Edited version of private advice

Authorisation Number: 1051998055896

Date of advice: 5 July 2022

Ruling

Subject: Employee share scheme

Question 1

Are the irretrievable cash contributions made by Company A to the Trustee to fund, pursuant to the Plan:

• the subscription for, or acquisition on-market of, Shares
• the administration of the Trust

a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 2

Is Company A entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of, Shares to satisfy the issue of Shares by the Trustee to Participants pursuant to the Plan?

Answer

Yes.

Question 3

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

Answer

Yes.

Question 4

Will Company A's irretrievable cash contributions to the Trustee, to fund the subscription for, or acquisition on-market of, Shares to satisfy Company A's obligations with respect to the issue of Shares to Participants pursuant to the Plan, be deductible to Company A at a time determined by section 83A-210 of the ITAA 1997?

Answer

Yes.

Question 5

Will the Commissioner 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 A in respect of:

• irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of, Shares by the Trustee to satisfy the Awards granted under the Plan
• costs incurred by Company A in relation to the on-going administration of the Plan and the Trust?

Answer

No.

Relevant facts and circumstances

Company A is a public company listed on the Australian Securities Exchange.

Company A is the head company of the Company A tax consolidated group (Company A TCG).

The Plan

Company A established the Plan which allows Company A to grant the following Incentives to Participants:

• Rights: an entitlement to receive Shares, or a cash payment in certain circumstances, subject to the satisfaction of applicable conditions (including any Vesting Condition) and compliance with any applicable exercise procedure
• Options: an entitlement to receive Shares, or a cash payment in certain circumstances, subject to the satisfaction of applicable conditions (including any Vesting Condition) and company with any applicable exercise procedure
• Restricted Shares: a Share allocated in accordance with the Plan Rules that is subject to restrictions on Dealing, Vesting Conditions and/or other restrictions or conditions.

Although Units may also be granted under the Plan, they are not in the scope of this ruling as they are cash settled and the Trust will not be used to facilitate the cash payment to employees.

Offer

Company A may make an Offer to Eligible Employees to participate in a grant of Incentives. Each Eligible Employee should be advised of the information required under the Plan Rules in connection with an Offer. 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 refuse to allow the participation of an Eligible Employee that ceases to be an Eligible Employee or ceases to satisfy any other conditions imposed by the Board before the grant is made.

Rights

Where an Eligible Employee has accepted an Offer to participate in a grant of Rights, the Board will, subject to its discretion to refuse to allow participation, grant Rights to the Eligible Employee. Unless the Board determines otherwise, no payment is required for the grant of a Right.

In the of a Right that is exercisable, the Board will notify a Participant that a Right is exercisable and the exercise will be effected in the form and manner determined by the Board and notified to the Participant. Where the Right has not been exercised by the expiry date, it will automatically be exercised on the expiry date.

Subject to any express rule to the contrary, a Right will only Vest (and if applicable, become exercisable) where each Vesting Condition, all other relevant conditions advised to the Participant by the Board, have been satisfied or otherwise waived by the Board.

Vesting occurs upon notification from Company A to the Participant that a Right has Vested. The Vesting will be satisfied by Company A allocating Shares to the Participant.

As soon as practicable following Vesting (and if applicable, exercise) of a Right, the Board must issue to, procure the transfer to, or procure the setting aside for the Participant the number of Shares in respect of which Rights have Vested (or exercised).

The Board may determine that the Vesting (and if applicable, exercise) of a Right will be satisfied by Company A making a cash payment in lieu of an allocation of Shares.

Options

Where an Eligible Employee has accepted an Offer to participate in a grant of Options, the Board will, subject to its discretion to refuse to refuse to allow participation, grant Options to the Eligible Employee. Unless the Board determines otherwise, no payment is required for the grant of an Option.

Subject to any express rule to the contrary, an Option will only Vest and become exercisable where each Vesting Condition, and all other relevant conditions advised to the Participant, have been satisfied or otherwise waived by the Board. Vesting occurs upon notification from Company A to the Participant that an Option has Vested.

The exercise of an Option will be effected in the form and manner determined by the Board and notified to the Participant, and must be accompanied by the payment of the relevant Exercise Price.

The exercise of an Option will be satisfied by Company A allocating Shares to the Participant. As soon as practicable following the exercise of an Option, the Board must issue to, procure the transfer to, or procure the setting aside for the Participant the number of Shares in respect of which Options have been exercised.

The Board may determine that the exercise of an Option will be satisfied by Company A making a cash payment in lieu of an allocation of Shares.

Restricted Shares

After an Eligible Employee has accepted an Offer to participate in a grant of Restricted Shares, the Board must, subject to its discretion to refuse to refuse to allow participation, allocated the Restricted Shares in accordance with any timeframe specified in the Offer by issuing, procuring the transfer of or procuring the setting aside of the Restricted Shares for the Eligible Employee.

Unless the Board determines otherwise, no payment is required for the grant of a Restricted Share (other than a Restricted Share purchased by salary sacrifice). Restricted Shares purchased by salary sacrifice are in return for a reduction of the Participant's pre-tax remuneration by not more than $X,000 per annum (which would not happen if not for the Offer).

Vesting occurs where both:

• the Vesting Period and each other relevant condition (including all Vesting Conditions) advised to the Participant by the Board have been satisfied or otherwise waived by the Board
• Company A notifies the Participant that the restrictions in respect of the Restricted Shares have ceased or no longer apply.

Unless provided otherwise in the terms of an Offer, when a Share held by the Trustee on behalf of a Participant ceases to be a Restricted Share, the Trustee will continue to hold the Share on trust on behalf of the Participant until such time as the Participant, or Company A on behalf of the Participant, directs the Trustee to either:

• transfer the Share into the Participant's name or another account
• sell the Share and pay the proceeds of the sale to the Participant.

Lapse of Incentives

Rights and Options will lapse upon the earliest to occur of:

•         XX years after the date on which the Rights (other than a Vested but unexercised Right which will be automatically exercised on the expiry date) or Options (unless the Board determines that the Options will be exercised on the expiry date by way of a cashless exercise arrangement) were allocated to the Participant or any other date nominated as the expiry date in the Offer

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

•         the failure to meet a Vesting Condition or any other condition applicable within the Vesting Period

•         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 or Option.

A Restricted Share will be forfeited upon the earliest to occur of:

• the Restricted Share being forfeited in accordance with a provision of the Plan Rules (including in accordance with a term of an Offer)
• the failure to meet a Vesting Condition or any other condition applicable to the Restricted Share within the Vesting Period
• the receipt by Company A of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Restricted Share.

Non-Australian residents

The Board may adopt additional rules of the Plan that will apply to a grant made to an Eligible Employee who is a resident in a jurisdiction other than Australia. However, this ruling is restricted to Australian resident employees. Company A does not currently have any foreign resident employees.

Trust

Company A established the Trust under a deed entered into between Company A and the Trustee.

The Trustee of the Trust is an independent third party.

The recitals of the Trust Deed state that Company A established the Trust for the purpose of holding Shares for the benefit of Participants of the Plan. The Trustee will acquire, hold and transfer Shares in relation to the Plan.

In the Trust Deed, the activities of the Trustee include:

• entering into and executing agreements
• acquiring and disposing of Shares on the terms of the Trust Deed
• receiving and applying distributions in relation to Shares on the terms of the Trust Deed
• selling Shares and applying the proceeds on the terms of the Trust Deed
• opening and operating bank accounts to retain, on current or deposit account at any bank, any money it considers proper
• taking and acting on the advice or opinion of any legal practitioner or other professional person
• transferring Shares or paying the proceeds of sale of Shares to Participants
• with the consent of Company A, transferring all or part of any Trust Property to a new or existing trust that exists for the benefit or Participants
• paying taxes and undertaking activities that involve record-keeping and administrative actions necessary to operate the Trust
• receiving dividends in respect of Unallocated Shares and interest from bank accounts and using those funds to acquire additional Shares for the Plan or pay necessary and incidental costs of administering the Trust
• generally doing all acts the Trustee deems necessary or expedient to carry out the powers and discretions on the terms of the Trust Deed.

Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of section 130-85(4) of the ITAA 1997.

Company A or any Group company is not a beneficiary of the Trust.

Acquisition of Shares

The Trustee must, if directed by Company A, acquire Shares in the ordinary course of trading or by way of an off-market transaction, or subscribe for new Shares issued by Company as soon as practicable after receipt of a notice from Company A for the purpose of enabling Company A to satisfy its obligations to allocate Shares under the Plan.

In this notice, Company A must offer to provide funds to the Trustee for the purpose of acquiring Shares and/or request the Trustee to apply some of the capital of the Trust for the purposes of acquiring Shares.

The Trustee is not required to acquire or subscribe for Shares if it does not receive sufficient payment from Company A or if it does not have sufficient funds to do so out of the capital of the Trust.

Transfer of Shares

Following receipt of a written direction by Company A or the relevant Participant to do so, the Trustee must transfer to the relevant Participant the specified number of allocated Shares (provided the number does not exceed the maximum number of Shares allocated to that Participant) on the specified date.

Funding

Company A may contribute money to the Trustee to fund the acquisition or subscription of Shares for the purposes of the Plan, with the contributions being irretrievable by Company A or any other Group company.

Company A must provide the Trustee with any funds required to comply with its obligations regarding the acquisition of Shares (after application of any available capital of the Trust by the Trustee).

All funds received by the Trustee from Company A:

• will constitute Accretions to the corpus of the Trust and will not be repaid to Company A (subject to below)
• may be paid to Company A as consideration for the subscription for Shares provided such Shares are held under the terms of the Trust Deed, or a third party where the Trustee acquires Shares in the ordinary course of trading or by way of an off-market transaction
• must not be paid to any Participant, unless expressly provided for by the Trust Deed or the Plan Rules.

Where an amount paid by Company A to the Trustee is in excess of the amount required by the Trustee to subscribe for, acquire, allocate or deliver those Shares, Company A may require the Trustee to:

• apply such amount to subscribe for, acquire, allocate or deliver Shares in accordance with the Trust Deed or the Plan Rules
• deposit the funds into any account opened and operated by the Trustee in accordance with and to be used for the purposes set out in the Trust Deed.

Company A must pay all reasonable expenses, outgoings, costs and charged incurred in establishing and operating the Plan, including:

• any amount of income or other Tax payable by Company A and/or the Trustee in relation to a Plan
• any costs related to an audit of the Trust
• any costs directly related to selling and transferring Shares or exercising Share Rights (if any) incurred by the Trustee.

Unallocated Shares

The Trustee will hold Unallocated Shares on trust for the benefit of Participants generally from time to time in accordance with the terms and conditions of the Trust Deed.

In relation to Unallocated Shares, the Trustee:

• may exercise voting rights but only where the Trustee determines that voting in those circumstances is 'merely incidental' to obtaining, holding and providing Shares to Participants
• in respect of any Dividend declared which provides an option to shareholders to elect the form of Dividend received, only has discretion to elect to receive the Dividend it will receive in respect of the Unallocated Share as either cash, shares or options
• may apply any capital receipts, Cash Dividends or other distributions received to purchase further Shares as Trust Property
• must not participate in any Entitlement Offer
• must hold and Bonus Shares issued as Trust Property

Rights in respect of Allocated Shares

Subject to terms of the Trust Deed and the Plan, each Participant is absolutely entitled to:

• any and all allocated Shares held by the Trustee on their behalf
• all other benefits, rights and privileges attached to, or resulting from holding, those allocated Shares

Subject to the Trust Deed and except where the Trustee would be required to incur a cost, expense or liability for which it is not fully indemnified, the Trustee will only deal with allocated Shares:

• subject to the applicable Plan Terms
• in accordance with a valid direction of Company A or relevant Participant
• subject to any holding lock on, or other restriction on transfer of, the Shares having been lifted.

It is the intention of the Trust Deed to give each of the Participants substantially the same rights in respect of their allocated Shares as if the allocated Shares were registered directly in the name of the relevant Participant.

Reasons for decision

All legislative references are to provisions of the ITAA 1936 or to provisions of the ITAA 1997, unless otherwise indicated.

Question 1

Detailed reasoning

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

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.

In particular, paragraph (ha) of the 'fringe benefit' definition excludes a benefit constituted by the acquisition of money or property by an employee share trust (EST) within the meaning of subsection 130-85(4).

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 are relevant. To qualify as an EST, a trustee's activities must be limited to:

• obtaining shares or rights in a company (paragraph 130-85(4)(a))
• ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the ESS to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph 130-85(4)(b))
• other activities that are merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and (b) (paragraph 130-85(c)).

The Commissioner accepts that the Plan is an ESS as a Right, Option or Restricted Share granted under the Plan is an ESS interest under paragraph 83A-10(1), being a beneficial interest in a either a share in a company or a right to acquire a share in a company.

A Right, Option or Restricted Share (other than a Restricted Share purchased by salary sacrifice) is also an ESS interest to which Subdivision 83A-B or A-C applies because a Participant acquires the ESS interest under an ESS for nil consideration, which is at a discount. A Restricted Share purchased by salary sacrifice is an ESS interest to which Subdivision 83A-B or A-C applies because a Participant acquires the ESS interest in return for a reduction in salary that would not have otherwise happened (paragraph 83A-105(4)(a)).

In addition, when the Right, Option or Restricted Share is later exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of those Incentives and not in respect of employment (refer to ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax - Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

Therefore, paragraphs 130-85(4)(a) and (b) are satisfied because:

• the Trust acquires shares in a company, namely Company A
• the Trust ensures that ESS interests (as defined in subsection 83A-10(1)) are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the 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 phrase 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 TD 2019/13 Income tax: what is an 'employee share trust'? 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 objects of the Trust are for the sole purpose of undertaking activities that are in line with the definition of an EST under section 130-85(4), including paragraph 130-85(4)(c). The other activities undertaken by the Trustee are merely incidental to managing the Plan.

Therefore, the irretrievable cash contributions made by Company A to fund, pursuant to the Plan, the subscription for, or acquisition on-market of, Shares by the Trust, or the on-going administration of the Trust will not be a fringe benefit.

Question 2

Detailed reasoning

Subsection 8-1(1) 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 A carries on a business which produces assessable income, and operates an ESS as part of its remuneration strategy.

Under the Plan, Company A grants Rights, Options and Restricted Shares to Participants and makes irretrievable cash contributions to the Trustee (in accordance with the Plan and the Trust Deed) which the Trustee will use to acquire Shares for allocation to Participants.

Incurred in carrying on a business

Under the Trust Deed, Company A must provide the Trustee with the funds required to enable the Trustee to subscribe for, or acquire, Shares.

Under the Trust Deed, the contributions made by Company A to the Trustee are irretrievable by Company A or any other Group company and Company A or any Group company is not a beneficiary of the Trust.

Company A will grant ESS interests as part of its remuneration and reward program for Participants. The costs incurred by Company A for the acquisition on-market of Shares to satisfy grants of ESS interests arise as part of these remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. Therefore, subsection 8-1(1) is satisfied.

Not capital or of a capital nature

The costs will be an outgoing incurred for periodic funding of an ESS for employees of Company A. Costs incurred are likely to be in relation to more than one grant of Incentives, and Company A intends to satisfy the Incentives using Shares acquired by the Trust. This indicates that the irretrievable cash contributions to the Trust will be ongoing in nature and be part of the broader remuneration expenditure of Company A.

While the irretrievable cash 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 comparatively small. Therefore, the payments are not capital, or of a capital nature, and paragraph 8-1(2)(a) is not satisfied.

Accordingly, Company A will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee to acquires Shares to satisfy ESS interests issued pursuant to the Plan.

Question 3

Detailed reasoning

In addition to the reasoning provided in Question 2, Company A incurs on-going administration costs for operating the Trust and has appointed the Trustee to administer the Trust. The Trust Deed states that Company A must provide the Trustee with any funds required in order to comply with its obligations regarding the acquisition of Shares (after application of any available capital of the Trust by the Trustee).

Company A must also pay all reasonable expenses, outgoings, costs and charged incurred in operating the Plan, including:

• any amount of income or other Tax payable by Company A and/or the Trustee in relation to a Plan
• any costs related to an audit of the Trust
• any costs directly related to selling and transferring Shares or exercising Share Rights (if any) incurred by the Trustee.

These costs are regular and recurrent which are deductible under section 8-1 as they are costs necessarily incurred by Company A in running the ESS while carrying on its business for the purpose of gaining or producing its assessable income. These costs are not capital or of a capital nature as the loss or outgoings are regular, recurrent and part of the ordinary employee remuneration costs of Company A (ATO Interpretative Decision ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible).

Question 4

Detailed reasoning

Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to the Trust to purchase Shares in excess of the number required to grant the relevant ESS interests to the employees arising in the year of income 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.

The Plan is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests (that is a beneficial interest in a share or a beneficial interest in a right to acquire a beneficial interest in a share) are provided to employees in relation to their employment with Company A (or the Group).

Company A's ESS contains a number of interrelated components which include the provision of irretrievable cash contributions by Company A to the Trustee. These irretrievable cash contributions enable the Trustee to acquire Shares for the purpose of enabling each Participant, indirectly as part of the Plan, 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 Share, or beneficial interest in a right to a beneficial interest in a Share, is acquired by a Participant under the Plan.

Indeterminate rights under the Plan

A Right or Option provided under the Plan is an indeterminate right because the right entitles the employee to acquire either a Share or cash, to be determined at a future time at the discretion of the employer. Although the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate right will, pursuant to section 83A-340, be treated as if it had always been an ESS interest.

Section 83A-210 applies equally to contributions made in respect of ESS interests and indeterminate rights. Therefore, an irretrievable cash contribution in respect of an indeterminate right is taken to have been paid at the acquisition time of the ESS interest. If an indeterminate right becomes an ESS interest, deductible contributions made in respect of those rights can be claimed in the income year when the ESS interest is deemed to have been acquired under section 83A-340 (this will be the year in which the indeterminate right was granted to an employee). Once this has been established, such contributions can be matched to ESS interests issued to the employee, and where necessary, the relevant earlier income year assessments can be amended to allow the deduction (Item 28 of subsection 170(10AA)).

It is important to note that an indeterminate right which is satisfied by the provision of cash never becomes an ESS interest and the contribution to the Trust in respect of the provision of that right is permanently deferred. However, where that ESS interest is subsequently issued to another participating employee, this employee becomes the 'ultimate beneficiary' and the deduction is available in the income year that this participating employee acquired this ESS interest.

Question 5

Detailed reasoning

Part IVA is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would be obtained but for section 177F, 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 EST where the conditions of Division 83A are met.

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

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

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