Edited version of your written advice

Authorisation Number: 1051494212237

Date of advice: 22 March 2019

Ruling

Subject: Employee Share Scheme

Issue 1: Income tax

Question 1

Will the company be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made to the Trustee of the Employee Share Trust (the Trust) to fund the subscription for, or acquisition on-market of the company’s shares to satisfy Employee Share Scheme (ESS) interests issued pursuant to the company’s Performance Equity Plan (the Plan)?

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 to the Trustee, to fund the acquisition of 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 Plan 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 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 company shares by the Trust?

Answer

No.

Issue 2 - Fringe benefit tax

Question 6

Will the provision of Awards by the company and other employer entities within the company Group under the Plan 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 and other employer entities within the company Group to the Trustee, to fund the acquisition of company shares, be treated as a fringe benefit, within the meaning of section 136(1) of the FBTAA, in relation to the company, and other employer entities within the company Group?

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 and other employer entities within the company Group by the amount of tax benefit gained from irretrievable cash contributions made by the company to the Trustee, to fund the acquisition of company shares?

Answer

No.

This ruling applies for the following periods:

Income tax years:

1 July 20XX to 30 June 20XX

For Fringe Benefits Tax years:

1 April 20XX to 31 March 20XX

Relevant facts and circumstances

The company established the Plan with shareholder approval to grant Awards to employees (Participants) pursuant to the Plan Rules.

The company established an employee share trust (Trust) under the terms of Trust Deed (the Trust Deed), with the trustee (Trustee).

The Trust Deed allows the Trustee to acquire, hold, and allocate Shares to Participants (as defined in the Plan). The Trust is established to assist the company with capital management for the Plan, to facilitate the acquisition of newly issued or market purchased Shares to satisfy Awards granted under the Plan.

The company made irretrievable contributions in the form of cash to the Trust, and the Trustee has agreed to use this money to acquire Shares to satisfy Awards granted Participants in accordance with the terms of the Trust Deed and the Plan Rules.

The Plan is operated in accordance with the Trust Deed.

The Plan

Under the Plan, eligible employees (Participants) are made an Offer by the Board to participate in the Plan on terms and conditions determined by the Board for grant of Awards.

The acceptance of the Offer must be in accordance with the instructions outlined in the Offer, unless the Board determines otherwise.

Grant of Awards

Awards granted are for nil consideration and subject to Vesting Conditions.

As soon as practicable, following the Vesting of Awards, the Board must issue to Participant the number of Shares in respect of which Awards have Vested and no further action is required on the part of the Participant.

Lapse of Awards

Awards lapse upon failure to meet a Vesting Condition, or upon Participant electing to surrender the Awards.

Employee Share Trust

The company established the Trust to facilitate the acquisition, holding of, and allocation of Shares to Participants in accordance with the Plan.

The Trust is an independent legal entity and is not part of the company and the company cannot be a beneficiary of the Trust.

The company will only make contributions to the Trust to fund the acquisition of Shares once Awards have been granted.

Obligations of the Trustee

Under the Trust Deed, the sole activities of the Trustee are to acquire and hold Shares for the purpose of providing them to Participants of the Plan on exercise of Awards, and the administration of the Trust.

The Trust will be managed and administered so that it satisfies the sole activities test for the purpose of subsection 130-85(4) of the ITAA 1997.

Contributions to the Trustee

The company must provide the Trustee any funds required by the Trustee in order to comply with its obligations under the Trust Deed.

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 177C

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 section 83A-10

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 section 104-35

Income Tax Assessment Act 1997 section 104-155

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

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

Reasons for decision

Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.

Question 1

Section 8-1 allows a deduction for a loss or outgoing that satisfies one of the positive limbs in subsection 8-1(1). However, even if a positive limb is satisfied, a deduction is not permitted under subsection 8-1(2) (the ‘negative limbs’) to the extent that the loss or outgoing is capital or of a capital nature or it is private or domestic in nature; is incurred in gaining or producing exempt income or non-assessable non-exempt income; or another provision of the ITAA 1997 or ITAA 1936 prevents the deduction.

The purpose of the Plan is to grant Awards as part of the remuneration and reward program for employees of the company. The irretrievable cash contributions that the company makes to the Trustee are employee remuneration costs directly related to the production of the company’s assessable income. Therefore, subsection 8-1(1) is satisfied.

The irretrievable cash contributions that the company makes to the Trustee are not outgoings of capital or of a capital nature. Therefore, paragraph 8-1(2)(a) is not satisfied.

Accordingly, the company will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee of the Trust to fund the acquisition of newly issued or on-market Shares to satisfy Awards granted to Participants pursuant to the Plan Rules.

Question 2

The company will incur costs in relation to the implementation and ongoing administration of the Trust.

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, the company may pay to the Trustee from company’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 the company and the Trustee.

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

● costs incurred in gaining or producing the assessable income of the company, or

● costs necessarily incurred in carrying on the business of the company for the purpose of gaining or producing the assessable income of the company.

The view that the costs incurred by the company are deductible under section 8-1 is consistent with ATO Interpretative Decision 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 and accordingly deductible under section 8-1. As discussed in the detailed reasoning above in question 1, the costs are revenue and not capital in nature and therefore not excluded from being deductible under paragraph 8-1(2)(a).

The company is entitled to an income tax deduction, pursuant to section 8-1, 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 would generally be allowable in the income year in which the company incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210.

Section 83A-210 provides that if:

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

(i) under an arrangement; and

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

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

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

Section 83A-210 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 Plan, establishment of the Trust and provision of irretrievable cash contributions by the company to the Trustee, are considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i).

ESS interest

An ESS interest in a company is defined in subsection 83A-10(1) 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 Plan, each right provided to an Eligible Employee when an offer is made under the LTIP 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.

Employee share scheme

Subsection 83A-10(2) defines ‘employee share scheme’ as:

a scheme under which ESS interests in a company are provided to employees or associates of employees, (including past or prospective employees) of:

(a) the company; or

(b) subsidiaries of the company;

in relation to the employees' employment.

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

(a) any arrangement; or

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement which provides an ESS interest to Participants in relation to their employment in the company, in accordance with the Trust Deed.

The provision of irretrievable cash contributions by the company to the Trustee under the Plan and the Trust Deed, the acquisition and holding of the company shares by the Trustee and the allocation of the company shares to Participants 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.

If the cash contributions are provided by the company to the Trustee of the Trust before the time the Participant acquires the ESS interest, section 83A-210 will apply. The effect is that the company can only deduct the amount of the cash contributions in the income year when the Participants acquire the ESS interest.

However, section 83A-210 will not apply to a deduction for cash contributions provided by the company to the Trustee if the contributions are made at or after the time the Participant acquires the ESS interest. The effect is that those cash contributions can be deducted by the company under section 8-1 in the income year in which the contributions are made to the Trustee of the Trust.

Question 4

Ordinary Income

Section 6-5 provides that a taxpayer’s assessable income includes income according to ordinary concepts, which is called ordinary income. The term “income according to ordinary concepts” is not defined. However, there are a number of cases which have elaborated certain factors that assist in determining whether a receipt should be characterised as income according to ordinary concepts.

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 McHug'h JJ stated at page 138 that:

“To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient’s purpose in engaging in the transaction, venture or business”.

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

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

The character of the subscription proceeds received by the company from the trustee can be determined by the character of the right or thing disposed of in exchange. In this case, as the company issues shares in itself to the Trustee in exchange for the subscription proceeds, the character of the newly issued shares is one of capital. Therefore, the receipt, being the subscription proceeds, takes the character of share capital, and, accordingly is of a capital nature.

The subscription proceeds received by the company from the Trustee where the Trustee has subscribed for new shares in the company to satisfy obligations to Participants under the Plan 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.

Section 20-20

Subsection 20-20(2) 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.

The company will receive an amount when the Trustee of the Trust subscribes for shares in the company. 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) 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.

Recoupment is defined in subsection 20-25(1) as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing.

None of the provisions listed in section 20-30 are relevant to the current circumstances. Therefore, the subscription amount does not constitute an assessable recoupment under subsection 20-20(3).

The subscription proceeds received by the company from the Trustee of the Trust for shares in the company will therefore not be an assessable recoupment under section 20-20.

Capital Gains Tax (CGT)

Section 102-20 provides that you make a capital gains or loss if, and only if, a CGT event happens. Where the receipt of subscription proceeds does not relate to a CGT event, a capital gain will not arise.

CGT events for which you can make a gain or loss are specified in Division 104. CGT events that may have possible application when subscription proceeds are received by the company from the Trustee of the Trust 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) states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. Paragraph 104-155(5)(c) also 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, as the company is issuing shares, being equity interests as defined in section 974-75, to the Trustee of the Trust, CGT event D1 and H2 do not happen.

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

Therefore, if the Trustee of the Trust satisfies its obligations under the Trust Deed by subscribing for new shares in the company, then the subscription proceeds received by the company will not be included in the assessable income of the company under section 6-5 or section 20-20, and a CGT event will not happen under Division 104.

Question 5

Summary

The Commissioner will not make a determination that Part IVA 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. Before the Commissioner can exercise his discretion to make a determination in respect of Part IVA under subsection 177F(1), the following three requirements must be met:

● there must be a ‘scheme’ as defined in section 177A

● a ‘tax benefit’, as defined in section 177C, was obtained or would be obtained in connection with the scheme but for subsection 177F(1), and

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

In this case, the Plan constitutes a ‘scheme’ for the purposes of section 177A, and the deduction claimed by the company is a tax benefit obtained in connection to the scheme under paragraph 177C(1)(b).

However, on the basis of the ‘Relevant facts and circumstances’ in this private ruling, it cannot be objectively concluded that the person or persons who entered into or carried out any part of the scheme did so for the dominant purpose of enabling the company to obtain that tax benefit in connection with the scheme.

Therefore, the Commissioner will not seek to make a determination under section 177F, as a result of section 177D, to deny, in part or in 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 the company shares by the Trustee, pursuant to the Plan.

Question 6

Summary

The provision of Awards by the company to Participants under the Plan will not constitute a ‘fringe benefit’ within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

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

No amount will be subject to FBT unless a fringe benefit is provided.

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

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.

Provision of Awards

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

a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83AB or 83AC of that Act applies.

An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

An employee share scheme is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees, or associates of employees.

The company has stated that it will grant Awards to Participants under the LTIP at discount (as there is no consideration paid for them) and in connection with the Participants’ employment.

The Commissioner accepts that the LTIP is and employee share scheme, that the Awards provided under the LTIP are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of Awards pursuant to the LTIP will not be subject to fringe benefits tax 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 thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

Question 7

Summary

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

Pursuant to paragraph 136(1)(ha) of the of the FBTAA, a fringe benefit is defined to exclude:

a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997); …

An ‘employee share trust’ for an ‘employee share scheme’ is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4) which states:

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 determined in answer to Question 3 above, the Plan administered by the Trust constitutes an ‘employee share scheme’ under subsection 83A-10(2).

The Trust is an employee share trust, as defined in subsection 995-1(1), as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the Trust from being a fringe benefit.

Therefore, the irretrievable cash contributions made by the company to the Trustee of the Trust to fund the subscription for, or acquisition on-market of the company shares by the Trust pursuant to the Plan will satisfy the exclusion in paragraph (ha) of subsection 136(1) of the FBTAA.

Question 8

Summary

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 and other employer entities within the company Group 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

Section 67 of the FBTAA is the general anti-avoidance provision for FBT purposes. As stated in response to question 5 above, PS LA 2005/24 provides guidance in the application of Part IVA and other general anti-avoidance rules including subsection 67(1) of the FBTAA to an arrangement, including in a private ruling. It explains the operation of section 67 of the FBTAA and of relevance are paragraphs 185 – 188 as follows:

185. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

186. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

187. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 of the FBTAA differs from subsection 177D(2) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

188. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

The Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement.

As discussed in responses to questions 6 and 7 above, irretrievable cash contributions made to the Trustee will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA. As there would be no fringe benefits tax payable, 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 applies to increase the aggregate fringe benefits amount of the company, or other employer entities of the 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 the company shares.

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