Edited version of your written advice

Authorisation Number: 1051449232492

Date of advice: 14 January 2019

Ruling

Subject: Income tax - assessable income - employee share schemes - other

Question 1

Is Company X entitled to claim deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by Company X to the Trustee to acquire Shares to satisfy granting ESS interests made under the Plans?

Answer

Yes.

Question 2

Will irretrievable contributions made by Company X to the Trustee to fund the acquisition of ESS interests issued pursuant to the Plans, which are made at a time before Eligible Employees acquire the relevant ESS interests, be deductible to Company X at a time determined by section 83A-210 of the ITAA 1997?

Answer

Yes.

Question 3

Will irretrievable contributions made by Company X to the Trustee of the Share Trust, to fund the acquisition of ESS interests issued pursuant to the Plans, made at a time on or after the Participant acquires the relevant ESS interest, be deductible to Company X in the income year in which the contribution is made under section 8-1 of the ITAA 1997?

Answer

Yes.

Question 4

Will the irretrievable contributions made by Company X to the Trustee to fund the acquisition of Shares issued pursuant to the Plans be a fringe benefit within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

Will irretrievable contributions made by Company X to the Trustee to fund the acquisition of Shares issued pursuant to the Plans be assessable income of the Trust pursuant to sections 6-5 and 6-10 of the ITAA 1997 or Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 6

Will any capital gain or capital loss made by the Trustee arising as a result of either CGT event E5 or CGT event E7 happening in respect of Shares allocated to a Participant be disregarded under section 130-90 of the ITAA 1997?

Answer

Yes.

Question 7

Will the Commissioner make a determination that Part IVA of the ITAA 1936 applies to deny, in any part or in full, any deduction claimed by Company X for irretrievable contributions made by Company X to the Trustee for the purpose of acquiring Shares to satisfy grants of ESS interests under the Plans?

Answer

No.

This ruling applies for the following periods:

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

Background

1. Company X is an Australian company listed on the Australian Securities Exchange (ASX).

2. Company X is the head company of a tax consolidated group comprising itself and a number of wholly owned Australian resident subsidiaries (Group Entities).

3. Company X provides benefits to its employees through share ownership and incentive schemes (the Plans) to acquire Shares in the Company.

4. Company X has a number of share schemes in place for Australian employees to which Subdivision 83A-C of the ITAA 1997 applies.

The Trust

5. Company X settled the Share Trust.

6. Company X will make regular irretrievable contributions to the Trustee of the Share Trust to allow Shares to be acquired on a quarterly basis so as to allow the grant of ESS interests under the Plans.

7. The Trust Deed provides that the Trustee will hold the initial settlement amount and all accretions to the trust fund (Trust Property) for the benefit of employees (including their associated nominee) and Division 83A compliant employee share trusts (collectively referred to as Beneficiaries).

8. The Trust Deed provides that the Trustee’s activities will comply with the employee share trust requirements set out in subsection 130-85(4) of the ITAA 1997 with the main activities of the Trust being acquiring Shares to satisfy the grant of ESS interests under the Plans.

9. Company X cannot be a beneficiary in accordance with the Trust Deed. Company X does not have, at any time, any legal or beneficial entitlement to any of the shares forming part of the trust fund. Company X cannot acquire such an interest.

10. The grant of ESS interests under the Plans will be satisfied by the Trustee either purchasing Shares from other shareholders (either on or off market), subscribing for unissued Shares from Company X, or allocating General Trust Property (i.e. Shares previously acquired by the Trustee and held by the Trust).

11. In the event that the Trust is terminated, the Trustee must wind up the Trust and transfer the Trust Fund or the proceeds on sale of the Trust Fund as per the Trust Deed.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 136

Fringe Benefits Tax Assessment Act 1986 section 66

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

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 section 104-85

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 130-85

Income Tax Assessment Act 1997 section 130-90

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Is Company X entitled to claim deductions under section 8-1 of the ITAA 1997 for irretrievable cash contributions made by Company X to the Trustee to acquire Shares to satisfy granting ESS interests made under the Plans?

Detailed reasoning

Section 8-1 of the ITAA 1997 provides that:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred carrying on a business for the purpose of gaining or producing your assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

The terms of the Trust Deed demonstrate the irretrievable and non-refundable nature of an employer contribution made by Company X to the Trustee in accordance with the Trust Deed and the relevant Plan. Accordingly, such a contribution will be incurred at the time it is made for the purposes of subsection 8-1(1) of the ITAA 1997.

For a deduction to be allowable under subsection 8-1(1) of the ITAA 1997, there must be a nexus between the loss or outgoing and the gaining or producing of assessable income, or the loss or outgoing was incurred in carrying on a business for the purposes of gaining or producing your assessable income. The expenditure must be incidental and relevant to the production of assessable income (Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56).

Company X established the Trust for the purpose of facilitating and administering the Plans. In that regard, the irretrievable contributions made by Company X to the Trustee are part of the overall employee remuneration costs of Company X. Company X makes the contributions to the Trustee solely to enable the Trustee to acquire Shares for Participants in accordance with the Plan Rules in order to remunerate, retain and attract employees. Therefore, there will be a sufficient nexus with the business for the purposes of subsection 8-1(1) of the ITAA 1997.

Subparagraph 8-1(2)(a) of the ITAA 1997 provides that a loss or outgoing is not deductible under section 8-1 of the ITAA 1997 to the extent that it is a loss or outgoing of capital or capital in nature. The contributions that Company X makes to the Trustee are not outgoings of capital or of a capital nature as the contributions form part of the overall employee remuneration costs of Company X.

Paragraph 8-1(2)(b) of the ITAA 1997 provides that you cannot deduct a loss or outgoing that is private or domestic in nature. The irretrievable contributions made by Company X to the Trustee are not outgoings of a private or domestic nature as the contributions form part of the overall employee remuneration costs of Company X.

Paragraph 8-1(2)(c) of the ITAA 1997 prevents a tax deduction under section 8-1 of the ITAA 1997 where the loss or outgoing is incurred in relation to gaining or producing exempt or non-assessable non-exempt income. In this instance, there are no facts to suggest that the contributions made by Company X to the Trustee will have the character of outgoings that satisfy the requirements under paragraph 8-1(2)(c) of the ITAA 1997.

Paragraph 8-1(2)(d) of the ITAA 1997 provides that you cannot deduct a loss or outgoing under section 8-1 to the extent that a provision under this Act prevents you from deducting it. The contributions made to the Trustee by Company X are considered to form part of the overall employee remuneration costs of Company X, and are not prevented from being deductible by any other provision of the Act.

Conclusion

Therefore, Company X will be entitled to deduct an amount under section 8-1 of the ITAA 1997 for its irretrievable contributions made to the Trustee to acquire Shares to satisfy grants of ESS interests made under the Plans.

Question 2

Will irretrievable contributions made by Company X to the Trustee to fund the acquisition of ESS interests issued pursuant to the Plans, which are made at a time before an Eligible Employee acquire the relevant ESS interests, be deductible to Company X at a time determined by section 83A-210 of the ITAA 1997?

Detailed reasoning

The deduction for the irretrievable contributions made by Company X to the Trustee under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which Company X necessarily incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997, which provides:

If:

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

(i) under an arrangement; and

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

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

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

If Company X provides cash contributions to the Trustee before the time the Eligible Employee acquires the ESS interest then section 83A-210 of the ITAA 1997 will apply. The effect is that Company X can only deduct the amount of the cash contributions in the income year when an Eligible Employee acquires ESS interests under the Plans.

Question 3

Will irretrievable contributions made by Company X to the Trustee of the Share Trust, to fund the acquisition of ESS interests issued pursuant to the Plans, made at a time on or after the Participant acquires the relevant ESS interest, be deductible to Company X in the income year in which the contribution is made under section 8-1 of the ITAA 1997?

Detailed reasoning

The deduction for the irretrievable contributions under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which Company X necessarily incurred the outgoing; the exception to this being where section 83A-210 of the ITAA 1997 applies as above. If the irretrievable contribution is made by Company X to the Trustee at or after the time that ESS interests are acquired by Eligible Employees, section 83A-210 of the ITAA 1997 will not apply and the contribution will be deductible in the income year that it is paid by Company X to the Trustee. This is because the irretrievable contributions are made after the initial grant of the ESS interest.

Question 4

Will the irretrievable contributions made by Company X to the Trustee to fund the acquisition of Shares issued pursuant to the Plans be a fringe benefit within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Detailed reasoning

The liability of an employer to pay 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.

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 as being a benefit provided to an employee or an associate of an employee ‘in respect of’ the employment of the employee, but does not include:

(ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the ITAA 1997);

An ‘employee share trust’ is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust for an employee share scheme is a trust whose sole activities are:

(a) obtaining shares or rights in a company; and

(b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of:

(i) the company; or

(ii) a subsidiary of the company; and

(c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b)

As previously established, an employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees’ employment.

Each Plan is an employee share schemes under this definition, and each of the interests under the Plans are ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997.

The Trust was established to facilitate and administer the Plans. The main activities of the Trust will be acquiring Shares to satisfy the grant of ESS interests under the Plans, with these activities requiring the Trustee to undertake incidental activities that are a function of managing the Plans, as well as administering the Trust. No other activities will be conducted. As such, the Trust satisfies the requirements of paragraphs 130-85(4)(a), (b), and (c) of the ITAA 1997 and is an employee share trust for the purposes of subsection 136(1) of the FBTAA.

Accordingly, the contributions made by Company X to the Trustee of the Trust will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA due to the exclusion in paragraph 136(1)(ha) of the FBTAA.

Question 5

Will irretrievable contributions made by Company X to the Trustee to fund the acquisition of Shares issued pursuant to the Plans be assessable income of the Trust pursuant to sections 6-5 and 6-10 of the ITAA 1997 or Division 6 of the ITAA 1936?

Detailed reasoning

The basic trust assessing provisions are contained in Division 6 of the ITAA 1936. In general terms, it is the beneficiaries of a trust who are ultimately entitled to receive and retain the income of a trust and are taxable on that income. The trustee is generally taxed on the balance of the net income defined for tax purposes. This is referred to as income to which no beneficiary is presently entitled. Subsection 95(1) of the ITAA 1936 defines net income of a trust as the total assessable income of the trust calculated as if the trustee were a resident taxpayer in respect of that income, less all allowable deductions.

Subsection 6-5(1) of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts, which is also called ordinary income.

Subsection 6-10(1) of the ITAA 1997 provides that assessable income also includes some amounts that are not ordinary income.

Subsection 6-10(2) of the ITAA 1997 details amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income are called statutory income.

ATO Interpretive Decision ATO ID 2002/965 – Income Tax – trustee not assessable on employer contributions made to it under the employer’s employee share scheme (ATO ID 2002/965) provides the Commissioner’s view on whether the Trustee of an employee share trust will be assessed under section 6-5 or 6-10 of the ITAA 1997 on contributions made to it by an employer for the purpose of and under the employer’s employee share scheme. In the reasons for decision, ATO ID 2002/965 states that when the funds provided to the Trustee are used in accordance with the Trust Deed and the Plan Rules for the sole purpose of and under the employee share scheme, the contributions constitute capital receipts to the Trustee and are not assessable under sections 6-5 or 6-10 of the ITAA 1997.

As the purpose of the irretrievable contributions made by Company X to the Trustee is to procure Shares to satisfy awards made to employees of Company X under the Plans, which are employee share schemes, the contributions will be a capital receipt and not assessable.

Question 6

Will any capital gain or capital loss made by the Trustee arising as a result of either CGT event E5 or CGT event E7 happening in respect of Shares allocated to a Participant be disregarded under section 130-90 of the ITAA 1997?

Detailed reasoning

If CGT event E5 or E7 occurs, the trustee of a trust makes a capital gain if the market value of the asset (at the time of the event) is more than its cost base. The trustee of a trust will make a capital loss if the market value of the asset is less than its reduced cost base.

When any Vesting Conditions for an Award under each of the Plans is satisfied, and a Share related to that Award is held by the Trustee of the Trust, the Participant will be absolutely entitled to that Share and CGT event E5 will occur.

If a Share related to an Award is transferred from the Trustee to an Eligible Employee in satisfaction of their interest, CGT event E7 will occur.

However, any capital gain or capital loss made by the Trustee from CGT event E5 or CGT event E7 may be disregarded pursuant to section 130-90 of the ITAA 1997.

Section 130-90(1A) applies to disregard capital gains and capital losses made by an employee share trust in relation to CGT events happening to ESS interests that are CGT assets of the trust. As such, to meet the requirements under subsection 130-90(1A) of the ITAA 1997, there must be an ‘employee share trust’ and an ‘ESS interest’.

The Share Trust satisfies the definition of ‘employee share trust’ under subsection 130-85(4) of the ITAA 1997. Further, each ESS interest provided under each of the Plans is an ESS interest as per section 83A-10 of the ITAA 1997.

Paragraph 130-90(1A)(c) of the ITAA 1997 provides that for section 130-90 to apply, subdivision 83A-B or 83A-C of the ITAA 1997 must apply to the ESS interest. Each of the Plan Rules state that subdivision 83A-C applies to the respective Plans. Therefore, subsection 130-90(1A) of the ITAA 1997 applies and any capital gain or loss that the Trustee will make from CGT event E5 or E7 will be disregarded.

Capital gains or losses are disregarded for CGT event E5 or E7 in relation to shares acquired by an employee share trust to satisfy the future exercise of a right to acquire a share provided under an ESS, as per subsection 130-90(1) of the ITAA 1997. However, subsection 130-90(2) of the ITAA 1997 provides that the gains or losses are not disregarded if the employee acquires the share for more than its cost base in the hands of the employee share trust at the time the CGT event happens.

Conclusion

Any capital gain or loss made by the Share Trust arising as a result of either CGT Event E5 or CGT Event E7 will be disregarded under section 130-90 of the ITAA 1997.

Question 7

Will the Commissioner make a determination that Part IVA of the ITAA 1936 applies to deny, in any part or in full, any deduction claimed by Company X for irretrievable contributions made by Company X to the Trustee for the purpose of acquiring Shares to satisfy grants of ESS interests under the Plans?

Detailed reasoning

Part IVA of the ITAA 1936 is a general anti-avoidance provision. It gives the Commissioner the power to cancel a tax benefit that has been obtained, or would but for section 177F of the ITAA 1936 be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

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:

(1) a ‘tax benefit’ as identified in section 177C of the ITAA 1936, has been obtained or would (but for subsection 177F(1)) be obtained,

(2) the tax benefit was, or would have been, obtained in connection with a ‘scheme’ as defined in section 177A of the ITAA 1936, and

(3) having regard to the matters in subsection 177D(2) of the ITAA 1936, person or persons who entered into or carried out any part of the scheme did so for the dominant purposes of enabling a taxpayer to obtain a tax benefit in connection with the scheme.

The Commissioner will not make a determination under subsection 177F(1) of the ITAA 1936, as a result of section 177D of the ITAA 1936 to deny, in part or in full, any deduction claimed by Company X in respect of contributions made to the Trustee for the purpose of acquiring Shares to satisfy grants of ESS interests under Company X Employee Share Schemes.

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