terms collectively make it clear that the Trustee can only use the contributions received exclusively for the acquisition of Shares for eligible employees in accordance with the Plan. To this end, all other duties or general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the Shares for the sole benefit of Participants in accordance with the Plan.

Therefore, the EST is an employee share trust as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 as concluded above, and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Accordingly, as paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 excludes the contributions to the Trustee of the EST from being a fringe benefit, Company A and its subsidiary members will not be required to pay FBT in respect of irretrievable cash contributions made to the Trustee of the EST to fund the acquisition of Shares in accordance with the Trust Deed.

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