Edited version of private advice

Authorisation Number: 1052131175930

Date of advice: 30June 2023

Ruling

Subject: Employee share scheme

Question 1

Will theCompany be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 for the irretrievable cash contributions it makes to the Trustee to fund the subscription for, or acquisition on-market of, fully paid stapled securities in the Group pursuant to the Plans in respect of participants whose activities are all related to producing assessable income for the Company?

Answer

Yes

Question 2

Will the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of, Stapled securities pursuant to the Plans, be deductible under section 8-1 of the Income Tax Assessment Act 1997:

(a)          at the time determined by section 83A-210 of that Act, if those contributions were made before the acquisition of the relevant ESS interests by the participants of those Plans?

(b)          in the income year when the contributions are made, if those contributions were made after the acquisition of the relevant ESS interests by the participants of those Plans?

Answer

Yes

Question 3

Will the Commissioner make a determination under section 177F of the Income Tax Assessment Act 1936 that Part IVA of that Act applies to deny, in part or in full, any deduction claimed by the Company for the irretrievable cash contributions it makes to the Trustee to fund the subscription for, or acquisition on-market of, Stapled securities pursuant to the Plans?

Answer

No

Question 4

Will the provision of rights, options or stapled securities to employees of the Company and the Subsidiary under the Plans constitute a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No

Question 5A

Will the irretrievable cash contributions made by the Company, or a subsidiary member of the consolidated group, to the Trustee under the original Trust Deed to fund the subscription for, or acquisition on-market of, stapled securities pursuant to the Plans constitute a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No

Question 5B

Will the irretrievable cash contributions made by the Company, or a subsidiary member of the consolidated group, to the Trustee under the amended Trust Deed to fund the subscription for, or acquisition on-market of, stapled securities pursuant to the Plans constitute a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No

This ruling applies for the following periods:

For ruling questions 1, 2 and 3, the income years ending 30 June 20XX to 30 June 20YY

For ruling questions 4, 5A and 5B, the fringe benefit tax years ending 31 March 20XX to 31 March 20 YY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

The Group is a stapled group comprising the Company, a unit trust, and their controlled entities.

Each stapled security of the Group comprises one fully paid ordinary share in the Company and one fully paid unit in the unit trust. These stapled securities are listed on the Australian Securities Exchange.

The Company is the head company of a consolidated group for income tax purposes.

The Company and the Subsidiary are the employer entities of the consolidated group.

The Company operates several employee share plans (the Plans) that are governed by the rules of the respective Plan as part of its remuneration and reward program for its employees. Under the Plans, participants are provided restricted stapled securities, rights or options that are subject to vesting and trading conditions until the relevant vesting date. Restricted stapled securities are stapled securities held within a trust (the Trust) and allocated to the relevant participants until they vest and the respective participants become entitled to the securities.

The Trust was established to facilitate the provision of stapled securities to participants under the Plans. The Trust is governed by the Trust Deed.

The Trustee of the Trust is an independent third party.

The Company and the Subsidiary will make cash contributions to the Trustee to fund the acquisition of stapled securities. These contributions are irretrievable and non-refundable because the Company and the Subsidiary are not beneficiaries of the Trust and are not entitled to any part of the Trust fund (including stapled securities held by the Trustee).

On DD MM YYYY, the Trust Deed was amended and the amended Trust Deed took effect from that date onwards.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 83A-210

Fringe Benefits Tax Assessment Act 1986 section 136

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Detailed reasoning

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.

The Company carries on a business which produces assessable income. The Company operates the employee share schemes (ESS) as part of its remuneration strategy.

Under the Plans, the Company grants awards to employees and makes irretrievable cash contributions to the Trustee (in accordance with the Plans and the Trust Deed) which the Trustee will use to acquire stapled securities (on-market or by subscription) for allocation to participants to satisfy their awards.

Incurred in carrying on a business

The Company and the Subsidiary provides the Trustee with all the funds required to enable the Trustee to subscribe for or acquire the stapled securities.

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

•                     no group entity is a beneficiary or has any entitlement to any part of the Trust's funds at any time

•                     during the life of the Trust, the Trustee can only deal with the Trust's funds and property for the benefit of the beneficiaries; and

•                     where the Trust is terminated and wound up, no group entity is entitled to any of the Trust's funds.

The Company has granted (and will in the future grant) awards under the Plans as part of its remuneration and reward program for participants. The contributions to the Trustee are part of an on-going series of payments in the nature of remuneration of its employees and incurred to satisfy the awards as part of the remuneration arrangement.

Not capital or of a capital nature

The Company and the Subsidiary has made (and will continue to make) irretrievable contributions to the Trustee to satisfy its obligations under the Plans. This indicates that the irretrievable contributions are a periodic outlay (rather than a one-off).

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.

Accordingly, the Company will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee to acquire stapled securities to satisfy ESS interests issued to its employees pursuant to the Plans.

Question 2

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 ESS interests under an ESS that occurs before the ultimate beneficiary acquires the ESS interest. 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 Plans are ESSs for the purposes of subsection 83A-10(2) as they are schemes under which beneficial interests in the stapled securities (which are ESS interests under subsection 83A-10(1)) are granted to the Company's employees as a result of their employment.

The Plans contain a number of interrelated components which includes the provision of irretrievable cash contributions by the Company to the Trustee. These contributions enable the Trustee to acquire stapled securities for the purpose of enabling each participant, indirectly as part of the Plans, to acquire ESS interests.

The deduction for the irretrievable cash contribution can only be deducted from the assessable income of the Company in the income year when the relevant beneficial interest in a share in the Company is acquired by a participant under the Plan.

Question 3

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 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 the Company to obtain a tax benefit.

Question 4

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 136(1)(f) to (s) of the FBTAA.

In particular, paragraph 136(1)(h) excludes a benefit constituted by the acquisition of an ESS interest under an ESS (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C applies.

The Commissioner accepts that the Plans are ESSs and the stapled securities, rights or options provided under the Plans are ESS interests to which Subdivision 83A-B or 83A-C applies.

Accordingly, the provision of ESS interests under the Plans will not be subject of FBT on the basis that they are acquired under an ESS (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.

Question 5A

Detailed reasoning

Paragraph 136(1)(ha) of the FBTAA excludes a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning given under subsection 130-85(4) of the ITAA 1997) from being a 'fringe benefit'.

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).

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

•                     the Trustee acquires stapled securities in the Group on behalf of the Trust, and

•                     the Trustee ensures that ESS interests (as defined in subsection 83A-10(1)) are provided under employee share schemes (as defined in subsection 83A-10(2)) by allocating those stapled securities to the employees in accordance with the Trust Deed and the rules of 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 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 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, as set out in the original Trust Deed, are for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under subsection 130-85(4) including paragraph 130-85(4)(c) as the other activities undertaken by the Trustee are merely incidental to managing the ESS.

Therefore, the irretrievable cash contributions made by the Company and the Subsidiary to the Trustee, prior to the Trust Deed being amended, to fund the acquisition of stapled securities to satisfy grants of ESS interests will not be a fringe benefit.

Question 5B

Detailed reasoning

As set out in question 5A above, paragraph 136(1)(ha) of the FBTAA excludes a benefit constituted by the acquisition of money or property by an employee share trust from being a 'fringe benefit'.

In the present case, the objects of the Trust, as set out in the amended Trust Deed, are for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under subsection 130-85(4) including paragraph 130-85(4)(c) as the other activities that will be undertaken by the Trustee are merely incidental to managing the ESS.

Therefore, the irretrievable cash contributions the Company and the Subsidiary make to the Trustee, after the Trust Deed was amended, to fund the acquisition of stapled securities to satisfy grants of ESS interests will not be a fringe benefit.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).