Edited version of private advice

Authorisation Number: 1051803508099

Date of advice: 01 March 2021

Ruling

Subject: Fringe benefits tax

Question 1

Will the irretrievable cash contributions made by Company C or another entity within the Company A tax consolidated group to the trustee ('Trustee') of the Trust B Share Trust ('EST'), to fund the subscription for, or acquisition on-market or off-market of, Company A shares, constitute a fringe benefit within the meaning of section 136(1) of the Fringe Benefits Tax Assessment Act 1986 ('FBTAA')?

Answer

No

This ruling (for Question 1) applies for the following periods:

Fringe Benefits Tax year ended 31 March 20xx

Fringe Benefits Tax year ended 31 March 20xx

Fringe Benefits Tax year ended 31 March 20xx

Fringe Benefits Tax year ended 31 March 20xx

Fringe Benefits Tax year ended 31 March 20xx

Subject: Income Tax

Question 2

Will Company A as head company of the Company A income tax consolidated group ('ACG') be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') for the irretrievable cash contributions it makes to the Trustee, to fund the subscription for, or acquisition on-market or off-market of, Company A shares by the Trustee to satisfy ESS interests issued pursuant to the Company A Incentive Plan ('EIP') in respect of employees based in Australia?

Answer

Yes

Question 3

Will the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for, or acquisition on-market or off-market of, Company A shares by the Trustee, be deductible to Company A under section 8-1 of the ITAA 1997 at a time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes

Question 4

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, a deduction claimed by Company A as head company of the ACG for the irretrievable cash contributions made by it to the Trustee to fund the subscription for, or acquisition on-market or off-market of, Company A shares by the Trustee?

Answer

No

This ruling (for Questions 2 to 4 inclusive) applies for the following periods:

Income Tax year ended 30 June 20xx

Income Tax year ended 30 June 20xx

Income Tax year ended 30 June 20xx

Income Tax year ended 30 June 20xx

Income Tax year ended 30 June 20xx

Relevant facts and circumstances

Company A is an Australian business.

Company A is the head company of the Company A income tax consolidated group ('ACG').

Company A has established an employee share plan, the EIP, under which senior executives may be provided with performance rights ('Rights'), with each Right representing a right to acquire a fully paid ordinary share in Company A (a 'Company A Share') in the future, at no cost, subject to vesting conditions. Senior executives were granted Rights under the EIP on an annual basis as part of their remuneration.

The implementation of the EIP form part of Company A's long-term strategy of creating shareholder wealth by:

•   rewarding the hard work of senior executives in Company A in a way that is competitive, market related and cost-effective for the business;

•   motivating and promoting the long-term retention of senior executives in Company A;

•   reflecting the importance of senior executives to the future success of Company A;

•   enabling the executives to benefit in the long-term growth and ownership of Company A by participating in these plans; and

•   attracting new executive talent to achieve Company A's strategy.

The EIP is currently the only incentive plan at the Company and this ruling only applies to the EIP.

EIP Overview

The EIP is governed by the EIP Rules ('Plan Rules').

Grant

The Board of Directors of Company A (Board) may, from time to time, in its absolute discretion, invite Eligible Employees (as defined in the Plan Rules) to participate in a grant of Rights and/or Restricted Shares. An offer to participate in the EIP (Offer) will be made on the terms set out in the Plan Rules and/or on any additional or alternative terms as the Board may determine.

An Eligible Employee to whom Rights have been granted becomes a 'Participant' under the EIP.

There will be no participants to the EIP other than those that are "employees, associates of employee or other relationships similar to employment as set out in section 83A-325 of the ITAA 1997." The EIP has operated for a number of years and all of the participants have been employees of Company B, a wholly owned subsidiary of Company A. Company A does not have any non-Australian resident employees.

The Board will, amongst other things, set out in the Offer:

•   the number of Rights being offered, or the method by which the number will be calculated;

•   the amount (if any) that will be payable for the grant of Rights;

•   any vesting conditions or other conditions that apply, including any vesting period;

•   when Rights may vest; and

•   whether the vesting of Rights will be satisfied through an allocation of Company A Shares or by making a cash payment.

Acceptance of an Offer must be made by the Eligible Employee in accordance with the instructions that accompany the Offer, or in any other way the Board determines.

The Board may, at its discretion, refuse to allow the participation of an Eligible Employee where that Eligible Employee ceases to be an Eligible Employee, or ceases to satisfy any other conditions imposed by the Board, before the grant of Rights is made.

Rights

A Right is defined in the Plan Rules as an automatic entitlement to a Company A Share (or, in certain circumstances, to a cash payment in lieu of a Company A Share) once applicable conditions (including any vesting conditions) are satisfied.

Where an Eligible Employee has accepted an Offer to participate in a grant of Rights, the Board will, subject to its discretion, grant Rights to the Eligible Employee.

Unless the Board determines otherwise:

•   no payment is required for the grant of a Right

•   Rights may not be registered in any name other than that of the Eligible Employee

•   The number of Rights granted may not be known when the Offer is made to the Eligible Employee.

Vesting

The following sets out how a Right will vest:

•   subject to any express clause to the contrary, a Right will only vest where each vesting condition, and all other relevant conditions advised to the Participant by the Board have been satisfied

•   the vesting of a Right will be satisfied by Company A allocating Company A Shares to the Participant

•   the Board may determine that the vesting of a Right will be satisfied by Company A making a cash payment in lieu of an allocation of Company A Shares

•   the Board may determine, prior to making a grant of Rights, that the vesting of those Rights will only be satisfied through an allocation of Company A Shares to the Participant, and not by making a cash payment

•   vesting occurs upon notification from Company A to the Participant that Rights have vested

Allocation

As soon as practicable following vesting of a Right, the Board must issue to, procure the transfer to, or procure the setting aside for the Participant of the number of Company A Shares in respect of which Rights have vested. No further action is required on the part of the Participant.

Payment of cash equivalent

Where the Board exercises its discretion to make a cash payment to a Participant in lieu of an allocation of Company A Shares, it will do so on the following terms:

•   Company A must pay to the Participant an amount in Australian dollars (or any other currency determined by the Board in its absolute discretion) equivalent to the value of Rights that have vested

•   the amount of the cash payment will be calculated by multiplying the number of Company A Shares in respect of which Rights have vested by the Current Market Price (as defined in the Plan Rules)

•   where the Board determines that the payment is to be made in a currency other than Australian dollars, unless the Board determines otherwise, the foreign exchange rate applied will be the average closing exchange rate of the relevant currency for the five days prior to the date of vesting.

A Right will lapse upon the earliest to occur of:

•   the Right lapsing in accordance with a provision of the Plan Rules (including in accordance with a term of an Offer);

•   failure to meet a vesting condition or any other condition applicable to the Right within the vesting period; or

•   the receipt by Company A of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Right.

A Participant is free to deal in Company A Shares allocated to them on vesting of their Right.

The EST

Company A has established the Trust B Share Trust (the 'EST') pursuant to the EST Deed (the 'Trust Deed') between Company A and the 'Trustee' for the purpose of obtaining Company A Shares for the benefit of participating senior executives of the EIP. This includes subscribing for Company A Shares at market value by acquiring Company A Shares on-market or by way of off-market transfers, and allocating, holding and delivering shares in Company A pursuant to the Plan Rules of the EIP. All of the Company A Shares acquired by the EST will be ordinary shares in Company A.

Operation of the EST

The Trust Deed sets out the manner in which contributions can be made to the EST and Company A Shares acquired. Pursuant to the Trust Deed, contributions to the EST are made on the following basis:

•   the EST is required to acquire Company A Shares determined appropriate and necessary by Company A;

•   funds must be transferred to the EST by Company A to enable the Trustee to acquire Company A Shares; the Trustee is not obliged to act in accordance with a request or direction by the Board if a Group company or Participant has not provided it with sufficient funds to comply with the request or direction. The funds contributed to the EST may be contributed by Company C, or another associated entity within the ACG.

•   The Trustee is subject at all times to the requirement that the Trustee manage and administer the EST so that the EST satisfies the definition of an 'employee share trust' for the purposes of subsection 130-85(4) ITAA 1997.

The Trustee will set aside and hold parts of the Trust Fund for identified Participants (each a 'Beneficiary') at the request of the Board, consistent with the Plan Rules.

The Trust Deed, among other incidental powers, and for the sole purpose of exercising its powers and discharging its obligations under the Deed and Plan Rules, grants the Trustee the powers to, including:

•   acquire Company A Shares, dispose of Company A Shares or otherwise make investments (including, without limitation, in Company A Shares) for the benefit of the Beneficiaries consistent with the purposes of the EST;

•   sell any rights that accrue to a Company A Share and apply the proceeds of sale in accordance with the Trust Deed and the Relevant Rules;

•   reinvest dividends and participate in Company A Share entitlements. Note that Company A Share entitlements do not include dividend distributions;

•   to raise and borrow money in any manner (including without limitation from the Company) without security over any part of the Trust Fund and to pay any interest on money borrowed;

•   accumulate, or permit the accumulation of, income;

•   accumulate, or permit the accumulation of, any amounts of the Trust Fund to which no Eligible Employee is presently entitled (whether income or capital in nature);

•   transfer all or any part of the Trust Fund to a new or existing trust that exists for the benefit of some or all of the Beneficiaries;

•   exercise the voting rights in respect of Shares held in the Trust Fund in accordance with the Plan Rules and the Trust Deed

The Trustee may apply Company A Shares which form General Trust Property for the benefit of the Beneficiaries as follows: transferring Company A Shares to, conferring legal title of Company A Shares upon, or granting a beneficial interest in Company A Shares to, a Beneficiary, or disposing of Company A Shares and applying the proceeds for the benefit of a Beneficiary presently entitled to the Company A Shares at the direction of the Beneficiary.

At all times, the decision by the Trustee will be made in accordance with the Trust Deed and in fulfilment of the Trustee's fiduciary duty to beneficiaries. Company A is not a beneficiary under the Trust Deed, and any funds, both the initial contributions and any additional contributions required to fund the EST, cannot be refunded, repaid or returned to Company A (other than by way of the Trustee paying the issue price where it subscribes for shares in Company A, or repayment of loans from a Group company). Further, Company A will have no interest in the shares held by the EST.

Nothing in the Trust Deed confers any right to Company A to Allocated or General Trust Property (other than repayment of any outstanding loans from a Group Company) on termination of the EST.

Reasons for decision

All legislative references are to provisions of the Income Tax Assessment Act 1997, unless otherwise indicated.

Question 1

Detailed reasoning

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

In general terms, a '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. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

One benefit excluded from being a 'fringe benefit', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA 1986, is 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.

In examining whether the requirements of subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that is relevant. To qualify as an employee share trust, a trustee's activities must be limited to those described in paragraphs 130-85(4)(a), (b) and (c).

Paragraph 130-85(4)(a) and (b) are satisfied because:

-   The EST acquires shares in a company, namely Company A; and

-   The EST ensures that ESS interests as defined in subsection 83A-10(1) (being Rights in the Company A Shares according to the EIP) are provided under an employee share scheme ('ESS') (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust Deed and the Plan Rules.

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 phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination 2019/13: Income tax: what is an 'employee share trust'? ('TD 2019/13')

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

In the present case, the activities that the Trustee is permitted to undertake under the Trust Deed are indicative of those required to administer an employee share trust and are incidental to the primary purposes stated in paragraphs 130-85(4)(a) and (b). This is consistent with the purpose of the EST, namely for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under subsection 130-85(4) (clause 13 of the Trust Deed).

Therefore, the cash contribution made by Company A or another entity within the ACG to fund the subscription for or acquisition on-market or off-market of Company A Shares by the EST will not be a fringe benefit.

Questions 2 to 4 - application of the single entity rule in section 701-1

The consolidation provisions of the Income Tax Assessment Act 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule ('SER') in section 701-1 the subsidiary members of an income tax consolidated group are taken to be parts of the head company. As a consequence, the subsidiary members cease to be recognised as separate entities during the period that they are members of the income tax consolidated group with the head company of the group being the only entity recognised for income tax purposes.

The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997.

As a consequence of the SER, the actions and transactions of the subsidiary members of the ACG are treated, for income tax purposes, as having been undertaken by Company A as the head company of the ACG.

Question 2

Detailed reasoning

For present purposes, subsection 8-1(1) will allow 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 A carries on a business which produces assessable income. Company A operates an ESS as part of its remuneration strategy.

Under the EIP, Company A grants Rights to employees and makes irretrievable cash contributions to the EST (in accordance with the Plan Rules) and the Trust Deed which the Trustee will use to acquire shares (on-market, off-market or by subscription) for allocation to Participants to satisfy their Rights.

Incurred in carrying on a business

Company A must provide the Trustee with all the funds required to enable the Trustee to subscribe for or acquire those Company A Shares.

The contributions made by Company A are irretrievable and non-refundable to Company A in accordance with the Trust Deed as:

-   Company A and members of the ACG do not have any entitlement to any money or Company A Shares in the Trust Fund, and

-   Neither Company A nor any member of the ACG is a beneficiary of the EST.

Company A has granted (and will in the future grant) Rights under the Plan Rules as part of its remuneration and reward program for Participants. The costs incurred by Company A for the acquisition of Company A Shares to satisfy the Rights arise as part of these remuneration arrangements, and contributions to the EST are part of an on-going series of payments in the nature of remuneration of its employees.

Not capital or of a capital nature

The costs will be an outgoing incurred for periodic funding of a bona fide ESS for employees of a member of the ACG. Costs incurred are likely to be in relation to more than one grant of Rights (rather than being one-off), and Company A intends to continue satisfying outstanding Rights using Company A Shares acquired by the EST. This indicates that the irretrievable contributions to the EST are ongoing in nature and are part of the broader remuneration expenditure of Company A.

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.

Question 3

Detailed reasoning

Section 83A-210 applies to determine the timing of the deduction, in respect of the contribution provided to the trust to purchase shares in excess of the number required to grant the relevant Rights to the employees arising in the year of income from the grant of Rights, under an ESS.

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. ('ATO ID 2010/103').

The EIP is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests (i.e. a beneficial interest in a right to acquire a beneficial interest in a share) are provided to employees (i.e., Participants) in relation to their employment with a member of the ACG.

The EIP contains a number of interrelated components which include the provision of irretrievable cash contributions by Company A to the Trustee of the EST. These contributions enable the Trustee to acquire Company A Shares for the purpose of enabling each Participant, indirectly as part of the EIP, to acquire ESS interests.

The deduction for the irretrievable cash contribution can only be deducted from the assessable income of Company A in the income year when the relevant beneficial interest in a Right to a beneficial interest in a Share in Company A, is acquired by a Participant under the EIP.

Indeterminate rights under the EIP

The Rights provided under the EIP are indeterminate rights for the purposes of section 83A-340. That is because the Board has the discretion to make cash payment instead of allocating Company A Shares on vesting of a Right. In this regard, such Rights are not rights to acquire beneficial interests in Company A Shares unless and until the Board determines the Rights will be satisfied by the provision of Company A Shares.

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

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

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

Question 4

Detailed reasoning

Part IVA of the Income Tax Assessment Act 1936 ('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 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 EST 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 A to obtain a tax benefit.

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