Edited version of private advice

Authorisation Number: 1052235116679

Date of advice: 29 April 2024

Ruling

Subject: Employee Share Scheme (ESS)

Question 1

Will Company X as head company of the Company X income tax consolidated group (TCG) obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), for irretrievable cash contributions made by Company X to the Trustee (Trustee) of the Employee Share Trust (EST) to fund the subscription for, or acquisition on-market of, the ordinary shares in Company X (Shares) by the EST?

Answer

Yes.

Question 2A

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

Answer

Yes.

Question 2B

Will Company X obtain an income tax deduction, pursuant to section 40-880 of the ITAA 1997, in respect of costs incurred by Company X in relation to the establishment or amendment of the Plans or the EST?

Answer

Yes.

Question 3

Are irretrievable cash contributions made by Company X to the Trustee to fund the subscription for, or acquisition on-market of, Shares by the EST to satisfy options or rights pursuant to the Plans, deductible under section 8-1 of the ITAA 1997 to Company X at a time determined by section 83A-210 of the ITAA 1997 where the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes.

Question 4

If the EST satisfies its obligation under the Plans (as defined in the relevant facts and circumstances) by subscribing for new Shares, will the subscription proceeds be included in the assessable income of Company X under section 6-5 or 20-20 of the ITAA 1997, or trigger a CGT event under Division 104 of the ITAA 1997?

Answer

No.

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 full, any deduction claimed by Company X in respect of the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for, or acquisition on-market of, Shares by the EST or costs incurred by Company X in relation to the on-going administration of the Plans and the EST?

Answer

No.

Question 6

Will the provision of a Performance Right, Option or Share in satisfaction of an award under the Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 7

Will the irretrievable cash contributions made by Company X to the Trustee pursuant to the Trust Deed or Amended Trust Deed (as defined in the relevant facts and circumstances), to fund the subscription for, or acquisition on-market of, Shares, pursuant to the Plans be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA?

Answer

No.

Question 8

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

Answer

No.

Question 9

Where under the Plans an executive or key employee is granted an ESS interest which requires that person to pay an amount to Company X, will the amount paid be included in Company X's assessable income under section 6-5 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Company X is the head company of the Company X TCG and is listed in the Australian Securities Exchange (ASX).

There are a number of subsidiaries of Company X that directly employ employees and these subsidiaries are referred to as Employer Entities.

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

The remuneration policy of Company X is designed to be competitive and equitable with the aim of aligning the economic interests of employees with those of its shareholders by providing competitive rewards to attract and retain high calibre executives and key employees and linking the rewards to the creation of shareholder value.

The purpose of Company X having employee equity plans is to:

•         Recognise and reward the ability and efforts of employees who have contributed to the success of Company X;

•         Provide an incentive to employees to achieve the long-term objectives of the Company X and to improve the overall performance of Company X;

•         Encourage employees to remain with Company X;

•         Attract persons of experience and ability to take up employment with Company X; and

•         Foster and promote loyalty and a long-term relationship between the Company X and its employees.

Company X offers key employees and executives the opportunity of equity ownership through the offer of Performance Rights and/or Options upon the satisfaction of certain performance and service conditions implemented through several plans, referred to as "the Plans".

Company X will incur the following costs in relation to the on-going administration of the EST:

•         Employee plan record keeping;

•         Production and dispatch of holding statements to employees;

•         Provision of annual income tax return information for employees;

•         Costs incurred in the acquisition of shares on market (e.g., brokerage costs and the allocation of such shares to Participants);

•         Management of employee termination; and

•         Other trustee expenses such as the annual audit of the financial statements and annual income tax return of the EST.

These are referred to in this ruling as 'on-going administration costs'.

Company X may also incur the following costs relating to the establishment or amendment of the Plans or the EST:

•         Legal fees incurred in establishing the EST or ESS plan rules

•         Legal fees in trustee company commencement charges

•         Legal fees on resignation of trustee company and appointment of new trustee company

•         Legal fees paid on amending the EST or ESS plan

•         Registration fees with various authorities, such as stamp duty and Australia Securities and Investments Commission fees and

•         Other legal fees incurred by the trustee of the EST.

Company X Employee Share Trust

The EST was established in 20YY for the sole purpose of acquiring Company X shares pursuant to the Plans for the benefit of participants The EST is operated in accordance with the Amended Trust Deed.

The Trustee of the EST is independent from Company X.

Company X and the Trustee entered into the Trust Deed.

A Deed of Amendment was signed by Company X amending the Trust Deed (the Amended Trust Deed). The Amended Trust Deed removed clauses XXX of the Trust Deed.

The Trustee did not exercise any of the broad discretionary powers contained in clauses XXX of the Trust deed from when the Trust Deed was signed in up until the Amended Trust Deed came into effect.

In accordance with the Amended Trust Deed, the EST broadly operates as follows:

•         The EST is managed and administered so that it satisfies the definition of EST for the purposes of subsection 130-85(4) of the ITAA 1997.

•         Company X must pay all Trust Expenses.

•         The Trustee in its reasonable discretion has the full power to do all things a trustee is permitted to do by law in respect of the Trust, the Trust Shares and the Trust Assets.

•         Company X and subsidiary members of Company X TCG are not beneficiaries of the EST or have, at any time, any legal or beneficial entitlement to any of the Shares held by the Trustee.

•         The EST is funded by cash contributions from Company X for the purchase of shares.

•         The funds are used by the Trustee of the EST to acquire the shares in Company X either on-market or via a subscription for new shares in Company X, based on written instructions from Company X.

•         All funds received by the Trustee from Company X will constitute Accretions to the corpus of the EST and will not be repaid to Company X and no Participant will be entitled to receive such funds.

•         The Shares acquired by the Trustee are allocated to the relevant employees upon exercise of Options or Performance Rights and the employees will become absolutely entitled to those Shares from that point in time.

•         The Trustee acknowledges that, in its capacity as Trustee of the Trust, the activities of the Trustee are limited to managing the Plans.

•         The Trust Assets, including the Unallocated Shares, are to be held by the Trustee on trust for Participants to be nominated by Company X from time to time until termination of the Trust under the Amended Trust Deed or by operation of law.

•         The Trustee is not permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the EST.

•         The Trustee is not permitted to carry out activities which result in the Participants being provided with additional benefits other than the benefits that arise from any relevant Plan Rules and/or relevant Terms of Participation.

•         The Trustee will acquire, deliver and allocate the Shares for the benefit of Participants provided that the Trustee receives sufficient payment to subscribe for or purchase such shares and/or has sufficient Unallocated Shares available.

•         Whilst the allocated Shares are held by the trust, the Participant will be entitled to dividend and voting rights.

•         The structure of the EST and the rules of the Plans are such that shares allocated to each employee will generally be transferred into the name of the relevant employee following receipt of a Withdrawal Notice.

•         If there is an inconsistency between the Amended Trust Deed and the relevant Plan Rules, the Amended Trust Deed shall prevail to the extent of any such inconsistency.

Any settlements of Rights or Options in cash will not flow through or involve the EST.

The establishment of the EST provides Company X:

•         Greater flexibility to accommodate the long-term incentive arrangements of Company X.

•         Allows for a streamlined approach to the administration of the Plans.

•         The EST can also be used to provide a range of incentives involving shares in Company X as circumstances change in the labour market that require different incentives to be provided to attract, reward and retain key executives and employees.

•         Capital management flexibility in that the EST can use the contributions made by Company X either to acquire shares in Company X on market, or alternatively to subscribe for new shares in Company X.

•         Providing an arm's-length vehicle through which Shares in Company X can be acquired and held on behalf of the relevant employee. This assists to satisfy corporate law requirements relating to a company dealing in its own shares.

Since implementation of the EST, money has generally only been contributed to the EST to enable the EST to acquire shares at the point in time that Shares are required to be allocated to employees under the terms of the relevant Plan. That is, Company X has not contributed money to the EST to enable the EST to "warehouse" shares.

Company X Plan 1

Plan 1 is to reward performance, retaining and motivating key talent in a manner that is aligned to the creation of shareholder wealth.

The Board has the discretion to make awards to eligible Participants on an annual basis subject to company and individual performance.

Notification Letters are provided to the eligible Participants to advise the employees of their award.

Awards may be delivered in the form of a combination of cash and/or Performance Rights.

The terms on which the Participants are invited to participate in the Plan 1 are set out in the invitation letter and the offer of Performance Rights are subject to the Company X Performance Rights Plan.

Company X Plan 2

Plan 2 was specifically developed and implemented in MONTH 20XX to mitigate the effects of the extremely tight labour market. Plan 2 acts as a retention incentive for those employees whose sustained contribution is of critical strategic and operational importance to the success of the business, in a manner aligned to the creation of shareholder wealth.

Plan 2 provides a one-off issue of Retention Rights at the discretion of the Board.

The terms on which the Participants are invited to participate in Plan 2 are set out in the invitation letter.

The Retention Rights are granted in the form of Performance Rights subject to the Performance Rights Plan rules.

Company X Performance Rights Plan (Rights Plan)

The purpose of the Rights Plan is to assist in the reward, retention and motivation of Eligible Participants; and align the interests of Eligible Participants with shareholders of the Group.

The Performance Rights granted under the Plans 1 and 2 are subject to the rules of the Rights Plan.

Eligible Participants may be granted Performance Rights at the Board's absolute discretion.

The Performance Rights may be subject to the satisfaction of certain pre-determined vesting hurdles and/or conditions prior to exercise.

The terms on which the Participants are invited to participate in the Rights Plan are set out in the invitation letter.

Following receipt of a completed and signed application form Company X will grant the Participant the relevant number of Performance Rights.

No amount is payable by a Participant for the grant of Performance Rights unless an exercise price is specified in an invitation.

Prior to a Performance Right being exercised a Participant is not entitled to vote at a meeting of the shareholders of Company X, nor receive any dividends declared by Company X.

A Participant may not sell, assign, transfer, grant a security interest over or otherwise deal with a Performance Right that has been granted to them.

The invitation and grant of Performance Rights does not automatically entitle an Eligible Participant to an award by way of equity. The actual method of settlement of a Performance Right, whether it be by way of equity or cash, is at the absolute discretion of the Board.

A holder of Performance Rights does not (in respect of their Performance Rights) have the right to participate in a pro rata issue of Shares made by Company X or to receive or sell renounceable rights.

A Performance Right granted under the Rights Plan will not be quoted on the ASX or any other recognised exchange.

On assessment of the Vesting Conditions and provided the Performance Rights have not lapsed, an Eligible Participant's Performance Rights can be exercised by lodging with Company X a signed Notice of Exercise of Performance Rights, unless the invitation provides for a deemed automatic exercise.

After the valid exercise or deemed exercise of a Performance Right, Company X will either:

•         Allot and issue, or cause to be transferred to that Participant (or the Trustee on behalf of a Participant), one Share for each Performance Right that is validly exercised; or

•         Make cash payment to the Participant equal to the sum of the Market Value of a Share at the date of exercise multiplied by the number of validly exercised Performance Rights that will be Cash Settled.

All resulting Shares will rank pari passu in all respects with the Shares of the same class for the time being on issue except for any rights attaching to the Shares by reference to a record date prior to the date of issue or transfer of the resulting Shares.

Any cash amount payable to a Participant for a cash settlement of Performance Rights will be paid to that Participant less all taxes required to be withheld under applicable law and any superannuation required to be paid under applicable law to satisfy the minimum amount required to be contributed by any member of the Group to avoid the imposition of a superannuation guarantee charge.

If resulting Shares are in the same class as Shares which are listed on the ASX, Company X will apply for quotation of the resulting Shares issued (or any unquoted resulting Shares transferred) within the time required by the ASX Listing Rules after the date of issue.

Unless otherwise stated in the invitation or determined by the Board in its absolute discretion, a Performance Right that has not vested will be forfeited immediately on the date that the Board determines (acting reasonably and in good faith) that any applicable vesting conditions have not been met or cannot be met by the relevant date.

Where a Performance Right has been forfeited in accordance with the Rights Plan, the Performance Right will automatically lapse.

Company X Employee Option Plan (Option Plan)

The terms and conditions of the Option Plan are set out in the Company X Employee Option Plan rules updated as of MONTH 20XX.

The Board may offer Options to Eligible Employees having regard to the factors outlined in Rule XX Eligibility.

The terms on which the Participants are invited to participate in the Option Plan are set out in the Offer Document (Offer).

The Options carry no right to dividends and not rights to voting.

In accordance with the terms of the Offer and Option Plan rules, Options are only exercisable in specific window periods or at the discretion of the Board in particular circumstances.

Subject to the Option Plan rules, each Option entitles a Participant to subscribe for and be issued or transferred (as the case may be) one Share at the Exercise Price.

An Option is exercisable by the Participant lodging a properly completed Notice of Exercise.

Unless otherwise specified in the Offer, not all Options are required to be exercised and it does not affect the Participant's right to exercise other Options at a later time provided the Options have not lapsed or expired.

Options cannot be transferred nor are the Options listed for Official Quotation on the ASX.

Upon exercise of the Options, the Participant will pay the required exercise price as set out in the Offer or elect a cashless exercise, which does not require an exercise price to be paid, and the underlying Shares the Participant is entitled to on exercise will be registered in the name of the Trustee and held pursuant to the Trust, unless the Board determines otherwise.

Shares issued on the exercise of Options will rank pari passu with all existing Shares from the date of issue and will be entitled to those dividends which will be paid by Company X to the Trustee and the Trustee will pay the dividends to the shareholders when the Trustee holds Shares on behalf of shareholders.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 8-1(1)

Income Tax Assessment Act 1997 section 8-10

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 25-5

Income Tax Assessment Act 1997 subsection 25-5(1)

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 subsection 83A-10(1)

Income Tax Assessment Act 1997 subsection 83A-10(2)

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 104-155

Income Tax Assessment Act 1997 subsection 130-85(4)

Income Tax Assessment Act 1997 subsection 974-75(1)

Income Tax Assessment Act 1997 section 995-1

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Question 1

Subsection 8-1(1) of the ITAA 1997 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, under 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.

Incurred in carrying on a business

Company X carries on a business which produces assessable income and operates a number of ESS as part of its remuneration strategy.

Under the Plans, Company X may grant Options or Performance Rights to employees and makes cash contributions to the Trust (in accordance with the Amended Trust Deed) which the Trustee uses to acquire shares (either on-market or by subscription) for allocation of Shares to Participants pursuant to the Plans.

Company X provides the Trustee with all the funds required to enable the Trustee to subscribe for, or acquire, the Company shares.

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

•         All funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee; and

•         On termination, Company X (or any other member of the Group) will not be a beneficiary of the Trust and will have no interests in the Shares held by the Trust.

Since Company X makes irretrievable cash contributions to the Trust to acquire or subscribe for Shares to satisfy the Options or Performance Rights pursuant to the Plans, the amount has been incurred for the purposes of subsection 8-1(1) of the ITAA 1997.

The costs incurred by Company X for the acquisition of shares to satisfy grants of ESS interests arise as part of its remuneration strategy. The cash contributions made by Company X to the Trust to acquire or subscribe for Shares to satisfy the Options or Performance Rights pursuant to the Plans are part of an ongoing 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 X. Costs incurred are likely to be in relation to more than one grant of shares, and Company X intends to continue making contributions on a regular basis as part of the ongoing process of remunerating Participants and the Trust is expected to acquire shares regularly. This indicates that the irretrievable cash contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure for Company X.

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, and paragraph 8-1(2)(a) is not satisfied.

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

Question 2A

As discussed above in Question 1, section 8-1 allows a deduction for all losses and outgoings to the extent they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income, except where the outgoings are of a capital nature.

Company X carries on a business which produces assessable income and operates a number of ESS as part of its remuneration strategy.

Company X will incur on-going administration costs associated with the services provided by the Trustee in respect of the Plans which are set out in the facts and circumstances. These include costs such as brokerage costs and annual audit expenses. These costs are of an on-going nature that are not separately deductible under a more specific section of the ITAA 1997. The ongoing administration costs would also not include any establishment or amendment costs. Under clauses XXX of the Amended Trust Deed, Company X must also pay all costs associated with the administration of the Trust.

Therefore, Company X's ongoing administrative costs of the EST are necessarily incurred in carrying on its business for the purpose of producing its assessable income.

Furthermore, the costs are not capital in nature given the advantage sought by the costs are not to add to its profit-making structure, the expenses are regular and recurrent, and their essential character is that of a working expense of the business.

Accordingly, Company X will be entitled to deduct costs incurred in relation to the on-going administration of the EST under section 8-1 (Taxation Determination TD 2022/8 Income Tax: deductibility of expenses incurred in establishing and administering an employee share scheme).

Question 2B

Establishment expenses are outgoings associated with the creation of an ESS and include fees and start-up costs incurred in establishing the EST and ESS plan rules. Amendment expenses include legal fees paid in respect of amending the EST and the ESS plan rules. Company X may incur establishment or amendment expenses as defined in the relevant facts and circumstances from time to time throughout the ruling period.

Section 40-880 allows deductions for certain business capital expenditure that fall outside the scope of the deduction provisions of the income tax law. It requires the expenditure to be capital in nature and in relation to a business that is, was or is proposed to be carried on for a taxable purpose. Costs incurred in relation to the establishment or amendment of the EST are capital in nature and are incurred in relation to Company X's business as the expenditure relates to remuneration of employees of Company X.

Section 40-880 contains limitations and exceptions in subsections 40-880(3) to (9) which may prevent a deduction being allowed. Subsection 40-880(3) provides that the expenditure is only deductible to the extent that the business is carried on for a taxable purpose. It is clear that the business of Company X is carried on for a taxable purpose. Similarly, the other limitations and exceptions in subsections 40-880(4) to (9) do not prevent the expenses from being deductible under section 40-880.

Therefore, establishment and amendment expenses of the EST are deductible in equal proportions over five years under section 40-880 (Taxation Determination TD 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an employee share scheme).

Question 3

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.

An 'employee share scheme' is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees 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.

Under the Rights Plan and the Plan 1, the Performance Rights issued are able to be cash-settled or equity settled at the sole discretion of the Company X Board. In this case, at the time these Rights are acquired by the Participants, they are not ESS interests but are indeterminate rights pursuant to section 83A-340. This is because the Board has the discretion to satisfy the Rights by either a Share or by making a payment of a cash equivalent amount or a combination thereof under the Rights Plan.

Once the Board determines that it will not exercise its discretion under the Rights Plan and the Rights will be satisfied by provision of Shares, section 83A-340 operates to treat the indeterminate right as if it had always been a right to acquire a beneficial interest in shares, and therefore, an ESS interest for the purposes of section 83A-210.

Therefore, the Plans will satisfy the definition of an 'employee share scheme' in subsection 83A-10(2) as it is a scheme under which ESS interests in Company X (that is, Rights that are settled with Shares) are provided to the employees of Company X in relation to their employment with Company X.

Company X's ESS contains a number of interrelated components which include the provision of irretrievable cash contributions by Company X 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 Plans, to acquire ESS interests.

If irretrievable contributions are made by Company X to the EST before the rights are acquired (and the rights are settled with shares making them ESS interests by virtue of section 83A-340), section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1 to be the income year in which Participants originally acquired the Performance Rights.

Question 4

Section 6-5

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts.

The term 'income according to ordinary concepts' is not a defined term. However, case law has identified certain factors to be taken into consideration.

The characterisation of the subscription proceeds received by Company X from the EST can be determined by the character of the right or thing disposed of in exchange for the subscription proceeds (GP International Pipecoaters v. Federal Commissioner of Taxation [1990] HCA 25). Where Company X issues the EST with new shares in itself, the character of the newly issued share is one of capital. Therefore, the receipt of the subscription proceeds takes the character of share capital, which is of a capital nature.

Accordingly, the subscription proceeds should not be treated as ordinary income assessable in the hands of Company X under section 6-5.

Section 20-20

Section 20-20 relevantly provides for the assessment of recoupments received by way of insurance or indemnity, or if it is a recoupment of a loss or outgoing that is deductible because of a provision listed in the table in section 20-30.

The subscription proceeds received by Company X from the EST would not represent an amount received by way of insurance or indemnity as there is no insurance contract and the receipt does not arise because of a statutory or contractual right of indemnity nor in the nature of compensation.

None of the provisions listed in section 20-30 are relevant to a receipt of subscription proceeds.

Therefore, the subscription proceeds received by Company X from the EST does not constitute an assessable recoupment under section 20-20.

Division 104

A capital receipt will only be included as an assessable net capital gain if it arises as a result of a CGT event (section 102-20 of the ITAA 1997).

The only CGT events that may have possible application to the receipt of the subscription proceeds are CGT event D1 (Creating a contractual or other rights) and/or CGT event H2 (Receipt for event relating to a CGT asset).

However, paragraphs 104-35(5)(c) and 104-155(5)(c) respectively provide that CGT event D1 and CGT event H2 do not apply if a company issues or allots equity interests or non-equity shares in the company.

As the shares constitute 'equity interests' (per subsection 974-75(1)), neither CGT event D1 nor CGT event H2 will occur.

Accordingly, the subscription proceeds will not be assessable as a capital gain to Company X under Division 104.

Question 5

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 of the ITAA 1936, 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 Company X to obtain a tax benefit.

Question 6

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 definition.

Paragraph (h) of subsection 136(1) of the FBTAA excludes the following from being a 'fringe benefit':

(h) 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.

The Commissioner accepts that each of the Plans are ESS on the basis that a Performance Right, Option or Share granted under the Plans is an ESS interest under paragraph 83A-10(1).

The Commissioner also accepts that Performance Rights granted under the Rights Plan or Plan 1 that may be satisfied in cash instead of Shares are indeterminate rights pursuant to section 83A-340. At the time that Performance Rights are granted under the Rights Plan or Plan 1, it may be unclear if paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA applies because those Performance Rights may be satisfied in cash instead of Shares. Hence, when Performance Rights are granted, they may not be ESS interests within the meaning of subsection 83A-10(1).

Where the Performance Rights are ultimately satisfied with Shares instead of cash, section 83A-340 will operate to treat those Performance Rights to have always been ESS interests within the meaning of subsection 83A-10(1). In these circumstances, the Plans will satisfy the definition of an 'employee share scheme' in subsection 83A-10(2) as it is a scheme under which ESS interests in Company X (that is, Rights that are settled with Shares) are provided to the employees of Company X in relation to their employment with Company X.

Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states:

This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

As Participants may acquire Performance Rights, Options to acquire Shares or Shares under the Plans at a discount or for nil consideration (i.e. also at a discount), they are ESS interests under subsection 83A-20(1) to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies.

Accordingly, the provision of Performance Rights, Options to acquire Shares or Shares by Company X to Participants under the Plans will not be subject to FBT on the basis that they are acquired by Participants 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.

In addition, when Performance Rights or Options to acquire Shares are later exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the right to acquire shares and not in respect of employment (refer to ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

For completeness, where the Performance Rights granted under the Rights Plan or Plan 1 is ultimately satisfied with cash instead of Shares, the granting of the Performance Rights under the Rights Plan or Plan 1 will be viewed as a series of steps in the payment of salary or wages, and not a separate benefit to a payment of salary or wages which are excluded from the definition of fringe benefit by paragraph 136(1)(f) of the FBTAA.

The outcome is consistent with ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits.

Question 7

An employer's liability to 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.

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)

Therefore, for the irretrievable cash contributions to be excluded from the definition of 'fringe benefit', the trust must be an 'employee share trust' as defined in 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(4)(c)).

In the present case, paragraphs 130-85(4)(a) and (b) are satisfied because:

•         the EST acquires shares in Company X

•         as stated above in response to question 3, the Commissioner accepts that each of the Plans are an ESS under which ESS interests are provided to Participants

•         the Trustee 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 Participants in accordance with the Amended Trust Deed and the Plans.

Paragraph 130-85(4)(c) provides that any other activities a trustee engages in must be 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'?.

In the present case, the objects of the EST are for the sole purpose of undertaking activities that are in line with the definition of an EST under subsection 130-85(4), including paragraph 130-85(4)(c). The other activities undertaken by the Trustee are merely incidental to managing the Plans.

Therefore, paragraph 136(1)(ha) of the FBTAA applies to exclude the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for, or acquisition of, Shares pursuant to the Plans from being a fringe benefit.

Question 8

Section 67 of the FBTAA is a general anti-avoidance provision of the FBTAA. Subsection 67(1) of the FBTAA is satisfied where a person, or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer, or the eligible employer and another employer, to obtain a tax benefit.

The Commissioner will only make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement.

As stated above in response to question 7, without the provision of a fringe benefit, no amount will be subject to FBT. The irretrievable cash contributions made by Company X to the Trustee pursuant to the Amended Trust Deed) will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA for the reasons outlined in response to question 7. As these benefits have been excluded from the definition of a fringe benefit, the FBT liability is not any less than it would have been but for the arrangement.

Therefore, the Commissioner will not seek to make a determination that section 67 applies to increase the aggregate fringe benefits taxable amount to the Employer Entities by the amount of tax benefit gained from irretrievable cash contributions made by Company X to the Trustee to fund the subscription for, or acquisition on-market of, shares by the Trustee pursuant to the Plans.

Question 9

Under subsection 6-5(1) of the ITAA 1997, assessable income includes amounts that are income according to ordinary concepts.

The ESS is part of the remuneration strategy Company X and as such is an integral part of the conduct of the Company X's business.

In accordance with the ESS, the Trustee either acquires the shares on market or it subscribes for the issue of shares using the funds provided by Company X. An exercise price paid by an executive or key employee in accordance with the ESS is a receipt of the company derived in the course of operating the ESS as an integral part of its business operations.

Under the Option Plan, the shares would be registered under the Trustee on issue by Company X. The payment of the exercise price by the employee to Company X is considered a payment for the delivery of a share from the Trustee of the EST.

As outlined in ATO ID 2010/155 Income Tax Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee, the receipt by the employer of the exercise price paid by the employee to acquire a share under the ESS is properly regarded as either a product of, or incidental to, the conduct of the employer's business and is included in the employer's assessable income under section 6-5 of the ITAA 1997.

Therefore, the receipt Company X of the exercise price paid by the employee to acquire a share under the ESS is included in the employer's assessable income as income according to ordinary concepts under section 6-5 of the ITAA 1997.

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