Edited version of private advice

Authorisation Number: 1052270899317

Date of advice: 31 July 2024

Ruling

Subject: Employee share scheme

Question 1

Will Company A be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) for irretrievable cash contributions made by Company A to the Trustee of Company B EST to fund the subscription for, or acquisition on-market (or off-market) of fully paid ordinary shares in Company B (Shares), to satisfy employee share scheme (ESS) interests issued to Company A's employees (Participants) pursuant to either (or both) of the Company B Employee Option Plan, and the Company B Performance Rights Plan (the Plans)?

Answer

Yes.

Question 2a

Will the irretrievable cash contributions made by Company A to the Trustee of the Company B EST, to fund the subscription for, or acquisition on-market (or off-market) of Shares by the Trustee to satisfy ESS interests issued to Company A's employees pursuant to the Plans, be deductible to Company A 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 Plans?

Answer

Yes.

Question 2b

Will the irretrievable contributions made by Company A to the Trustee of the Company B EST, to fund the subscription for, or acquisition on-market (or off-market) of Shares by the Trustee to satisfy ESS interests issued to Company A's employees pursuant to the Plans, be deductible to Company A 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 Plans?

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 Company A for the irretrievable cash contributions made to the Company B EST to fund the subscription for, or acquisition on-market (or off-market) of Shares by the Trustee, pursuant to the Plans?

Answer

No.

Question 4

Will the provision of ESS interests to employees of Company A under the Plans 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 Company A to the Trustee of the Company B EST, to fund the subscription for, or acquisition on-market (or off-market) of Shares pursuant to the Plans, constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

This ruling applies for the following periods:

For questions 1, 2a, 2b and 3

•         Income Tax Year ending 30 June 202X

•         Income Tax Year ending 30 June 202X

•         Income Tax Year ending 30 June 202X

•         Income Tax Year ending 30 June 202X

•         Income Tax Year ending 30 June 202X

For questions 4 and 5

•         FBT Year ending 31 March 202X

•         FBT Year ending 31 March 202X

•         FBT Year ending 31 March 202X

•         FBT Year ending 31 March 202X

•         FBT Year ending 31 March 202X

Relevant facts and circumstances

Company B

• Company B is listed on the Australian Securities Exchange (ASX).

• Company B is the head company of an income tax consolidated group.

Company A

•         Company A is a subsidiary of the Company B group, however it is not part of the Company B tax consolidated group (Group).

•         Selected Company A employees are eligible to be participants in the Plans (Participants).

The Plans

• Company B operates the Plans for Participants employed by the Group and Company A as part of its strategy to attract, retain and motivate key talent.

Key terms of Performance Rights Plan

• Participants are granted rights to acquire ordinary shares in Company B (Shares), for no cost and subject to performance and service vesting conditions, at the sole discretion of the Board (Performance Rights).
• Participants are not entitled to any voting rights, dividends or to participate in any rights issue as a result of holding Performance Rights.
• Performance Rights are not transferable without written consent of the Board.
• Each vested Performance Right entitles the Participant to one Share for no exercise price.
• All Performance Rights granted under the Plan are subject to the satisfaction of service and/or performance conditions (Vesting Conditions), as determined by the Board and specified in the invitation letter.
• The Participant will generally forfeit their unvested Performance Rights where the Vesting Conditions are not satisfied.
• Following exercise of vested Performance Rights, the Trustee is directed by the Board to acquire Shares on behalf of the Participant (either on-market, via a new issue, or allocation of existing shares held by the Company B EST). These shares will rank equally with all other shares in Company B.
• While allocated Shares are held in the Company B EST, Participants are entitled to dividend and voting rights they are entitled to participate in any rights issue in respect of the shares. Participants are absolutely entitled to their Shares as against the Trustee.
• The Participant may request the Trustee transfer the resulting Shares to them by submitting a Withdrawal Notice in accordance with the terms of the Plan.

Key terms of Employee Option Plan

• Participants are granted options (for no cost) to acquire Shares, at the sole discretion of the Board (Options).
• Participants are not entitled to any voting rights, dividends or to participate in any rights issue as a result of holding Options.
• An Option issued is personal to the Participant and cannot be assigned, transferred, encumbered or otherwise dealt with by the Participant.
• Each exercised Option entitles the Participant to one Share, subject to the payment of an exercise price.
• All Options under the Plan are subject to the satisfaction of Vesting Conditions, as determined by the Board and specified in the invitation letter.
• Any Option granted under the Plan will lapse if not exercised during its exercise period.
• On exercise of Options the Trustee is directed by the Board to acquire the Shares on behalf of each Participant, either on market, via a new share issue or allocate shares already acquired by the Trustee to the relevant Participants. Such shares will rank equally with all shares in Company B.
• While allocated shares are held in the Company B EST, Participants are entitled to dividend and voting rights. Participants are absolutely entitled to their Shares as against the Trustee.
• The Participant may request the Trustee transfer the resulting Shares to them by submitting a Withdrawal Notice with the terms of the Plan.

Company B EST

• Company B established the Company B EST under the terms of the Trust Deed to facilitate the acquisition, holding, and allocation of Shares to Participants in accordance with employee equity plans that Company B operates from time to time (including the Plans).
• For tax purposes, the Company B EST is an independent legal entity. Company A cannot be a beneficiary of the Company B EST.
• While Company A has stated an intention to only make irretrievable contributions to the Company B EST to fund the acquisition of Shares once Performance Rights have been granted to a Participant under the Plans, there may be circumstances resulting in the acquisition of Shares before Performance Rights have been granted.

Powers of the Trustee

• The Trust Deed grants the Trustee general powers to do all things a trustee is permitted by law. These powers include.
  • subscribing for, purchasing, or acquiring Trust Assets or Shares
  • selling/disposing of Trust Assets
  • receiving dividends on Trust Shares and applying them in accordance with the Deed
  • selling or transferring Trust Shares to Participants
  • selling any rights relating to Shares (that are not unallocated) and applying the proceeds in accordance with the Deed.

Allocating Shares to Company B EST

• Under the Trust Deed, the Trustee will be instructed by notice to subscribe for, acquire and/or allocate a number of Shares specified in the notice.
• The Board will instruct the Trustee to subscribe for or purchase Shares on-market, depending on several factors including Company B's current capital management strategy.
• The Trustee will, in accordance with instructions received and pursuant to the Trust Deed acquire, deliver, and allocate Shares to Participants provided that the Trustee receives sufficient payment to subscribe for or purchase Shares and/or has sufficient unallocated Shares available in the EST.
• In respect of Rights subject to Vesting Conditions, no interest for Participants in the Shares will arise until Vesting Conditions are met and Shares are allocated.
• Company A must make irretrievable contributions to the EST if directed by the Board under the requirements of the Trust Deed.

Contributions to Company B EST

• All funds received by the Trustee from Company A would normally be in the form of irretrievable contributions that will constitute accretions to the corpus of Company B EST and no Participant will be entitled to receive a distribution of or from such funds. The funds will not be returned or repayable to Company A except where they are used for subscribing for Shares (i.e., the contributions will be irretrievable). Company A may also provide funds to the Trustee by way of a loan, at interest not exceeding commercial rates.
• Where Company B makes the contribution of funds to the Trustee on behalf of Company A Participants, Company B will recharge Company A for the total contribution at nil markup.
• Company A will not be beneficiaries under the Trust Deed and any funds Company A contributes to Company B EST, other than specifically in the form of a loan, may not be refunded, repaid or returned to Company A other than by way of the Trustee paying the issue price where it subscribes for Shares.
• Company A will have no interest in the Shares held by Company B EST.

Reasons for decision

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

Question 1

Detailed reasoning

Subsection 8-1(1) 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.

Company B carries on a business and operates an Employee Share Scheme (ESS) as part of its remuneration strategy. Select Company A employees are eligible to participate in the ESS (Participants).

Under the Plans, Company B will grant either Performance Rights or Options to Participants. Company A will make irretrievable cash contributions to the Trustee which the Trustee will use to acquire Shares for allocation to Company A Participants (in accordance with the Plans and the Trust Deed).

Incurred in gaining or producing assessable income or in carrying on a business

The cash contributions made by Company A to the Trustee are irretrievable and non-refundable as:

• all funds received by the Trustee will constitute Accretions to the corpus of the Company B EST and will not be repaid, other than as consideration for Shares under the terms of the Trust Deed and the Plans.
• nothing in the Trust Deed confers, or is intended to confer, on Company B any security interest, proprietary right or proprietary interest in the Shares acquired by the Trustee.

The outgoing incurred by Company A to facilitate the Trustee's acquisition of Shares to satisfy grants of ESS interests arise as part of Company A's employee reward and remuneration arrangements, and contributions to the Company B EST are part of an ongoing series of payments in the nature of remuneration.

The Commissioner accepts that the purpose of granting Performance Rights and Options under the Plans is to incentivise employees and in turn, is likely to result in the gaining or production of the assessable income of Company A as a result of the employee's increased performance and productivity.

The Commissioner accepts there is sufficient nexus between the irretrievable cash contributions made by Company A to the Trustee to satisfy the granting of Company B Performance Rights and Options under the Plans to its own employees, and the income earning activities of Company A.

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

Not capital or of a capital nature

The Court held in Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; Spotlight Stores Pty Ltd v Federal Commissioner of Taxation [2004] FCA 650; 2004 ATC 4674; 55 ATR 745 that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature.

Contributions will be recurring and be made from time to time as and when Shares are to be subscribed for or acquired pursuant to the Trust Deed. Therefore, to this end, it is concluded that the contributions are not capital in nature, but rather outgoings incurred by Company A in carrying on its business.

Accordingly, Company A will be entitled to deduct an amount under section 8-1 for irretrievable cash contributions it makes to the Trustee to acquire Shares to satisfy awards granted to its' employees under the Plans.

Question 2a

Detailed reasoning

The deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which Company A incurred the outgoing. Under certain circumstances, the timing of the deduction is determined under section 83A-210.

Section 83A-210 provides the following:

If:

(a) at a particular time, you provide another entity with money or other property:

(i) under an arrangement; and

(ii) for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and

(b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest;

then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time.

Therefore, the time an employer incurs the outgoing is the time the ESS interest is acquired by a beneficiary, rather than the time the employer makes the contribution to the trust, if the contribution was made before the ESS interests are acquired.

ATO Interpretative Decision ATO ID 2010/103 Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust provides the Commissioner's view that a deduction is allowable when awards are granted to employees, to the extent the money provided is used to acquire shares to satisfy the awards granted.

Subsection 83A-10(1) defines an 'ESS Interest' in a company as a beneficial interest in:

a)    a share in the company; or

b)    a right to acquire a beneficial interest in a share in the company.

Under the Plans, a Participant will acquire an ESS interest when the Participant is granted a Performance Right or Option.

Each Plan is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests are provided to employees in relation to their employment with Company A. Paragraph 83A-10(2)(b) provides that an ESS scheme includes ESS interests provided to employees or associates of employees of subsidiaries of the company providing ESS interests. As Company A is a subsidiary of Company B, this condition is met.

The Plans contain several interrelated components which include the provision of irretrievable cash contributions by Company B to the Trustee. These irretrievable cash contributions enable the Trustee to acquire Shares for the purpose of enabling each Participant, indirectly through the Plans, to acquire ESS interests.

The deduction for the irretrievable cash contribution made in respect of a Share can only be deducted from the assessable income of Company A in the income year when the relevant beneficial interest in a Share, or beneficial interest in a right to acquire a beneficial interest in a Share, is acquired by a Participant under the Plans.

Shares that are purchased by the Trustee to satisfy its obligations under the Plan, and subsequently allocated to Participants under the Plans are ESS interests for the purpose of section 83A-210.

Question 2b

Detailed reasoning

Where the contribution is made after the acquisition of the relevant ESS interests, irretrievable contributions made by Company A to the Trustee of Company B EST to fund the subscription for or acquisition on-market (or off-market from existing securityholders) of Shares by Company B EST to satisfy the ESS interests granted to Participants are deductible in the income year in which the contribution is made. For the purposes of the Plans, the Participant will acquire an ESS interest when the Participant is granted a Right or Option.

Question 3

Detailed reasoning

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

The Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust where the conditions of Division 83A 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 A to obtain a tax benefit.

Question 4

Detailed reasoning

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax.

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 (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;

ESS interests (being Performance Rights or Options) will be granted to Participants of the Plans. The ESS interests offered to Participants under the Company B Equity Plans are offered in connection with a Participant's employment by Company A, as a subsidiary of Company B.

Accordingly, the provision of Performance Rights and Options 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-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

In addition, when a Performance Right or Option 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 Performance Right and not in respect of employment (per 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).

Question 5

Detailed reasoning

One benefit excluded from being a 'fringe benefit', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an employee share trust within the meaning of the ITAA 1997.

In examining whether the requirements of subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that is relevant. To qualify as an employee share trust, a trustee's activities must be limited to those described in paragraphs 130-85(4)(a), (b) and (c).

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

•         Company B EST acquires shares in Company B, and

•         Company B EST 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 the employees in accordance with the Trust Deed and the Plans.

Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'?

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental.

In the present case, the activities that the Trustee is permitted to undertake under the Trust Deed, particularly in relation to those listed in clause 4, are indicative of those required to administer an employee share trust and are merely incidental to the primary purposes stated in paragraphs 130-85(4)(a) and (b).

Therefore, the cash contribution made to the Trustee to fund the subscription for, or acquisition on-market, of Company B Shares will not be a fringe benefit.

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