Edited version of private advice

Authorisation Number: 1052263749053

Date of advice: 2 July 2024

Ruling

Subject: Employee share scheme

Question 1

Will the Company as head company of an income tax consolidated group, be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) for irretrievable cash contributions it makes to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, fully paid ordinary shares in the Company, to satisfy employee share scheme (ESS) interests issued pursuant to the New Plan?

Answer

Yes.

Question 2a

Will the irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the New Plan, be deductible to the Company under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997, if the contributions are made before the acquisition of the relevant ESS interests by participants under the New Plan?

Answer

Yes.

Question 2b

Will the irretrievable contributions made by the Company to the Trustee, to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the New Plan, be deductible to the Company under section 8-1 of the ITAA 1997 in the income year when the contributions are made, if the contributions are made in the same income year or in a year that is after the acquisition of the relevant ESS interests by participants under the New Plan?

Answer

Yes.

Question 3

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applies to deny, in part or in full, any deduction claimed by the Company for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Shares pursuant to the New Plan?

Answer

No.

Question 4

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

Answer

No.

Question 5

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

Answer

No.

This ruling applies for the following period

1 July 20XX - 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Company is an Australian public company listed on the ASX and is the head company of a tax consolidated group. In order to attract, retain and motivate key talent, the Board approved the establishment of a Performance Rights Plan and operated it as an Employee Share Scheme (ESS) in accordance with Division 83A of the ITAA 1997. The Plan operated to reward eligible employees with the ability to acquire ordinary shares in the Company provided certain performance and service-related conditions were met, and by validly exercising vested rights. Recently the Plan was amended such that validly exercised vested rights may be settled by cash rather than ordinary shares, at the discretion of the Board (New Plan). The adoption of the New Plan coincided with an increase in the number and frequency of grants to employees, resulting in the Board deeming it necessary to establish a trust to manage the scheme. This Ruling is limited to grants made post adoption of the New Plan.

Performance Rights under the New Plan

The granting of Performance Rights under the New Plan operates as follows:

• At the sole discretion of the Company's Board, Eligible Persons may be offered the grant of awards known as Performance Rights.
• Performance Rights provide the right to acquire a beneficial interest in a share in the Company, provided:
  • the Board determines performance hurdles specified in the offer have been met;
  • the employment conditions are met, and
  • the Eligible Person has validly exercised the vested Performance Right.
• Unless the Board determines otherwise:
  • a Performance Right entitles its holder to one ordinary share in the Company upon vesting and exercise of that Performance Right, and
  • no payment is required for the grant or on exercise of a Performance Right.
• Invitations sent to Eligible Persons outline:
  • the number of Performance Rights being offered;
  • the period during which the Performance Rights may vest;
  • the dates when the Performance Rights lapse;
  • whether any amount is payable upon exercise of a Performance Right;
  • any applicable Performance and Employment Conditions to be attached to the Performance Rights;
  • information relating to any applicable trust arrangement;
  • any other information required by the ESS Rules in Division 1A of Part 7.12 of the Corporations Act considered to be relevant by the Board relevant to the Performance Rights or Performance Shares.
• Once an Eligible Person accepts an invitation to participate, they become a Participant in the scheme.
• The Board may determine that some or all of a Participant's vested Performance Rights be satisfied by a cash payment in lieu of an allocation of Shares.
• A Participant may not trade a Performance Right, other than with the prior consent of the Board or by force of law upon death or bankruptcy of the Participant.
• Unless the Board determines otherwise, Performance Rights granted under the New Plan do not entitle the holder to voting rights or rights to receive dividends.
• A performance Right will not vest unless the Performance Conditions attaching to the Performance Right have been satisfied or waived by the Board, or if certain conditions pertaining to a takeover, scheme of arrangement or winding up of the Company exist.
• The Company will notify each Participant as soon as practicable when any Performance Right they hold has vested, and if relevant, its determination of whether any will be satisfied by cash instead of shares. A Participant must exercise any vested Performance Rights by delivering to the Company a completed Exercise Notice within 30 days of being notified, or the vested Performance Rights will lapse.
• After the valid exercise of vested Performance Rights, the Company will issue to the Participant the Shares to which they are entitled, within 10 business days, or determine that the Performance Rights shall be satisfied by paying a cash amount in lieu of an allocation of Shares.
• Where a Participant ceases employment or ceases to satisfy any other relevant conditions imposed by the Board at the time of grant, all Performance Rights they hold will lapse unless the Board determines otherwise.
• Where a Participant acts fraudulently or dishonestly, or wilfully breaches their obligations, then the Board may deem their (vested or unvested) Performance Rights to have lapsed.
• On exercise of a Performance Right, where the issuance of Performance Shares to a Participant would fall within a Blackout Period, or breach the insider trading or takeover provisions of the Corporations Act, the Company may delay the issue of the Shares until 10 Business Days after there is nothing preventing the issue of the shares.
• The New Plan allows the Company to use a trust to facilitate the acquisition of, and subsequent allocation of Shares to a Participant under the terms and conditions as provided by the Company.
• Upon vesting and exercise of a Performance Right, the resulting Share will rank equally in all respects with other Shares on issue, except in regard to any rights attaching to Shares by reference to a record date prior to the date of their issue.

The Company Share Plan Trust

The Company Share Plan Trust was established for the purposes of holding Shares for the benefit of Participants who will become the beneficial owners of Shares pursuant to a Company Plan.

For completeness, the Trust will not be involved in the process of satisfying any Performance Rights that the Board decides will be settled in cash, which will be settled directly by the Company.

The Trust must be operated in accordance with the Deed and the New Plan. Subject to the Deed, the Trustee must follow direction given to it by the Board in relation to operating the Trust.

The Trustee, an independent third party, will operate the Trust in accordance with the Deed. Importantly, the Trustee acknowledges and agrees that its activities in the capacity of Trustee will be limited to managing the Company Plans (undefined) and will be administered and managed so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997 [the 'sole activities test'].

Broadly, the Trust will operate as follows:

• The Company will provide money to the Trustee to fund the acquisition of shares for the purposes of the New Plan.
• All funds received by the Trustee from the Company will constitute accretions to the corpus of the Trust and will not be repaid to the Company (or any other Group company).
• The Trust must be operated in accordance with the Deed (which binds the Company, and the Trustee), and the New Plan. Subject to the Deed, the Trustee must follow direction given to it by the Board in relation to operating the Trust.
• When directed by the Board, the Trustee must acquire either:
  • Shares on-market;
  • Shares off-market (at market value), or
  • new Shares issued by the Company to enable the Company to satisfy its obligations under the New Plan at that time or in the future.
• The Board will either offer the Trustee funds to acquire the shares or request the Trustee apply some or all of the capital of the Trust for that purpose, or a combination of the two.
• Until directed to transfer Shares to a particular Participant by the Board, the Trustee will hold all Shares for the benefit of all Participants generally, (that is, on an Unallocated basis (Unallocated Shares)).
• When directed by the Company, and in accordance with the New Plan, the Trustee will transfer the legal and beneficial title in Unallocated Shares to Participants, sell them on the ASX, or conduct other actions relating to the Unallocated Shares as required.
• In relation to Unallocated Shares, the Trustee:
  • may exercise, at its own discretion, voting rights attaching to those shares, but only to the extent it is 'merely incidental' to obtaining, holding and providing those Shares to the Participants;
  • may apply any capital receipt, dividends or other distributions received to purchase further Shares to be held on trust for the purposes of the Trust;
  • may not participate in any rights issued in respect of those Shares;
  • may hold any bonus Shares issued on trust for the purpose of the Deed; and
  • must keep an account of all that are held as assets of the Trust.

On termination of the Trust, the Trustee may apply the capital of the Trust;

• if Shares, to a Participant other than a Company Director, to satisfy their ESS interests, or to a Discretionary Beneficiary, or
• if cash, to cover its expenses, or to a Discretionary Beneficiary.

For the avoidance of doubt, the Trustee must not apply any balance of Shares to the Company.

The Company must pay all Trust expenses, however the Trustee may pay Trust Expenses from dividends received in relation to Unallocated Shares and interest earned on funds held in the Trust.

Contributions to the Trust

The Company intends to only make contributions to the Trust once Performance Rights have been granted to a participant under the New Plan.

Relevant legislative provisions

Section 8-1 of the ITAA 1997

Subsection 8-1(1) of the ITAA 1997

Subsection 8-1(2) of the ITAA 1997

Subsection 130-85(4) of the ITAA 1997

Section 83A-210 of the ITAA 1997

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

Section 83A-340 of the ITAA 1997

Section 83A-B of the ITAA 1997

Section 83A-C of the ITAA 1997

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

Part IVA of the ITAA 1936

Section 177F of the ITAA 1936

Subsection 177D(2) of the ITAA 1936

Subsection 136(1) of the FBTAA 1986

Paragraph 136(1)(h) of the FBTAA 1986

Paragraph 136(1)(f) of the FBTAA 1986

Paragraph 136(1)(ha) of the FBTAA 1986

Section 66 of the FBTAA 1986

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Legislative references in the following are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997), unless otherwise indicated.

Questions 1 to 3 - application of the single entity rule in section 701-1

The consolidation provisions in Part 3-90 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 income tax consolidated group are treated, for income tax purposes, as having been undertaken by the Company, as the head company of the tax consolidated group.

Questions 4 to 5

The SER in section 701-1 has no application to the Fringe Benefits Tax Assessment Act 1986. The Commissioner has therefore provided a ruling to the Company as the employing entity in the Group.

Question 1

For present purposes, 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 and operates an employee share scheme (ESS) as part of its remuneration strategy.

Under the New Plan, the Company will grant awards to eligible employees and make irretrievable contributions to the Trust which the Trustee will use to acquire Company Shares (either on-market or by subscription) for allocation to Participants to satisfy their rights.

Incurred in carrying on a business

The Company must provide the Trustee with all the funds required to act as requested.

The contributions made by the Company are irretrievable and non-refundable to the Company in accordance with the Deed, as all funds provided by the Company are not repayable. Additionally, the Trustee may only carry out activities that constitute the management of the New Plan and agrees that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' contained in subsection 130-85(4).

The Company will grant Performance Rights under the New Plan as part of its remuneration and reward program for eligible employees. The costs incurred by the Company for the acquisition of Company Shares to satisfy the Performance Rights that arise as part of these remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees.

Not capital or of a capital nature

The costs will be an outgoing incurred for periodic funding of a bona fide employee share scheme for employees of the Company. Costs incurred are likely to be in relation to more than one grant of rights (rather than being one-off). This indicates that the irretrievable contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure of the Company. 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 irretrievable cash contributions it makes to the Trustee of the Trust to acquire Company Shares to satisfy ESS interests issued pursuant to the New Plan.

Question 2a

Section 83A-210 applies to determine the timing of the Company's deduction under section 8-1, where the contribution to the Trust to purchase the shares required to grant the relevant ESS interests to employees occurs in an income year before the grant of the relevant ESS interests under an ESS. Further information is available in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

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

However, the New Plan also permits the Performance Rights to be cash settled. This is discussed below under 'indeterminate rights'.

The New Plan contains 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 Company Shares for the purpose of enabling each Participant to acquire ESS interests as per the New Plan.

If the irretrievable cash contributions are made before acquisition of the relevant ESS interests, the contribution can only be deducted from the assessable income of the Company in the income year when the relevant beneficial interest in a Company Share, or beneficial interest in a right to a beneficial interest in a Company Share, is acquired by a Participant under the New Plan.

Indeterminate rights

Performance Rights granted under the New Plan are indeterminate rights for the purposes of section 83A-340 as the invitation indicates the right can be settled by either a share or making a payment of a cash equivalent amount. In this circumstance, the Performance Right is not a right to acquire a beneficial interest in a share unless and until the time when the Board determines it will be satisfied by the provision of a share.

Once it is determined that it will be satisfied by provision of a share, section 83A-340 operates to treat these Performance Rights as though they had always been rights to acquire beneficial interests in shares.

If irretrievable contributions are provided to the Trustee before these Performance Rights are acquired (and they do subsequently become ESS interests), then section 83A-340 operates to deem the Share Rights to always have been ESS interests. Where this occurs, section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1. In such a case, a deduction for the contribution to fund the Share Rights would be available to the Company in the income year in which Participants acquire the Performance Rights.

Note, as per the facts, where the Share Rights do not become an ESS interest because they are ultimately satisfied in cash, the outgoing will not flow through the Trust. If they did flow through the Trust, the Trust would not satisfy the sole activities test for the purposes of subsection 130-85(4).

Question 2b

Consistent with the analysis in Question 2a above, where the contribution is made after the acquisition of the relevant ESS interests, irretrievable contributions made by the Company to the Trustee of the Trust to fund the subscription for, or acquisition on market of Company Shares to satisfy the ESS interests granted to Participants, will be deductible in the income year in which the contribution is made by the Company pursuant to section 8-1. Section 83A-210 will not apply to modify the timing of the deduction as its requirements are not satisfied.

Question 3

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 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 artificially 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), 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

Where Performance Rights are settled with Shares

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

In general terms, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. In particular, paragraph (h) excludes:

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.

The Commissioner accepts that the New Plan is an employee share scheme. Specifically, the Commissioner accepts that the Performance Rights provided under the New Plan are ESS interests once it is determined that they will be settled with Shares in the Company, and that Subdivision 83A-B or Subdivision 83A-C applies to those ESS interests as they are provided at a discount.

At the time the Performance Rights are granted under the New Plan, 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 Company Shares. Hence, they may not be ESS interests within the meaning of subsection 83A-10(1).

However, where the Performance Rights are ultimately satisfied with shares instead of cash, the indeterminate rights will, pursuant to section 83A-340, be treated as if they had always been ESS interests. In these circumstances, they will constitute the acquisition of ESS interests acquired under an ESS within the meaning of subsection 83A-10(2) to which Subdivision 83A-B or 83A-C applies. Accordingly, the provision of Performance Rights under the New Plan that are settled with shares will not be subject to FBT on the basis that they are acquired by Participants under an employee share scheme (to which Subdivision 83A-B or 83A-C will apply), and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of a fringe benefit in subsection 136(1) of the FBTAA.

In addition, when a Performance Right is later exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the option and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme). Therefore, the provision of Company Shares in satisfaction of the exercise of Performance Rights will also not be a fringe benefit.

Where Performance Rights are settled with cash

As mentioned above, certain benefits provided to an employee or an associate of an employee 'in respect of' their employment is excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the definition of 'fringe benefit' in subsection 136(1) of FBTAA. Relevantly, paragraph (f) specifically excludes "a payment of salary or wages".

Where an employee's Performance Rights are ultimately satisfied with cash instead of shares, the granting of the Performance Rights will be viewed as a series of steps in the payment of salary or wages and not a separate benefit to the payment of salary or wages. As such, the payment of cash in satisfaction of the Performance Rights is specifically excluded from the definition of fringe benefit. This outcome is consistent with ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits.

Question 5

As mentioned in question 4, 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.

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. There are many exceptions to what is included as a fringe benefit, as outlined in paragraphs (f) to (s) of the 'fringe benefit' definition. Relevantly, paragraph (ha) of the definition of fringe benefit excludes;

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 section 130-85(4) as a trust whose sole activities are;

(a)  obtaining shares or rights in a company; and

(b)  ensuring that employee share scheme 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 or 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).

The Trustee acknowledges and agrees that its activities in the capacity of Trustee will be limited to managing the Company Plans and that it will administer the Trust so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997.

Accordingly, the contributions made by the Company under the Company Plan to the Trustee (an EST) to fund the acquisition of Shares by the Trust are exempt from FBT.

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