Edited version of private advice

Authorisation Number: 1052111325761

Date of advice: 3 May 2023

Ruling

Subject: Income tax - employee share schemes

Question1

Will Company X be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by it to the Trustee to fund the subscription for, or acquisition on-market (or off-market) of, Shares by the Trust?

Answer

Yes

Question 2

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 it to the Trustee to fund the subscription for, or acquisition on-market (or off-market) of, Shares by the Trustee?

Answer

No

Question 3

Will the provision of Awards by the Employing Entities to Participants under the Plans constitute a 'fringe benefit' within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

Question4A

Will the irretrievable cash contributions made by the Employing Entities to the Trustee pursuant to the Trust Deed, to fund the subscription for, or acquisition on-market (or off-market) of, Shares constitute a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA?

Answer

No

Question4B

Will the irretrievable cash contributions made by the Employing Entities to the Trustee pursuant to the Amended Trust Deed, to fund the subscription for, or acquisition on-market (or off-market) of, Shares constitute a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA?

Answer

No

This ruling applies for the following periods:

A number of ruling periods

The scheme commenced on:

A particular income year

Relevant facts and circumstances

Company X and Company Y

Company X is an investment company listed on the Australian Securities Exchange.

Company X is the head company of an income tax consolidated group (Group) and Company Y is a 100% subsidiary of Company X.

Company X and Company Y are both employing entities of the Group (collectively, the Employing Entities). The Employing Entities make either direct or indirect contributions (via Company X) to the Employee Share Plan Trust (the Trust) for their employees who participate in the employee shares schemes (ESS).

Employee Share Plan Trust

The Trust was established under the trust deed (Trust Deed) between Company X and the trustee of the Trust (Trustee).

Employee Shares Scheme (ESS)

As part of its remuneration framework, Company X established multiple ESS plans to reward performance and retain and motivate employees (the Plans).

The Plans provide eligible employees rights to acquire a share in Company X (Rights), options to acquire a share in Company X (Options) and shares in Company X (Shares) that are subject to disposal restrictions (Restricted Securities) (collectively, Awards).

For the purposes of this Ruling, an eligible employee or participant who has been granted one or more Awards under the Plans (Participant) is limited to Australian residents within the meaning of subsection 6(1) of the ITAA 1936.

The Plans

Under the Plans:

a)    Eligible employees were invited to participate via an invitation letter setting out the terms and conditions of the offer (Invitation Letter).

b)    The Invitation Letter sets out whether the Award is a Right, Option, and/or Restricted Security, the vesting conditions and any applicable performance hurdles (Conditions).

c)    The Participants generally receive the Awards for no consideration, however, some Participants may receive their Awards through sacrificing a portion of their fees.

d)    Rights and Options do not carry voting rights or dividend entitlements. Restricted Securities carry dividend and voting rights.

e)    The Awards generally may not be transferred or disposed of by the Participant without the prior consent of the board of Company X (the Board).

f)     Upon Rights and Options being exercised (and satisfaction of the Conditions), the Board will instruct the Trustee to subscribe for, acquire and/or allocate the relevant number of Shares to, or for the benefit of the Participant.

g)    The Board has the discretion to determine that some of relevant vested Awards be settled in cash rather than Shares, by payment to the Participant of an equivalent value. The cash consideration will be provided by Company X and not by the Trust.

h)    For Restricted Securities that are vested, the Board must lift the corresponding disposal restrictions.

i)      All Shares issued under the Plans are fully paid ordinary shares and rank equally in all aspects with other ordinary shares issued by Company X.

The Trust was implemented as an Employee Share Trust (EST) for the purpose of delivering and holding Shares on behalf of Participants. The Plans allows Company X to provide funds to the Trustee to subscribe for and/or acquire and hold the Shares on behalf of Participants and pay for services provided by the Trustee.

Trust Deed

Broadly, the Trust operates as follows:

a)    For the sole purpose of obtaining Shares for the benefit of Participants under the Plans.

b)    The Board will instruct the Trustee to subscribe for, acquire and/or allocate a number of Shares specified in the notice. This instruction may occur at any time, depending on Company X's capital management strategy.

c)    The subscription for or acquisition of Shares must be at market value.

d)    If a request or direction(s) is received from the Board, the Trustee must allocate Shares to the account established for the Participants provided that the Trustee receives sufficient payment from Company X or a member of the Group to subscribe for or purchase Shares, the Trustee holds sufficient capital and/or has sufficient unallocated Shares available in the Trust.

e)    The Shares are held and registered in the name of the Trustee on behalf of the Participants who are the beneficial owner of the Shares.

f)     Neither Company X nor any member of the Group will or have any beneficiary interest in any Shares.

g)    All funds provided by Company X or a member of the Group to the Trustee for the purpose of purchasing Shares constitute corpus of the Trust and are irretrievable by Company X or any member of the Group.

h)    Nothing in the Trust Deed confers or is intended to confer on Company X or a member of the Group any charge, lien or any other proprietary right or interest in the Shares acquired by the Trustee in accordance with the Trust Deed.

i)      Company X will pay the Trustee from its own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as Company X and the Trustee may agree from time to time.

j)      The Trustee is not entitled to receive any fees, commission or other remuneration in respect of its office or its performance of its obligations as trustee of the Trust, from an account that is established on behalf of the Trust.

k)    On termination of the Trust, the Trustee is to apply the balance of capital or income of the Trust to Participants that are presently entitled to the net income of the Trust.

The express powers of the Trustee in respect of the Trust includes:

a)    To enter into and execute all contracts, deeds and documents and do all acts or things which it deems expedient for the purpose of giving effect to and carrying out the rights, powers and discretions conferred on the Trustee by this deed.

b)    To subscribe for, purchase or otherwise acquire and to sell, transfer or otherwise dispose of Shares which the Trustee is authorised to acquire or dispose of, consistent with the purposes of the Trust.

c)    To appoint and, at its discretion, remove or suspend custodians, trustees, managers, servants and other agents, determine the powers to be delegated to them, pay such remuneration to them as it thinks fit and any person so employed or engaged is deemed for the purpose of the deed to be employed or engaged by the Trustee.

Amended Trust Deed

The Trust Deed was amended by Deed of Amendment executed by Company X and the Trustee (Amended Trust Deed). Under the Amended Trust Deed, a few clauses were amended to ensure that the Trust satisfied the definition of an 'employee share trust' in subsection 130-85(4) of the ITAA 1997.

Company X has confirmed that the Trustee has not undertaken any of the activities of the Trust Deed that may have resulted in the Trust not satisfying the definition of an 'employee share trust' in subsection 130-85(4) of the ITAA 1997.

The Trust Deed is applicable for the period of the income tax year to a period of the income tax year and the Amended Trust Deed is applicable from a period of the income tax year

Contributions to the Trust

The Employing Entities have not and will not pay cash contributions to the Trust prior to the issue or acquisition of Awards under the Plans by Participants.

Relevant legislative provisions

Subsection 177D(2) of the ITAA 1936

Section 177F of the ITAA 1936

Part IVA of the ITAA 1936

Paragraph 8-1(1)(b) of the ITAA 1997

Paragraph 8-1(2)(a) of the ITAA 1997

Section 8-1 of the ITAA 1997

Subsection 83A-10(1) of the ITAA 1997

Subsection 83A-10(2) of the ITAA 1997

Subsection 83A-105(1) of the ITAA 1997

Section83A-340 of the ITAA 1997

Subdivision 83A-B of the ITAA 1997

Subdivision 83A-C of the ITAA 1997

Division 83A of the ITAA 1997

Paragraph 130-85(4)(a) of the ITAA 1997

Paragraph 130-85(4)(b) of the ITAA 1997

Paragraph 130-85(4)(c) of the ITAA 1997

Subsection 130-85(4) of the ITAA 1997

Section 701-1 of the ITAA 1997

Paragraph 136(1)(f) of the FBTAA

Paragraph 136(1)(g) of the FBTAA

Paragraph 136(1)(h) of the FBTAA

Paragraph 136(1)(ha) of the FBTAA

Paragraph 136(1)(j) of the FBTAA

Paragraph 136(1)(k) of the FBTAA

Paragraph 136(1)(l) of the FBTAA

Paragraph 136(1)(la) of the FBTAA

Paragraph 136(1)(lb) of the FBTAA

Paragraph 136(1)(lc) of the FBTAA

Paragraph 136(1)(ld) of the FBTAA

Paragraph 136(1)(le) of the FBTAA

Paragraph 136(1)(m) of the FBTAA

Paragraph 136(1)(ma) of the FBTAA

Paragraph 136(1)(mb) of the FBTAA

Paragraph 136(1)(n) of the FBTAA

Paragraph 136(1)(p) of the FBTAA

Paragraph 136(1)(q) of the FBTAA

Paragraph 136(1)(r) of the FBTAA

Paragraph 136(1)(s) of the FBTAA

Subsection 136(1)of the of the FBTAA

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

ApplicationoftheSingleEntityRule

Questions 1 & 2

The consolidation provisions of the ITAA 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 Group are treated, for income tax purposes, as having been undertaken by Company X as the head company of the Group.

Questions 3 & 4

The SER in section 701-1 has, however, no application to the FBTAA. The Commissioner has therefore provided a ruling to the Employing Entities in their capacity as the employer/employing entity providing benefits to employees in relation to Questions 3 & 4.

Question1

Paragraph 8-1(1)(b) 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 paragraph 8-1(2)(a), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature.

Necessarily incurred

For a deduction to be allowable under paragraph 8-1(1)(b), a nexus must exist between the outgoing and a business carried on for the purpose of gaining or producing of assessable income.

In Magna Alloys & Research Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [1980] FCA 180, the Full Federal Court stated that an outgoing is necessarily incurred in carrying on a business where, viewed objectively, it is reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business being carried on for the purpose of earning assessable income.

Company X is an investment company listed on the Australian Securities Exchange.

Company X operates the Plans as part of its employee remuneration strategy to attract, retain and motivate key talent. The Plans provide for the use of a trust for the purposes of acquiring and holding Shares on behalf of and delivering those Shares to Participants.

The Trustee is not obliged to comply with the request or direction(s) of the Board if it has not received sufficient funds from Company X or any member of the Group to purchase, subscribe for and allocate Shares under the Plans.

Therefore, there is sufficient nexus between the cash contributions made by Company X to the Trustee and Company X's remuneration arrangements with its employees, which directly relate to the business carried on by Company X or the purpose of producing Company X's assessable income.

However, for the cash contribution made by Company X to the Trustee to be deductible under section 8-1, the contribution must be a permanent loss or outgoing to which Company X has definitely committed itself and there should be no circumstance in which Company X can retrieve any of the contributions (Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339 and Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650 (Spotlight)).

The cash contributions made by Company X to the Trustee are irretrievable and non-refundable to Company X, as both the Trust Deed and Amended Trust Deed (the Deeds) do not contain any clauses which allow any trust funds to be returned to Company X from the Trust for purposes other than acquiring Shares to implement the Plans.

Therefore, the cash contributions made to the Trustee are necessarily incurred by Company X in carrying on its business.

The advantage provided by each payment to the Trustee does not have a lasting quality because it forms part of the overall remuneration of Company X's employees. Furthermore, the contributions are a recurring outlay (rather than a once-off payment). Therefore, it can be concluded that the cash contributions are not capital, or of a capital nature (Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73 and Spotlight at paragraph 71).

Based on the above analysis, Company X will be entitled to a deduction under section 8-1 in respect of the irretrievable cash contributions made by it to the Trustee to fund the subscription for, or acquisition on-market, of Shares to satisfy the issue of Shares to the Participants pursuant to the Plans.

Question2

Part IVA of the ITAA 1936 is the general anti-avoidance provision which gives the Commissioner the discretion 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 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 scheme 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) 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 3

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' under paragraphs 136(1)(f) to (s) of the FBTAA.

Relevantly, paragraph 136(1)(h) of the FBTAA excludes the following from being a fringe benefit:

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

The Board may in its discretion determine that some of the relevant vested Awards be satisfied in cash instead of Shares. Therefore, at the time the relevant Awards are acquired by the Participants under the Plans, they are not rights to acquire a beneficial interest in a share, but are indeterminate rights pursuant to section 83A-340. However, where the indeterminate rights are ultimately satisfied with Shares instead of cash, section 83A-340 will operate to treat those Awards to have always been ESS interests within the meaning of subsection 83A-10(1). In these circumstances, the Plans will constitute an ESS within the meaning of subsection 83A-10(2) because it is a scheme under which ESS interests are provided to employees of the Employing Entities in relation to their employment.

As the Awards are generally granted under the Plans for nil consideration, they are acquired by the employees at a discount and therefore are ESS interests to which Subdivision 83A-B will apply, unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C will apply.

Accordingly, the provision of Awards under the Plans to the employees of the Employing Entities, where those Awards are satisfied with Shares, will not constitute a 'fringe benefit' by virtue of paragraph 136(1)(h) of the FBTAA (ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee Share Scheme: indeterminate rights not fringe benefits).

For completeness, where the indeterminate rights are ultimately satisfied with cash instead of Shares, the granting of the right will be viewed as a series of steps in the payment of salary or wages which are excluded from the definition of a 'fringe benefit' by paragraph 136(1)(f) of the FBTAA.

Question 4A

Paragraph 136(1)(ha) of the FBTAA 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);

An employee share trust (EST) is defined in subsection 130-85(4) as 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 respect of the Employing Entities, paragraphs 130-85(4)(a) and (b) are satisfied because the Trust:

•                acquires shares in a company, namely Company X, and

•                ensures that ESS interests as defined in subsection 83A-10(1) (being the Awards that are not cash settled) are provided under an ESS (that is, the scheme established by the Plans) by allocating Shares to Participants in accordance with the Trust Deed and the Plans.

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 and are not merely incidental are set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'?

According to paragraph 13 of TD 2019/13, the following activities are not 'merely incidental' as they are not a natural incident or consequence of administering an ESS:

(a) 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

(b) engaging in trading activities in relation to shares in the employer company, other than purchasing and selling shares to satisfy obligations under the ESS, and

(c) providing security over any of the trust's assets.

However, paragraph 6 of TD 2019/13 provides that, 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 EST. 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.

Company X has confirmed that the Trustee has not undertaken any of the activities of the Trust Deed that may have resulted in the Trust not satisfying the definition of an 'employee share trust' in subsection 130-85(4) of the ITAA 1997.

Further, Company X has confirmed that where vested Awards are to be cash settled, any cash payments will be made by Company X directly to the Participant and the Trust will not be used to satisfy cash payments to employees.

Therefore, irretrievable cash contributions made by the Employing Entities to the Trust established by the Trust Deed will not constitute a fringe benefit as the exclusion in paragraph 136(1)(ha) of the FBTAA will apply.

Question4B

A few clauses in the Trust Deed were amended pursuant to the Amended Trust Deed to ensure that the Trust satisfied the definition of an 'employee share trust' in subsection 130-85(4). Accordingly, the Amended Trust Deed contains only powers and/or duties that are merely incidental, as required by subsection 130-85(4)(c).

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

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