Edited version of private advice

Authorisation Number: 1051791993108

Date of advice: 18 December 2020

Ruling

Subject: Employee share schemes

Question 1

Will Company X 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 Company X to the trustee of the employee share trust (Trustee) to fund the subscription for or acquisition from other shareholders of Company X shares by employee share trust (Trust)?

Answer

Yes

Question 2

Will Company X obtain an income tax deduction, pursuant to subsection 25-5(1) of the ITAA 1997, in respect of costs incurred by Company X in managing its own tax affairs in relation to the Employee Share Scheme?

Answer

Yes

Question 3

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

Answer

Yes

Question 4

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

Answer

Yes

Question 5

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

Answer

No

Question 6

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company X in respect of the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for or acquisition from other shareholders of Company X shares by the Trust?

Answer

No

Question 7

Will the provision by Company X of rights to acquire ordinary shares or shares by Company X to Participants under the Plan be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No

Question 8A

Will the irretrievable cash contributions made by Company X to the Trustee pursuant to the Original Trust Deed, to fund the subscription for or acquisition from other shareholders of Company X shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer

No

Question 8B

Will the irretrievable cash contributions made by Company X to the Trustee pursuant to the Amended Trust Deed, to fund the subscription for or acquisition from other shareholders of Company X shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer

No

Question 9

Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to Company X and Subsidiary Y by the amount of tax benefit gained from irretrievable cash contributions made by Company X to the Trustee, to fund the subscription for or acquisition from other shareholders of Company X shares?

Answer

No

This ruling applies for the following periods:

For ruling questions 1 to 6 Income tax years ended 30 June 20XX to 30 June 20XX

For ruling questions 7 to 9, the ruling period is the fringe benefit tax years ended 31 March 20XX to 31 March 20XX.

The scheme commenced on:

In a particular income year

Relevant facts and circumstances

Company X

Company X is an Australian registered company involved in a particular industry.

Company X is a subsidiary of Offshore Co.

Company X is the head entity of Company X income tax consolidated group consisting of itself and all wholly owned Australian subsidiaries.

Company X's main operating subsidiary, Subsidiary Y, operates the business.

Subsidiary Y is also the only employer entity of the Company X income tax consolidated group.

The Plan is part of Company X's remuneration strategy and aims to ensure the long-term creation of value in Company X by:

a) Rewarding eligible participants (Participants) by allowing them to share in the growth of the business, and

b) Assisting with the retention of key talent personnel.

Company X Employee Share Option Plan (Plan)

The Plan was originally approved by the board of directors of Company X (the Board) in a particular year. The terms and conditions of the Plan are set out in the Company X Employee Share Option Plan Rules (Plan Rules).

Since adoption, the Plan Rules have incorporated changes in respect to the delegation of authority and relevant trading guidelines concerning the Shares. The Plan Rules were updated, and the updates approved by the Board in a particular year.

The terms on which Participants are invited to participate in the Plan are set out in the offer document (Offer).

Under the Plan and Plan Rules:

a.    Participants may be granted an option (Option) to subscribe for and be allotted, credited as fully paid, a share in Company X (Share) or at the option of Company X, to be transferred an existing Share, credited as fully paid, in each case at the Exercise Price.

b.    The Board determines the procedure for offering Options to Participants, including the form and content of any invitation, offer or acceptance procedure.

c.     It is at the Board's discretion to extend an invitation to Participants to be granted a number of Options under the Plan specified in the Offer.

d.    Offers are extended on such terms and conditions as the Board decides, from time to time, including:

                                  i.    The number of Options which are being offered;

                                 ii.    Any issue price (which is intended to be nil);

                                iii.    Any vesting conditions;

                               iv.    Any exercise price (which is intended to be set at market value of the Shares at the time of exercise); and

                                 v.    The expiry date.

e.    The Board must procure at Company X's cost the preparation of a Share Valuation at least once each financial year within a certain number of months after the end of the preceding financial year.

f.      Participants must complete and sign the acceptance form attached to the Offer by the specified date in order to participate in the Plan.

g.    Participants may nominate an eligible nominee to accept an Offer and hold Options and Shares post exercise (Exercise Shares) (together Plan Securities) by lodging a signed notice of nomination to the Board in the prescribed manner.

h.    The Options are held by a Participant until such time as they are exercised, disposed of or otherwise lapse.

i.      The Options may be subject to vesting conditions as set out in the Offer. It is a vesting condition that Participants are not entitled to make payment of the purchase consideration and take delivery of any shares before vesting conditions are met.

j.      The Board gives a Participant written notice when vesting conditions are met (or otherwise waived by the Board).

k.     A Participant may only exercise Options in accordance with the Plan Rules once they are vested (or when vesting conditions are otherwise waived by the Board) (Vested Options) and must do so before the expiry date on the Offer.

l.      Vested Options are exercisable by the Participant lodging with the Company a completed and signed notice of exercise, the relevant option certificate, and payment of the exercise price, which the Board may stipulate to be paid directly to the Trustee.

m.   The Participant acquires the number of Exercise Shares they are entitled to either by the Company arranging for the issue of a new Share or procuring the transfer of an existing Share.

n.    Options must be exercised in multiples of x or such other multiple as the Board determines, unless the Participant exercises all Options able to be exercised by the Participant at that time.

o.    Options that have not vested and have not expired (Unvested Options) lapse and cease to exist on the date of whichever the following occurs first:

                                  i.    Termination of employment for cause by Company X or its related bodies corporate, with "Related Body Corporate" (Related Entities) having the meaning given to it by the Corporations Act 2001 (Corporations Act)

                                 ii.    Termination for any other reason by Company X or its Related Entities - the expiry of any time period set by the Board upon termination

                                iii.    Termination by voluntary resignation; and

                               iv.    Termination of contract of service.

p.    Vested options lapse and cease to exist at the Expiry Date.

q.    Participants may not dispose of (or in any way encumber) any Option or Exercise Share (Plan Securities) unless the Board (in its discretion) consents thereto and may only be transferred to persons nominated or a trust approved by the Board.

r.     The Plan Rules set out circumstances in which there may be a disposal of Plan Securities. This includes circumstances where:

                                  i.    The Board with the agreement of a Participant, buy-back the Plan Securities held by a Participant

                                 ii.    A Participant gives notice to the Company of their intention to dispose of Vested Options or Exercise Shares held by a Participant; and

                                iii.    The Participant is required to dispose of their Plan Securities if the Relevant person ceases to be an employee.

s.     The disposal of Plan Securities also includes a possible buy-back by Company X of Options held by Participants, outside the Trust for an amount equal to the Option Valuation. The Option Valuation is defined as the Share Valuation minus the Exercise of the Option; if the Option Valuation is less than zero, the Option Valuation will be deemed to be zero.

Contributions to the Trust may be made by the Company pursuant to the Plan on behalf of Australian tax resident Participants who are working in Australia and are performing services that generate income for Company X in Australia.

Contributions may also be made to acquire Shares in relation to awards granted to foreign tax residents that do not provide services that generate income in Australia. When Company X makes a contribution to the Trust, it will clearly identify the contribution that will be made in relation to Shares to be acquired in respect of awards offered to those Participants. The consideration of contributions made with respect to these Participants (and any associated Australian tax implication for Company X) are outside the scope of this ruling.

Company X Employee Share Trust (Trust)

The Trust was established on a particular date (Original Trust Deed) as a sole purpose trust for the purpose of acquiring, holding and transferring shares in connection with equity incentive plans established by Company X for the benefit of participants of those plans. The Trust will only be used to administer shares relating to Options already on offer or to be offered under the Plan.

The Trust broadly operates as follows:

a.    Company X must provide the Trustee with the funds required for the purchase of shares in accordance with the Plan and all funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee.

b.    These funds are used by the Trustee to acquire shares in Company X either from other shareholders or via a subscription for new shares in Company X based on written instructions from Company X.

c.     Where the Plan Rules stipulate that the shares are to be held by the Trustee on behalf of Participants, the Trustee will hold Company X shares as shares in respect of a Participant(s) (i.e. on an allocated basis), although the Participants will be the beneficial owner of and absolutely entitled to their Allocated Shares. Legal transfer of title in the Shares can occur post that time.

d.    Where the Plan Rules include that the shares may be held by the Trustee on behalf of Participants or employees, the Trustee will hold the shares as unallocated shares for Participants generally.

e.    The Trust is precluded from exercising voting rights in relation to the unallocated shares.

f.      After a disposal restriction period lapses (if any), the Trustee must transfer the relevant number of shares into the name of the relevant employee or any third party as directed by the relevant employee (i.e. legal title) upon a withdrawal notice being submitted to the Trustee or following a written instruction by Company X.

g.    The Trustee can sell Allocated shares on behalf of a Participant where permitted to do so by the Participant.

h.    The Trustee may make investments and subscribe for, sell or otherwise dispose of privileges.

i.      The Trustee is not entitled to receive from the Trust any fees, commission or other remuneration for operating or administering the Trust. However, Company X must pay or reimburse to the Trustee from Company X's own resources any such fees, commission or other remuneration incurred by the Trustee, as Company X and the Trustee agree from time to time.

j.      In the event that the Trust is terminated, the Trustee must not pay any of the Surplus Assets to any Group Company. Group Company is defined as Company X and each of its subsidiaries.

k.     The Trustee is a separate legal entity to Company X. The directors of the Trustee company are also directors of Company X. The Trustee company is part of the Company X tax consolidated group.

l.      The Trust does not form part of the Company X tax consolidated group and separate tax filings will be made for the Trust.

Company X subsequently made amendments to the Original Trust Deed (Amended Trust Deed). Company X requested the Trustee's consent to the Amended Trust Deed (Request for Consent). Consent to the Amended Trust Deed was provided by the Trustee on a particular date with the Amended Trust Deed taking effect from a particular date.

Under the Amended Trust Deed:

a.    A definition for 'ESS Interest' was inserted to provide that the term has the meaning in section 83A-10 of the ITAA 1997

b.    The Trustee has the power to acquire, hold, dispose or otherwise deal with on any terms any property (being ESS Interests, Shares or Trust Assets) and to make ancillary investments thereof for the purposes of the Deed

c.     The Trustee has the power to subscribe for, purchase or otherwise acquire Trust Assets, Shares or rights which the Trustee is authorised by the Deed to acquire, and (where relevant) on such terms and conditions as it thinks fit, and do all things incidental to this activity

d.    The Trustee has the power to sell or otherwise dispose of Trust Assets, Shares or rights which the Trustee is authorised by the Deed to dispose of, and (where relevant) on such terms and conditions as directed by the relevant Participant, and do all things incidental to this activity.

Ancillary investments encompass only investing in Company X shares and retaining excessive cash in the bank account and nothing further.

As a result, under the Amended Trust Deed, the Trustee may make only ancillary investments and the Trustee is no longer able to subscribe for, sell or otherwise dispose of privileges.

Company X confirmed that the Trustee had not, to that date, undertaken any investments or dealt with any privileges except for the acquisition of shares in Company X and holding those shares on behalf of the Participants.

Company X will not typically provide cash contributions to the Trust prior to the grant of Options under the Plan to Participants.

Where appropriate, Company X will wait until the Options vest and receipt of the exercise notice and exercise price (if applicable) from Participants before providing the Trust with the cash necessary to acquire Exercise Shares to satisfy the acquisition/ subscription of shares related to those Options.

However, where it makes commercial sense to do so, Company X will make cash contributions to the Trust prior to the Options being exercised by the Participants - for example, where existing Participants wish to dispose of their Shares. This allows the Trustee to have enough Shares in the Trust ahead of the time they need to be allocated to Participants.

Associated costs

Company X will incur various on-ongoing administration costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust, such as:

a.    Employee plan record-keeping

b.    Production and dispatch of holding statements to employees

c.     Costs incurred in the acquisition of shares (e.g. brokerage costs and the allocation of shares to Participants)

d.    Preparing the annual audit of the financial statements of the Trust

e.    Preparing the annual income tax returns of the Trust

f.      An annual trustee fee; and

g.    Annual bank charges.

Company X will also incur costs in managing its own tax affairs, including:

a.    Obtaining accounting, tax and legal advice in relation to the employee share scheme and Trust; and

b.    Tax advisor fees associated with the private binding ruling application.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 130-90

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

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 104-85

Reasons for Decision

All references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Question 1

Subsection 8-1(1) of the ITAA 1997 allows you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, pursuant to subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature.

Company X is a holding company whose subsidiary, Subsidiary X carries on the business. Company X operates an ESS as part of its remuneration strategy.

Under the Company X Pty Ltd Employee Share Option Plan (Plan), Company X grants options or shares to employees and makes cash contributions to the Trust (in accordance with the Original and Amended Trust Deed as the case may be) which the Trustee uses to acquire shares (either from other Participants or by subscription) for allocation to Participants to satisfy their options or allocation of Shares.

Company X must provide the Trustee with all the funds required to enable the Trustee to subscribe for, or acquire, the Company X shares.

The cash contributions made by Company X to the Trust are irretrievable and non-refundable to Company X in accordance with the Original or Amended Trust Deed (as the case may be), as:

a.    All funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee; and

b.    On termination of the Trust, the Trustee must not pay any of the Surplus Assets to any Group Company.

Therefore, if Company X makes a cash contribution to the Trust to acquire or subscribe for Company X shares to satisfy the grant of options pursuant to the Plan, the amount has been incurred for the purposes of subsection 8-1(1) of the ITAA 1997.

The costs incurred by Company X for the acquisition of shares to satisfy its obligations under the Plan in respect of the grant of options or shares arise as part of Company X's remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. As such, it is incurred in the process of carrying on a business for gaining or producing Company X's assessable income.

The cash contributions will be an outgoing incurred for periodic (rather than once-off) funding of an ESS for employees of Company X. The cash contributions are made as part of an ongoing process of remunerating employees, with the Trust expected to acquire shares regularly. Nothing in the facts suggests any intention for any contribution to be retained in the Trust for an extended period of time.

While the contributions may secure an enduring or lasting benefit for the employer that is independent of the year-to-year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be sufficiently small. Therefore, the payments are not capital, or of a capital nature.

Company X will be entitled to a deduction under section 8-1 of the ITAA 1997 in respect of the irretrievable cash contributions made by Company X to the Trustee of the Trust to fund the subscription for, or acquisition on-market, of Company X shares.

Question 2

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Section 8-10 of the ITAA 1997 states that if more than one provision applies, the most appropriate provision should be used (i.e. the specific provision should override the general provision).

Division 12 of the ITAA 1997 sets out particular types of deductions that are dealt with by a specific provision of either the ITAA 1936 or the ITAA 1997. Section 25-5 of the ITAA 1997 is such a provision listed in Division 12 dealing with tax-related expenses.

Subsection 25-5(1) of the ITAA 1997 allows a deduction for tax-related expenses, such as, managing your tax affairs.

Company X incurs costs in managing its own tax affairs, including:

a.    Obtaining tax advice in relation to the ESS; and

b.    Tax advisor fees associated with the private binding ruling applications.

These costs are tax-related expenses deductible under subsection 25-5(1) of the ITAA 1997.

Question 3

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, incurred in producing exempt or non-assessable non-exempt income or where a provision of the tax law prevents the deduction.

Company X carries on a business. Company X operates an ESS as part of its remuneration strategy.

Company X has incurred various on-ongoing administration costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust, such as:

a.    Employee plan record keeping

b.    Production and dispatch of holding statements to employees

c.     Costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to Participants)

d.    Preparing the annual audit of the financial statements of the Trust

e.    Preparing the annual income tax returns of the Trust

f.      An annual trustee fee; and

g.    Annual bank charges.

The annual trustee fee is an annual expense paid by Company X to the Trustee for the administration of the Trust by the Trustee.

Pursuant to the Original and Amended Trust Deed, the Trustee is not entitled to receive from the Trust any remuneration in respect of its performance of its obligations as trustee of the Trust. Instead, Company X is required to pay or reimburse to the Trustee any fees, commission or other remuneration incurred by the Trustee, as Company X and the Trustee agree from time to time.

These costs are regular and recurrent employment expenses which are deductible to Company X under section 8-1 of the ITAA 1997 as they are costs necessarily incurred in operating the ESS while carrying on its business for the purpose of gaining or producing its assessable income.

For completeness, these costs are not capital or of a capital nature as the loss or outgoings are regular and recurrent and are part of the ordinary employee remuneration costs of the company (see also ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible).

Question 4

It is often the case that an outgoing will be both incurred and paid in the same year of income, and as such, the amount is deductible in that income year for the purposes of section 8-1 of the ITAA 1997.[1]

However, section 83A-210 of the ITAA 1997 modifies this rule in certain circumstances in respect of contributions provided by an employer to a trust to purchase shares under an ESS.

The effect of section 83A-210 is to deem the timing an employer incurred the outgoing to be the time when the ESS interest is acquired by a beneficiary under an arrangement, rather than the time when the employer makes the contribution to the trust, if the contribution was made before the ESS interests are acquired. Further information is available 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.

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. Shares that are purchased by the Trustee to satisfy its obligation under the ESS, and subsequently granted to Company X Participants pursuant to the Plan, are ESS interests for the purposes of section 83A-210.

The ESS satisfies the definition of an 'employee share scheme' in subsection 83A-10(2) as it is a scheme under which ESS interests in Company X are provided to the Participants of Company X in relation to their employment with Company X.

The granting of the ESS interest to the Participants, the provision of the cash contributions to the Trustee, the acquisition and holding of shares by the Trustee and the allocation of shares to Participants are all interrelated components of the Company X ESS. All the components constitute an arrangement for the purposes of section 83A-210 that must be carried out so that the scheme can operate as intended.

For the Options, Company X will not typically provide cash contributions to the Trust prior to the grant of Options under the Plan to Participants. However, where it makes commercial sense to do so, Company X will make cash contributions to the Trust prior to the Options being exercised by the Participants - for example, where existing Participants wish to dispose of their Shares.

Therefore, where irretrievable cash contributions are made at a time before the Participants acquire the relevant ESS interest, the irretrievable cash contribution can only be deducted from the assessable income of Company X in the income year when the ESS interest is acquired by the Participant under the Plan, as provided by section 83A-210 of the ITAA 1997.

Question 5

Section 6-5

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. The expression "income according to ordinary concepts" is not a defined term. However, case law has identified certain factors which may assist in determining whether a receipt is properly characterised as income according to ordinary concepts.

As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In GP International Pipecoaters v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 64 ALJR 392; (1990) 93 ALR 193; (1990) 21 ATR 1; 90 ATC 4413; [1990] HCA 25 (Pipecoaters), the High Court of Australia found that:

To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt 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.

The character of the subscription proceeds received by Company X from the Trust can be determined by the character of the right or thing disposed of in exchange for the receipt. Where Company X issues the Trust with new shares in itself, the character of the newly issued share is one of capital. Therefore, the receipt of the subscription proceeds takes the character of share capital, and accordingly, is of a capital nature.

In conclusion, the subscription proceeds should not be treated as ordinary income assessable in the hands of Company X under section 6-5 of the ITAA 1997.

Section 20-20

Subsection 20-20 relevantly provides for the assessment of recoupment received by way of insurance or indemnity or under a provision listed in section 20-30.

By its very nature, the subscription proceeds received by Company X from the Trust will not represent an amount received by way of insurance or indemnity. There is no insurance contract involved; and the receipt does not arise because of a statutory right or contract of indemnity nor in the nature of compensation. Therefore, the receipt of the subscription proceeds does not constitute an assessable recoupment under subsection 20-20(2) of the ITAA 1997.

As for subsection 20-20(3), an amount that Company X receives as recoupment of a loss or outgoing, except by way of insurance or indemnity, is an assessable recoupment if such loss or outgoing is deductible in the current or a prior income year because of a provision listed in the table in section 20-30.

None of the provisions listed in section 20-30 are relevant to the current circumstances. Therefore, the subscription amount also does not constitute an assessable recoupment under subsection 20-20(3) of the ITAA 1997.

Division 104

A capital receipt will only be included as an assessable net capital gain only if it arises as a result of a CGT event (section 102-20 of the ITAA 1997).

The only CGT events that may have possible application to the receipt of the subscription proceeds are CGT event D1 (Creating a contractual or other rights) and/or CGT event H2 (Receipt for event relating to a CGT asset).

Paragraphs 104-35(5)(c) and 104-155(5)(c) of the ITAA 1997 respectively provide that CGT event D1 and CGT event H2 do not apply if a company issues or allots equity interests or non-equity shares in the company.

As the ordinary shares of Company X constitute "equity interests" (see subsection 974-75(1) of the ITAA 1997), neither CGT event D1 nor CGT event H2 will occur.

Accordingly, the subscription proceeds will not be assessable as a capital gain to Company X.

Question 6

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

The Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust where the conditions of Division 83A of the ITAA 1997 are met.

In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the employee share trust arrangement.

Therefore, having regard to the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling Company X to obtain a tax benefit.

Question 7

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA 1986, which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax.

In general terms, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the definition.

Paragraph (h) of subsection 136(1) of the FBTAA 1986 excludes the following from being a 'fringe benefit':

(h) 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 83A-B or 83A-C of that Act applies;

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 employee's employment.

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. Shares that are purchased by the Trustee to satisfy its obligation under the Plan, and subsequently granted to Participants pursuant to the Plan, are ESS interests for the purposes of section 83A-10(1).

Therefore, the ESS constitutes an 'employee share scheme' within the meaning of subsection 83A-10(2) because it is a scheme under which ESS interests in Company X are provided to the Participants of Company X in relation to their employment with Company X.

As the rights to acquire ordinary shares or shares granted under the Plan will be acquired by the employees at a discount, they are ESS interests to which subdivision 83A-B of the ITAA 1997 applies.

Accordingly, the provision of rights to acquire ordinary shares or shares by Company X to Participants under 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 thereby excluded from being a fringe benefit by virtue of paragraph 136(1)(h) of the FBTAA 1986.

In addition, when a right to acquire ordinary shares is later exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the right to acquire shares 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).

Question 8A

Paragraph (ha) of subsection 136(1) of the FBTAA 1986 excludes from the definition of 'fringe benefit':

(ha) 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);

Therefore, for the irretrievable cash contributions to be excluded from the definition of 'fringe benefit', the Trust must be an 'employee share trust' as defined in subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) 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).

In the present case, paragraphs 130-85(4)(a) and (b) are satisfied because:

a)    The Trust acquires shares in a company, namely Company X; and

b)    The Trust ensures that ESS interests as defined in subsection 83A-10(1) (discussed above in Questions 4 and 7) are provided under an employee share scheme (discussed above in Questions 4 and 7) by allocating those shares to the Participants of Company X in accordance with the Original Trust Deed and the Plan.

Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'? (TD 2019/13).

According to paragraph 13 of TD 2019/13, 'investing in assets other than shares or rights to shares in the employer company' is not an activity that is 'merely incidental' as it is not a natural incident or consequence of administering an ESS.[2] Neither is the provision of 'additional benefits to participants and/or employees, over and above the delivery of the ESS interests or resulting shares and any dividend equivalent payment that accrues directly from the employee's ESS interest'.

The Original Trust Deed grants the Trustee the power to make investments (without limitation) and allows the Trustee to subscribe for, sell or otherwise dispose of privileges (privileges is undefined and therefore may amount to additional benefits that may be provided to the Participants).

However, whilst the relevant trust documents may include powers and/or duties that are broad reaching, the mere existence of those powers or duties in the trust document does not, of itself, mean that the trustee has breached the requirements to be an employee share trust. In examining whether the requirements of subsection 130-85(4) are met, it is necessary to examine the actual activities that the trustee has undertaken.[3]

Company X has confirmed that the Trustee has not undertaken any of the activities in Original Trust Deed which are not merely incidental. Therefore, while the Original Trust Deed contains powers and/or duties that are not merely incidental, the Commissioner is satisfied that the Trust does satisfy the definition of an employee share trust on the basis that the Trustee has not in fact breached the requirements to be an employee share trust in subsection 130-85(4) of the ITAA 1997.

As such, the irretrievable cash contributions made by Company X to fund the subscription for or acquisition from other shareholders of Company X shares by the Trust pursuant to the Original Trust Deed will be excluded from being a fringe benefit by virtue of paragraph 136(1)(ha) of the FBTAA 1986.

Question 8B

The Amended Trust Deed provides for the following amendments:

a)    The Trustee may make only ancillary investments (ancillary investments encompassing only investments in Company X's shares and retaining excessive cash in the bank account and nothing further).

b)    The Trustee is no longer able to subscribe for, sell or otherwise dispose of privileges.

c)    The Amended Trust Deed also inserted a definition for 'ESS Interest' which is defined as per section 83A-10 of the ITAA 1997.

Accordingly, the Amended Trust Deed contains only powers and/or duties that are merely incidental, as required by subsection 130-85(4)(c) of the ITAA 1997.

The Amended Trust Deed, therefore, satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 and, in turn, paragraph 136(1)(ha) of the FBTAA 1986 applies to exclude the irretrievable cash contributions made by Company X to the Trustee under the Amended Trust Deed from being a fringe benefit.

Question 9

PS LA 2005/24 Application of General Anti-Avoidance Rules (PSLA 2005/24) provides guidance on the application of Part IVA of the ITAA 1936 and other general anti-avoidance rules. In respect of section 67 of the FBTAA 1986, guidance is provided at paragraphs 185 to 188 of PSLA 2005/24.

As discussed above, the irretrievable cash contributions made by Company X to the Trustee (pursuant to both the Original Trust Deed and the Amended Trust Deed) will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986. Therefore, the fringe benefits liability is not any less than it would have been but for the existence of the arrangement.

In conclusion, the Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount by the amount of the tax benefit gained from the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for, or acquisition from other shareholders of, shares in Company X.

[1] Paragraph 15 of TR 97/7.

[2] See also paragraph 11 of TD 2019/13.

[3] Paragraph 6 of TD 2019/13.

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