1052225158894 | Legal database

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Edited version of private advice

Authorisation Number: 1052225158894

Date of advice: 28 February 2024

Ruling

Subject: Employee share scheme

Question 1

Is the Company entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cash contributions made to the trustee (Trustee) for the Company's Employee Award Plan Trust (Trust) to fund the subscription for, or acquisition on-market of, ordinary shares in the Company (Shares) pursuant to the Companies Plan Rules (Plan)?

Answer

Yes.

Question 2

Will the cash contributions made by the Company to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares pursuant to the Plan be deductible to the Company:

(a) at a time determined by section 83A-210 of the ITAA 1997, if those contributions are made before the acquisition of the awards under the Plan?

(b) in the income year when the contributions are made, if the contributions are made after the acquisition of the awards under the Plan?

Answer

Yes.

Question 3

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 the Company for the cash contributions made to the Trustee, to fund the subscription for, or acquisition on-market of, Shares by the Trustee pursuant to the Plan or costs incurred by the Company in relation to the ongoing administration of the Trust?

Answer

No.

Question 4

Will the provision of awards to employees of the Company under the Plan constitute a 'fringe benefit' within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

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

Answer

No.

Question 6

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to the Company, by the amount of tax benefit gained from the cash contributions made by the Company to the Trustee, to fund the subscription for, or acquisition on-market of, Shares by the Trustee?

Answer

No.

This ruling applies for the following periods:

For ruling questions 1 to 3

A particular income year

For ruling questions 4 to 6

A particular fringe benefit tax year

The scheme commenced on:

During a particular income year

Relevant facts and circumstances

Overview

1. The Company is an Australian public company with its shares listed on the Australian Securities Exchange (ASX).

2. The Company is an Australian resident for income tax purposes and is the head entity of a consolidated group (Group).

3. The Company is the only employer entity, employing only Australian staff.

4. The Company carries on a business for the purpose of gaining or producing assessable income.

The Company's Award Plan

5. According to the Plan rules, the purpose of the Plan is to:

• assist in the reward, retention and motivation of employees

• align the interests of employees with shareholders of the Group by providing an opportunity to employees to receive an equity interest in the Company in the form of awards, and

• provide a framework for the Board to implement and offer remuneration arrangements which are competitive in the market.

6. The Plan applies to full or part time employees (including an executive director), a non-executive director, a contractor, a casual employee or a prospective participant in relation to the Company and has been determined by the Board to be eligible to participate in the Plan from time to time (Eligible Participants).

7. The Plan broadly operates in the following manner:

a. the Board will invite an Eligible Participant to participate in the Plan by providing them with an invitation letter, application form and ancillary documentation

b. upon receipt of the invitation, the Eligible Participant can participate in the Plan by completing the application form and returning it to the Company

c. the Board may accept an application in whole or in part, and

d. following receipt of a completed and signed application form together with all applicable ancillary documentation, the Company will grant the Eligible Participant the relevant number of awards subject to the terms and conditions set out in the invitation, rules and ancillary documentation (where applicable).

8. Under the terms and conditions of the Plan, eligible Australian employees are granted performance rights or options (Awards) for nil consideration.

9. The Awards may be granted subject to vesting conditions. An Award that is granted without vesting conditions vests on the grant date.

10. Participants are not able to sell, assign, transfer or otherwise dispose of their Awards and, prior to vesting, carry no voting or dividend rights.

11. Upon the Board determining the conditions are met over the relevant performance/vesting period, Awards vest and the Board must allocate one Share to the Eligible Participant per vested Award exercised.

12. An exercise price may be payable in respect of a vested option. No exercise price is payable to validly exercise a performance right.

13. Shares received upon the exercise of vested Awards may be subject to disposal restrictions for a period.

14. In the event of a change of control, the Board may exercise discretion to determine whether all, or a portion, of the unvested Awards vest.

15. The Board may use an employee share trust to hold and deliver the Shares and may do all things necessary for the establishment, administration, operation and funding of the trust.

16. An Award which has not yet vested will be forfeited immediately on the date that the Board determines that any applicable vesting conditions have not or will not be met.

17. The Company is responsible for all brokerage costs payable in relation to the issue or transfer of Shares upon the exercise of the Award.

The Trust

18. The Company established the Trust under the terms of an amended trust deed (Trust Deed).

19. An independent third party is the trustee of the Trust.

20. Under the terms of the Trust Deed, the Trust operates as follows:

a. the objects and sole purpose of the Trust are limited to subscribe for, purchase or otherwise acquire hold and deliver Shares under the Plan for the benefit of employees and this clause cannot be amended

b. nothing in the deed confers on the Company any charge, lien or any other proprietary right or proprietary or beneficial interest in Shares acquired by the Trustee

c. the Board by written notice may direct the Trustee to purchase Shares on the ASX, subscribe for a number of Shares or otherwise acquire a number of Shares to be held by the Trustee for the purposes of the Plan

d. the Company must provide the Trustee any funds required by the Trustee in order to acquire the Shares, and/or request the Trustee to apply any surplus capital of the Trust for the purpose of acquiring or subscribing for Shares

e. the Trustee may not repay any contributions received to the Company

f. the Board may direct the Trustee to allocate Shares held by the Trustee to a named participant (Allocated Participant) who has exercised an Award and the Trustee must allocate the number of Shares (Allocated Plan Shares) as specified in the allocation notice given by the Board

g. an Allocated Participant shall be absolutely entitled to the Allocated Plan Shares, and the Allocated Participant is absolutely entitled to so much of the net income of the Trust for a year of income which is reasonably attributable to their Allocated Plan Shares

h. where required, the Trustee must as soon as practicable do all things necessary to transfer legal title in the Allocated Plan Shares to the Allocated Participant

i. the balance of the net income of the trust to which no beneficiary is presently entitled shall be accumulated by the Trustee as an accretion to the trust fund

j. upon termination of the Trust, any trust property remaining following the transfer of allocated trust property to participants will not be transferred to the Company or any of its subsidiaries

k. the Trustee must not grant a security interest over any Shares

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

Contributions to the Trust

21. The Company usually makes contributions to the Trust to fund the acquisition of Shares once awards have been granted to the employee under the Plan.

22. However, the Company may also make contributions to the Trust to fund the acquisition of Shares before the awards have been granted to the employee under the Plan.

Relevant legislative provisions

Part IVA of the Income Tax Assessment Act 1936

Section 8-1 of the Income Tax Assessment Act 1997

Section 83A-210 of the Income Tax Assessment Act 1997

Section 67 of the Fringe Benefits Tax Assessment Act 1986

Section 136 of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Question 1

Summary

Yes, the Company will be entitled to deduct an amount under section 8-1 for the cash contributions it makes to the Trustee of the Trust to fund the subscription for, or on market acquisition of, Shares pursuant to the Plan.

Detailed reasoning

You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income; or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income (subsection 8-1(1)).

However, you cannot deduct a loss or outgoing under section 8-1 to the extent that:

(a) it is a loss or outgoing of capital or of a capital nature (paragraph 8-1(2)(a))

(b) it is a loss or outgoing of a private or domestic nature (paragraph 8-1(2)(b))

(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income (paragraph 8-1(2)(c)); or

(d) a provision of the Act prevents you from deducting it (paragraph 8-1(2)(d)).

Contributions made to the Trustee are outgoings incurred by the Company

For the cash contributions made by the Company to the Trustee to be deductible under section 8-1, the contribution must be a permanent loss or outgoing to which the Company has definitely committed itself and there should be no circumstance in which the Company can retrieve any of the contributions.[1]

The Trust Deed provides that:

• nothing in the deed confers on the Company any charge, lien or any proprietary interest or beneficial interest in Shares acquired by the Trustee

• the Trustee must not repay to the Company any amount received as contributions for the purposes of the Plan, and

• on termination of the Trust, any remaining trust property cannot be transferred to the Company or any of its subsidiaries.

Therefore, these contributions are irretrievable and non-refundable to the Company and the Company is taken to have incurred an outgoing for the purposes of subsection 8-1(1) when the cash contributions are paid to the Trustee.

Contributions are incurred by the Company in carrying on a business for the purpose of gaining or producing its assessable income

For an outgoing to be deductible under section 8-1, a nexus must exist between the outgoing and a business carried on for the purpose of gaining or producing assessable income (paragraph 8-1(1)(b)).[2]

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.

The Company carries on a business for the purpose of gaining or producing assessable income.

The Plan is an employee remuneration plan offered to the Company's employees as part of the Company's remuneration framework. Its purpose is to:

assist in the reward, retention and motivation of employees
align the interests of employees with shareholders of the Group by providing an opportunity to employees to receive an equity interest in the Company in the form of Awards, and
provide a framework for the Board to implement and offer remuneration arrangements which are competitive in the market.

Under the rules of the Plan, the Board may use an employee share trust to hold and deliver the Shares and may do all things necessary for the establishment, administration, operation and funding of the trust.

The cash contributions that the Company makes to the Trustee are to enable the Trustee to acquire, allocate, hold and deliver Shares under the Plan for the benefit of employees in accordance with the Trust Deed. The Trust Deed provides that the Company must provide the Trustee any funds required by the Trustee in order to acquire the Shares for the purposes of the Plan.

Based on the facts provided, it is evident that the character of the cash contributions to the Trustee is that of expenses incurred in remunerating the group's employees and, therefore there is sufficient nexus between the contributions and the business carried on by the Company for the purpose of producing the Company's assessable income.

Accordingly, subsection 8-1(1) is satisfied.

Contributions are not an outgoing of capital or of a capital nature

A loss or outgoing is not deductible if it is a loss or outgoing of capital or of a capital nature (paragraph 8-1(2)(a)).

The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit and loss.[3]

Further, when considering whether an outlay is revenue or capital in nature, the following matters are relevant:

(a) the character of the advantage sought

(b) the manner in which it is to be used, relied upon or enjoyed, and

What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view.[5]

The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid.[6]

Based on the available facts, it is evident that the advantage sought by the Company through its contributions to the Trustee is to align the interests of its employees with those of its shareholders and reward, motivate and retain its employees. The Shares awarded to participants of the Plan is expected to result in the betterment of the Company's business.

The advantage is not considered to have a lasting quality as the contributions which form the Trust's funds is permanently and entirely dissipated within a relatively short period of the contributions being made.

Further, the contributions made by the Company are expected to be recurrent and subject to continuous demand, so long as the Plan is in operation.

Therefore, it is considered that the contributions paid by the Company are on revenue account - that is, they are not an outgoing of capital or of a capital nature. Accordingly, paragraph 8-1(2)(a) does not apply.

Contributions are not private or domestic in nature, incurred in gaining or producing exempt income or non-assessable non-exempt income, nor disallowed by a provision of the Act

A loss or outgoing is not deductible if it is a loss or outgoing of a private or domestic nature (paragraph 8-1(2)(b)); incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income (paragraph 8-1(2)(c)); or a provision of 'this Act' prevents you from deducting it (paragraph 8-1(2)(d)).

The contributions to the Trustee are not private or domestic in nature and are not incurred in gaining or producing exempt income or non-assessable non-exempt income as those contributions are incurred by the Company in gaining or producing its assessable income and has the essential character of a business expense. Accordingly, paragraphs 8-1(2)(b) and (c) do not apply.

In respect of paragraph 8-1(2)(d), a loss or outgoing is not deductible if a provision of 'this Act' prevents you from deducting it. Subsection 995-1(1) defines 'this Act' to include the ITAA 1936.

It is considered the contributions to the Trustee do not fall within any of the provisions which operate to limit deductions. Accordingly, paragraph 8-1(2)(d) does not apply.

Question 2

Will the cash contributions made by the Company to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares pursuant to the Plan be deductible to the Company:

(a) at a time determined by section 83A-210 of the ITAA 1997, if those contributions are made before the acquisition of the awards under the Plan?

(b) in the income year when the contributions are made, if the contributions are made after the acquisition of the awards under the Plan?

Summary

Yes, the cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of, Shares pursuant to the Plan will be deductible to the Company:

(a) at a time determined by section 83A-210, if those contributions are made before the acquisitions of the awards under the Plan, and

(b) in the income year when the contributions are made, if the contributions are made after the acquisition of the awards under the Plan.

Detailed reasoning

(a) Contributions made before the acquisition of Awards

Section 83A-210 applies to determine the timing of the deduction of contributions provided under an employee share scheme arrangement, but only if the contribution is made before the ESS interest is acquired by the ultimate beneficiary under the employee share scheme. The effect of section 83A-210 is to deem the timing an employer incurred the outgoing to be the time when the ESS interest is acquired by the ultimate beneficiary, rather than the time when the employer makes the contribution to the trust.[7]

Subsection 83A-10(2) defines an 'employee share scheme' as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospect employees) of the company or subsidiaries of the company in relation to the employee's employment.

Subsection 83A-10(1) defines an 'ESS interest', in a company, as a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company.

Based on the available facts, it is considered that the Awards granted under the Plan are rights to acquire a beneficial interest in the Share and are therefore 'ESS interests' for the purposes of subsection 83A-10(1) at the time they are granted to the relevant employee. The Plan is a scheme under which ESS interests are provided to the employees of the Company in relation to their employment. Accordingly, the Plan is an 'employee share scheme' as defined under subsection 83A-10(2).

Therefore, where the Company makes irretrievable cash contributions to the Trustee before the employee acquires the Awards under the Plan, section 83A-210 will apply to modify the timing of any deduction claimed by the Company to the time when the Awards are acquired by the employee.

(b) Contributions made after the acquisition of Awards

For irretrievable contributions made on or after an employee acquires the relevant ESS interests, section 83A-210 will not apply for the purpose of determining the income year in which the company can deduct those irretrievable contributions. This is because the contributions are not made before the 'acquisition time' as required by section 83A-210. In these circumstances, the general rule under section 8-1 applies to determine the income year in which the amount is deductible.

Accordingly, contributions made on or after an employee acquires the Award under the Plan will be deductible under section 8-1 in the income year in which the contributions are made by the Company.

Question 3

Summary

No, the Commissioner will not seek to make a determination under section 177F of the ITAA 1936 that Part IVA applies to deny, in part or in full, any deduction claimed by the Company for the cash contributions made to the Trustee, to fund the subscription for, or acquisition on-market of, Shares by the Trustee pursuant to the Plan or costs incurred by the Company in relation to the ongoing administration of the Trust.

Detailed reasoning

Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner the power to cancel a tax benefit that has been obtained, or would but for section 177F be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

The Commissioner generally accepts that a 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 an 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

Will the provision of awards to employees of the Company under the Plan constitute a 'fringe benefit' within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Summary

No, the provision of Awards to the employees of the Company under the Plan will not constitute a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

An employer is subject to fringe benefits tax in respect of their fringe benefits taxable amount for the year (subsection 66(1) of the FBTAA). The fringe benefits taxable amount is determined based on fringe benefits provided during the year.

'Fringe benefit' is defined under 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 but does not include a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C of that Act applies (paragraph 136(1)(h) of the FBTAA).

Awards provided under the Plan are ESS interests provided under an employee share scheme

The definitions of 'ESS interest' and 'employee share scheme' were outlined in Question 2 above.

As set out in Question 2, the Plan is considered an 'employee share scheme' (as defined under subsection 83A-10(2)) under which rights to acquire beneficial interests in the Shares (which are 'ESS interests' under subsection 83A-10(1)) are provided to employees of the Company in relation to their employment.

The Plan is an employee share scheme to which Subdivision 83A-B or 83A-C will apply

Subsection 83A-20(1) states that Subdivision 83A-B applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

As the Awards are provided to participants of the Plan for no consideration, they are acquired by those participants at a discount.

Therefore, Subdivision 83A-B would apply to those ESS interests (unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C would apply instead).

Conclusion

The provision of Awards to the employees of the Company under the Plan will not constitute a 'fringe benefit' by virtue of the exclusion under paragraph 136(1)(h) of the FBTAA.

Question 5

Summary

No, the irretrievable cash contributions made by the Company to the Trustee of the Trust under the Trust Deed, to fund the subscription for, or acquisition on-market of, Shares by the Trustee pursuant to the Plan will not constitute a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

'Fringe benefit' is defined under subsection 136(1) of the FBTAA and does not include a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the ITAA 1997) (paragraph 136(1)(ha) of the FBTAA).

Subsection 995-1(1) defines 'employee share trust' as having the meaning given by subsection 130-85(4).

Subsection 130-85(4) defines an 'employee share trust', for an employee share scheme, 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

Paragraphs 130-85(4)(a) and (b) of the definition of an 'employee share trust' are satisfied as the Trust acquires Shares in the Company and ensures that Awards (which are 'ESS interests' under subsection 83A-10(1)) are provided under the Plan (which is an 'employee share scheme' as defined in subsection 83A-10(2)) to participants (who are employees of the Company) by allocating those Shares to the participants in accordance with the Trust Deed and the rules of the Plan.

Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'? sets out the Commissioner's view on the type of activities that are and are not considered merely incidental for the purposes of paragraph 130-85(4)(c).[8]

Based on the available facts, the Trust Deed contains only powers and/or duties that are merely incidental as required by subsection 130-85(4)(c).

Accordingly, the Trust is considered an 'employee share trust' for the purposes of subsection 130-85(4).

As the Trust is considered an employee share trust, the irretrievable contributions made by the Company to the Trust operating pursuant to the Trust Deed will not constitute a 'fringe benefit' by virtue of the exclusion under paragraph 136(1)(ha) of the FBTAA.

Question 6

Summary

No, the Commissioner will not seek to make a determination that section 67 of the FBTAAapplies to increase the fringe benefits taxable amount of the Company by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of, Shares by the Trustee.

Detailed reasoning

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

As discussed above, the irretrievable cash contributions made by the Company to the Trustee will not be a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA, nor would the grant of ESS interests to eligible employees under the Plan if an employee share trust was not used. Therefore, the fringe benefits liability is not any less than it would have been but for the existence of the arrangement (i.e. the use of an employee share trust).

Accordingly, the Commissioner will not make a determination under section 67 of the FBTAA to include an amount in the aggregate fringe benefits amount of the Company by the amount of the tax benefit gained from irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for, or acquisition on-market of, Shares by the Trustee.

[1] Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339 and Spotlight Stores Pty Ltd v Commissioner of Taxation [2004] FCA 650.

[2] Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15.

[3] Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73.

[4] Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73.

[5] Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34.

[6] GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) [1990] HCA 25.

Commissioner of Taxation v Citylink Melbourne Limited [2006] HCA 35.

[7] 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.

[8] The activities are set out in paragraphs 12 and 13 of TD 2019/13.

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