Edited version of private advice

Authorisation Number: 1052381665458

Date of advice: 4 April 2025

Ruling

Subject: Employee share scheme

Question 1

Will Company A, as head company of the income tax consolidated group, obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by Company A (or another entity within the tax consolidated group) to Company B (Trustee) as trustee for Company A Employee Share Trust (Trust) to fund the subscription for, or acquisition on-market of, Company A Shares by the Trustee to satisfy the Options, Rights and Restricted Shares issued under the Plans?

Answer

Yes.

Question 2

Will Company A obtain an income tax deduction pursuant to section 8-1 of the ITAA 1997 in respect of the costs incurred in relation to the on-going administration of the Plans and the Trust?

Answer

Yes.

Question 3

Will irretrievable cash contributions made by Company A (or another entity within the tax consolidated group) to the Trustee, to fund the subscription for, or acquisition on-market of, Shares by the Trust, be deductible to Company A at the time worked out in accordance with section 83A-210 of the ITAA 1997?

Answer

Yes.

Question 4

Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of, Shares by the Trustee or costs incurred by Company A in relation to the on-going administration of the Plans and the Trust?

Answer

No.

Question 5

Will the consideration received by Company A, as a result of Participants exercising their Options granted under the Long Term Incentive Plan to acquire Shares, be included in Company A's assessable income under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 6

Is the provision of Shares, in satisfaction of the Options, Rights and Restricted Shares issued under the Plans, a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 7

Will the irretrievable cash contributions by Company A to the Trust in order to:

a)            subscribe for, or acquire on-market, Shares, and/or

b)            fund the ongoing administration of the Trust

be a fringe benefit within the meaning of that term in subsection 136(1) of the FBTAA?

Answer

No.

This ruling applies for the following periods:

For Questions 1 to 5:

1 January 202X to 31 December 202X

For Questions 6 to 7:

1 April 202X to 31 March 202X

The scheme commenced on:

1 January 202X

Relevant facts and circumstances

Background

1.  Company A manufactures and distributes products to retail and commercial customers in Australia.

2.  Company A is listed on the Australian Securities Exchange (ASX) and has a 31 December financial year end.

3.  Company A introduced the several incentive plans, collectively referred to as Plans to reward its employees in the short-term and long-term:

        i.        Long Term Incentive Plan (LTI Plan)

        ii.        Short Term Incentive Plan (STI Plan)

        iii.        Deferred Award Plan

        iv.        Exempt Share Award Plan.

Purposes of the Plans

4.  The purposes of the Plans are:

•                     To attract and/or retain skilled employees;

•                     To align employee (including key management personnel) interests with Company A's shareholders and the achievement of Company A's strategy; and

•                     To establish Employee Share Schemes within the meaning of Division 83A of ITAA 1997.

5.  The Deferred Award Plan and Exempt Share Award Plan (collectively referred to as the Employee Share Plans) are intended to encourage broad-based employee share ownership in Company A. Under the Employee Share Plans, Restricted Shares are offered to all eligible employees.

6.  The LTI and STI are incentive arrangements intended to motivate and retain senior employees of Company A. Under the LTI and STI, Options and Rights are granted to senior employees on a regular basis.

7.  Awards granted under the LTI and STI are subject to performance hurdles and/or the requirement to remain employed for a specified period of time.

8.  Awards made under the Plans are a key component of the remuneration packages offered to employees (including key management personnel).

Operation of the Plans

9.  Under the LTI and STI:

•                     Offers of Options, Rights and/or Restricted Shares may be made to Eligible Employees.

•                     Offers may be made annually or on a once-off basis.

•                     Offers will be subject to Vesting Conditions for the STI and LTI. Where Vesting Conditions are not met, the Options and Rights will lapse.

•                     Where the Vesting Conditions are met, each Right and Option may be converted to a Share in Company A under the terms of the relevant offer.

10.  Under the Employee Share Plans:

         i.        Restricted Shares may be acquired by employees under a salary sacrifice arrangement (up to the value of $5,000 annually) or as a free gift by Company A (up to the value of $1,000). The Restricted Shares are subject to a disposal restriction.

         ii.        Once the disposal restriction has been completed, the employees are eligible to freely transact the shares (subject to applicable law and share trading policies).

11.  Cash settlement of LTI/STI awards:

Under the LTI and STI there is an ability for Company A to settle the Rights and/or Options in cash rather than shares. Any cash payments made under the LTI and STI will be paid via payroll. The employee share trust will not be involved in the payment of cash awards.

Participants

12.  Participants in the Plans will be Eligible Employees (including key management personnel and the broader employee population) of Company A or its subsidiaries. The Eligible Employees, through management and conduct of Company A's business operations, directly generate assessable Australian income for Company A.

13.  The Participants are Australian tax residents who work primarily in Australia for the benefit for Company A in Australia.

Funding

14.  The Plans will be funded by irretrievable cash contributions made by Company A (or a subsidiary in Company A's tax consolidated group) to the Trust as and when required. Funds transferred into the Trust must only be used to subscribe for Shares or acquire Shares on market in Company A and for the purposes of administering the Plans.

15.  The contributions will be made to the Trust in the calendar year ending 31 December 20XX and subsequent income tax years in accordance with the protocols set out below:

              i.                The amount of funds transferred will be determined based on an estimated forecast to determine if the Trust holds sufficient Shares to satisfy future potential vestings and issues. This will include a review of:

•                    The quantum of outstanding Options and Rights,

•                    Likelihood of the Options and Rights vesting; and

•                    Estimate of the Options, Rights and/or Restricted Shares which will be issued.

           ii.         Management will review these forecasts and provide recommendations to the Board periodically to ensure the Trust is properly funded.

           iii.         Company A's Board will provide guidance to the Trustee on how the Trustee should acquire the Shares, whether by way of on market purchase or subscription.

           iv.         The Trustee will then consider the Board's recommendations and having regard to its broader obligations under the Trust Deed and trust law will acquire the shares on market or by way of subscription.

The Trust

16.  Company A established the Trust for the purpose of obtaining and administering Shares for the benefit of employees participating in Company A's Plans.

17.  The operation of the Trust is governed by the Trust Deed.

18.  All clause references in this section relate to the Trust Deed.

19.  Company A's reasons for administering the Options, Rights and/or Restricted Shares via the Trust include:

           i.         The Trust enables the acquisition of Shares, either on-market or by subscribing, in accordance with Company A's preferred timeline;

           ii.         Company A can manage its costs and share capital position by having the Trustee acquire Shares before the employees meet the vesting criteria and become entitled to the Shares. If the employees do not meet the vesting criteria, the Trust can reallocate the Shares to fulfill future vestings;

           iii.         The Trust provides the opportunity to improve cash flow planning as Company A can, if desired, make contributions to the Trust periodically throughout the vesting period. This provides Company A with flexibility to determine the most appropriate time to make contributions;

           iv.         The Trust provides the most efficient mechanism for implementing and managing disposal restrictions for grants of Restricted Shares;

           v.         The Trust is the most appropriate vehicle to acquire Shares during the vesting period or Restriction Period, thus assisting Company A to meet the costs of the Options, Rights and/or Restricted Shares; and

           vi.         The Trustee has a fiduciary duty to the Participants, and has the obligation to act in the interests of its beneficiaries, i.e. Participants.

20.  The Trustee of the Trust, Company B, is an independent third party.

21.  All contributions to the Trust will be made by Company A or a subsidiary member of its tax consolidated group.

22.  The Trustee's actions to purchase Shares on-market, or subscribe for new Shares take into consideration the Corporations Act 2001 requirements and the Trustee Act 1958 (VIC) requirements and at all times the Trustee will make decisions in accordance with the terms of the Trust Deed, the rules of the Plans, and in fulfilment of the Trustee's fiduciary duty to beneficiaries.

Operation of the Trust

23.  Broadly, the Trust operates as follows:

•                     The Trustee declares that the Fund is held by the Trustee for and on behalf of Eligible Participants on the terms and conditions of the Trust Deed. (Clause XX)

•                     The Trustee acknowledges and agrees that, subject to the Trust Deed:

(a)          each Participant is absolutely entitled to:

             i.        any and all Plan Shares held by the Trustee on that Participant's behalf, subject to the Plan Rules; and

             ii.        all other benefits, rights and privileges attached to, or resulting from holding, those Plan Shares, subject to the Plan Rules; and

(b)          it will only deal with or allocate Plan Shares:

             i.        in accordance with a valid direction of the relevant Participant or Company A;

             ii.        subject to the Plan Rules; and

•                     subject to any holding lock on the Shares having been lifted. (Clause XX)

•                     The Trustee has all the powers in respect of the Trust to the maximum extent permitted by law as outlined in Clause XX.

•                     In respect of an unallocated Share, the Trustee:

-                    will hold the unallocated Share on trust for the benefit of Participants generally;

-                    must not exercise any voting rights in relation to the unallocated Share;

-                    may apply any capital receipts, dividends or other distributions received in respect of the unallocated Share to purchase further Shares to be held on trust for the purposes of this Trust;

-                    must hold any Bonus Share issued in respect of an unallocated Share as an unallocated Share within the Fund;

-                    must not participate in any issue by Company A of rights (not being by way of a Bonus Share issue) to acquire Shares or other securities in respect of the unallocated Share without the written consent of Company A; and

-                    must keep an account of all unallocated Shares held by the Trustee. (Clause XX)

•                     Clause XX provides instructions to the Trustee, some of which are outlined below:

(a)          In respect of Plan Shares held by the Trustee which are to be provided to, or held for, a Participant, the Trustee will hold the legal title and transfer the beneficial title in the Plan Shares to the Participant.

(b)          The Trustee is entitled to regard as valid, and need only observe, an instruction, consent or other authorisation given or purported to be given by Company A, which may include an instruction, consent or other authorisation to:

             i.        transfer the legal and, if applicable, beneficial title in the relevant Plan Shares to the Participant in accordance with clause XX;

             ii.        remit any cash proceeds received by the Trustee in respect of the relevant Plan Shares to the Participant;

             iii.        conduct the sale of the Shares on ASX; or

             iv.        conduct any such other actions relating to the Shares as may be required by Company A.

(c)          Notwithstanding clause XX, the Trustee may not, at its own discretion, exercise any voting rights attaching to any of the Plan Shares or Shares it holds on trust, including in relation to any unallocated Share.

•                     Without limiting clause XX, Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4) of the Tax Act. (Clause XX)

•                     The Trustee must, upon direction by Company A, subscribe for or acquire Shares from time to time in accordance with the instructions contained in the written notice received from Company A referred to in clause XX, and the Trustee must do so as soon as practicable after receipt of, and in the manner directed in, the notice. (Clause XX)

•                     The Trustee must allocate the number of Shares specified by Company A as Plan Shares to the Account established for a Participant. (Clause XX)

•                     The Trustee must transfer or dispose of Plan Shares in accordance with the Plan Rules and any Offer, subject to any written direction from Company A to the contrary. (Clause XX)

•                     Plan Shares allocated in accordance with clause XX (and any Cash Dividends paid on such Plan Shares) must be held on the terms of this deed by the Trustee on behalf of the relevant Participant who is the beneficial owner of the Plan Shares and allocated in the accounts of the Trustee to the relevant Participant, until such time as the Plan Shares (and any such Cash Dividends) are transferred or disposed of in accordance with this deed or forfeited by the Participant in accordance with the relevant Plan Rules. (Clause XX)

•                     The Trustee is to do all things required to transfer legal title in Plan Shares to a Participant on whose behalf Plan Shares are held or to any third party as directed by Company A or the relevant Participant. Upon Plan Shares (and any Cash Dividends paid on the Plan Shares) being transferred to a Participant, the Participant will be legally and beneficially entitled to those Plan Shares (and any such Cash Dividends). (Clause XX)

•                     All funds received by the Trustee from Company A will constitute accretions to the corpus of the trust and will not be repaid to Company A and no participant shall be entitled to receive such funds (Clause XX).

•                     Pursuant to clause XX of the Trust Deed, the Trustee may apply any income received by the Trustee (including, but not limited to, dividends and returns of capital) to any Plan shares it holds on behalf of a participant subject to the terms of the Trust Deed and relevant Plan rules (after application by the Trustee of any capital as provided by clauses XX and XX of the Trust Deed).

•                     Before the end of each year of income, the Trustee may in its absolute discretion decide whether any amount received or held by the Trustee under each Plan is to be treated as being on income or capital account (clause XX of the Trust Deed).

24.  Under the Trust Deed, the Trustee has no right, authority or discretion to waive, renounce or disclaim any dividend or distribution paid by Company A on Shares.

LTI Plan Rules

25.  The LTI Plan is covered under the LTI Plan Rules dated 22 February 20XX.

26.  All rule references in this section relate to the LTI Plan Rules.

27.  The purposes of the Plan are to:

             i.        Assist in the reward, retention and motivation of Eligible Employees;

             ii.        Encourage participation by Eligible Employees in the growth and success of Company A through equity ownership;

             iii.          Align the interests of Eligible Employees more closely with the interests of shareholders in Company A by providing an opportunity for Eligible Employees to receive an equity interest in the form of Shares, Options or Rights;

             iv.          Provide Eligible Employees with the opportunity to share in any future growth in value of Company A; and

             v.         Provide greater incentive for Eligible Employees to focus on Company A's longer term goals. (Rule X)

28.  The following are some of the features of the LTI Plan:

             i.        The Board may, from time to time, select from among the Eligible Employees those Eligible Employees to whom Shares, Rights or Options will be offered via an invitation. (Rule XX)

             ii.        The Board has discretion to issue invitations on a differential basis to Eligible Employees as well as determine the timing and frequency of invitations. (Rule XX)

             iii.        Unless otherwise determined by the Board at the time of an Invitation, all Shares issued (or transferred) pursuant to the Invitation will rank equally with existing Shares on and from their Date of Grant. (Rule XX)

             iv.        The Board may offer Shares with such conditions relating to Disposal or forfeiture of the Shares as determined by the Board from time to time. (Rule XX)

             v.        The Board may, at its discretion, by notice to the Participant, reduce or waive the Share Vesting Conditions attaching to Shares in whole or in part at any time and in any particular case. (Rule XX)

             vi.          Subject to the LTI Plan Rules, and unless otherwise determined by the Board and specified in the Invitation, each:

•                    Option entitles the Participant, on the vesting and exercise of the Option to receive by way of issue or transfer (at the discretion of the Board) on Share at the Exercise Price (if any) or a cash payment in lieu of the issue or transfer of a Share; and

•                    Right entitles the Participant, on vesting and exercise of the Right, to receive one Share by way of issue or transfer (at the discretion of the Board) one Share at the Exercise Price (if any) or a cash payment in lieu of the issue or transfer of a Share. (Rule XX)

             vii.        Shares issued or transferred to a Participant on the exercise of Options or Rights will rank equally in all respects with existing Shares from the date of issue or transfer (as applicable) except for any rights attaching to the Shares by reference to a record date prior to the date of their issue or transfer (as applicable). (Rule XX)

             viii.        In relation to Vesting Conditions attaching to Options or Rights:

•                    Prior to an Invitation being made, the Board will determine and specify in the Invitation any Vesting Conditions attaching to Options or Rights.

•                    The Board may at its discretion reduce or waive the Vesting Conditions attaching to Options or Rights in whole or in part at any time and in any particular case, subject to any requirements under Applicable Law (including shareholder approval). (Rule XX)

             ix.        A Participant has no right or interest in a Share the subject of an Option or Right held by the Participant unless and until the Option or Right is exercised and a Share is issued or transferred. Nor does the holder of a Right have any rights to dividends, rights to vote or rights to the capital of Company A as a shareholder as a result of holding an Option or Right. Subject to Applicable Law, a Participant will not, as a holder of an Option or Right, have any right to attend a vote at general meetings of holders of Shares. (Rule XX)

             x.        The Board determine whether Company A will, with respect to each Vested Option or Vested Right that is exercised:

•                    Allot and issue, or transfer, one Share to the Participant (Equity Settled); or

•                    Pay a cash amount to the Participant equivalent to the Market Value of a Share as at the date of vesting of the Option or Right in accordance with the calculation in Rule XX (Cash Settled) in exercise of the discretion (if any) conferred on the Board in the Invitation with respect to cash settlement of the Vested Options or Vested Rights. (Rule XX)

             xi.        Where the Board determines that any Vested Options or Vested Rights will be Cash Settled in accordance with Rule XX, the cash payment to be made to a Participant will be equal to the aggregate Market Value of the Shares which would otherwise have been allotted and issued or transferred to the Participant if the Options or Rights had been Equity Settled, as at the date of vesting of the Options or Rights. (Rule XX).

             xii.        The Shares acquired under this Plan pursuant to exercise of Options or Rights may be subject to restriction on disposal (Restricted Shares). (Rule XX)

             xiii.        A holder of Restricted Shares must not Dispose of any of those Restricted Shares or any interest in those Restricted Shares while those Restricted Shares are held in the Plan and subject to these Rules. (Rule XX)

             xiv.        The Board may, at its discretion, by notice to the Participant, reduce or waive the period in which Restricted Shares are subject to restriction on disposal. (Rule XX)

STI Plan Rules

29.  The STI Plan is covered under the STI Plan Rules.

30.  All rule references in this section relate to the STI Plan Rules.

31.  The purpose of the Plan is to reward Eligible Employees for strong performance levels and contributions to the Group over a specified Performance Period. (Rule X)

32.  The following are some of the features of the STI Plan:

             i.         The Board may select from among the Eligible Employees those Eligible Employees to whom participation in the STI Plan will be offered. (Rule XX)

             ii.         Prior to an Invitation being made, the Board will determine and specify in the Invitation the form of Award to which a Participant may become entitled under the Plan. An Award may be made to a Participant in the form of:

•                    a cash payment in accordance with Rule XX;

•                    an issue of Rights subject to, and in accordance with Rule X;

•                    an issue of Shares subject to an in accordance with Rule XX; or

•                    any combination of (i), (ii) and (iii),

subject to these Rules and the terms of the Invitation. (Rule XX)

             iii.        Notwithstanding any other provision of these Rules, the Board may at any time, in its absolute discretion, prior to the grant of an Award:

•                    vary or waive one or more Performance Conditions applicable to the assessment of an Award;

•                    adjust the amount of an Award; and/or

•                    vary the form(s) in which an Award will be satisfied,

to take into account any unbudgeted extraordinary items or other circumstances that the Board determines warrant such treatment. (Rule XX)

             iv.        Where an Award is granted to a Participant wholly or partly in the form of a cash payment, Company A will use reasonable endeavours to pay such amount to the Participant as soon as reasonably practicable after the Board determines that the Participant is entitled to receive the Award. (Rule XX)

             v.        A Participant has no right or interest in a Share the subject of a Right held by the Participant unless and until the right is exercised and a Share is issued or transferred, nor does the holder of a Right have any rights to dividends, rights to vote or rights to the capital of Company A as a shareholder as a result of holding a Right. Subject to Applicable Law, a Participant will not, as a holder of a Right, have any right to attend a vote at general meetings of holders of Shares. (Rule XX)

             vi.        The Board will from time to time determine whether Company A will with respect to each Vested Right:

•                    allot and issue, or transfer, one Share to the Participant (Equity Settled); or

•                    pay a cash amount to the Participant equivalent to the Market Value of a Share as at the date of vesting of the Right in accordance with the calculation in Rule XX (Cash Settled) in exercise of the discretion (if any) conferred on the Board in the Invitation with respect to cash settlement of the Vested Rights. (Rule XX)

             vii.        Unless otherwise determined by the Board at the time of an Invitation, all Shares issued (or transferred) pursuant to the Invitation will rank equally with existing Shares on and from their Date of Grant. (Rule XX)

             viii.        The Board may, at its discretion, by notice to the Participant, reduce or waive the Share Vesting Conditions attaching to Shares in whole or in part at any time and in any particular case. (Rule XX)

             ix.        A Participant will have a vested and indefeasible entitlement to any dividends declared and distributed by Company A on the Shares which, at the books closing date for determining entitlement to those dividends. (Rule XX)

             x.        A Participant may exercise any voting rights attaching to Shares registered in the Participant's name. (Rule XX)

Employee Share Plan Rules

33.  The Employee Share Plan is covered under the Employee Share Plan Rules.

34.  The purposes of the Employee Share Plan are to:

             i.        encourage participation by Eligible Employees in the growth and success of Company A through equity ownership; and

             ii.        align the interests of Eligible Employees more closely with the interests of shareholders in Company A by providing an opportunity for those Eligible Employees to receive a direct or indirect equity interest in the form of Shares. (Rule X)

35.  The following are some of the features of the Employee Share Plan:

             i.        The Board may, from time to time, select from among the Eligible Employees those Eligible Employees to whom participation in an Award under the Plan will be offered. (Rule XX)

             ii.        In relation to Deferred Awards, Company A may offer, issue or transfer Shares under a Deferred Award to Eligible Employees:

•                    who elect to receive Shares funded through Salary Sacrifice contributions (but no more than $5,000 Market Value worth of Shares per financial year); or

•                    by Company A in its discretion, in addition to their wages, salary and remuneration at an Acquisition Price which is a discount to the Market Value of a Share. (Rule XX)

             iii.        The Restricted Period for a Deferred Award will expire on the earlier of:

•                    when the relevant Eligible Employee ceases employment within the meaning of section 83A-330 of the Tax Act;

•                    when the Board, in its discretion, agrees to end the Restriction Period;

•                    in the case of a Deferred Award of Shares, 3 years from the date of issue or transfer of the Shares. (Rule XX)

             iv.        Company A may offer, issue or transfer Shares under an Exempt Share Award to Eligible Employees for no consideration or at an Acquisition Price which is a discount to the Market Value of a Share. (Rule XX)

             v.        Exempt Share Awards may only be issued or transferred to Eligible Employees under the Plan in accordance with section 83A-35 of the Tax Act. (Rule XX)

             vi.        The Restriction Period for Exempt Share Awards will expire on the earlier of:

•                    3 years from the date of issue or transfer of the Shares (or such other period as may be required for the purposes of section 83A-35 of the Tax Act); and

•                    The time when the relevant Eligible Employee ceases employment with a Group Company. (Rule XX)

•                    Exempt Share Awards will not be subject to risk of forfeiture. (Rule XX)

             vii.        Deferred Awards and Exempt Share Awards are separate schemes for the purposes of Division 83A of the Tax Act. (Rule XX)

             viii.        A Share issued or transferred under the Plan will rank equally in all respects with Shares already on issue on the date of issue or transfer of the Share, except for entitlements which had a record date before the date of issue or transfer of the Share. (Rule XX)

             ix.        A Share issued or transferred to a Participant under this Plan will be a Restricted Share for the purposes of these Rules until any applicable Restriction Period has elapsed or been waived by the Board in accordance with these Rules. (Rule XX)

             x.        Any Shares that a Participant acquires in respect of Restricted Shares pursuant to a rights issue or bonus share issue by Company A will also be deemed to have the same Restriction Period attached, unless otherwise determined by the Board. (Rule XX)

             xi.        The Board may at any time waive or shorten the Restriction Period applicable to a Share, subject to any requirements under Applicable Law (including shareholder approval). (Rule XX)

             xii.        A Participant may, by written notice to the Board, request to terminate a prior Salary Sacrifice arrangement and their participation in the Plan at any time. (Rule XX)

Costs

36.  Company A incurs costs in relation to the on-going administration of the Plans and Trust. These costs primarily consist of the following:

             i.         Tax compliance fees for the Trust;

             ii.         Audit fees for the Trust;

             iii.        Fees paid to the external trustee for the on-going management of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 section 8-1

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

Income Tax Assessment Act 1997 subsection 8-1(2)

Income Tax Assessment Act 1997 paragraph 8-1(2)(a)

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 20-30

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

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

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

Income Tax Assessment Act 1997 subsection 83A-20(1)

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 83A-340

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

Income Tax Assessment Act 1997 paragraph 130-85(4)(a)

Income Tax Assessment Act 1997 paragraph 130-85(4)(b)

Income Tax Assessment Act 1997 paragraph 130-85(4)(c)

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 67(1)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(f)

Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(h)

Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(ha)

Reasons for decision

Issue 1: Income Tax

Question 1

Summary

Company A, as the head company of the Company A tax consolidated group will obtain an income tax deduction pursuant to section 8-1 in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of, Shares by the Trust.

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 A manufactures and distributes petroleum products to retail and commercial customers in Australia. Company A operates an ESS as part of its remuneration strategy.

Incurred in carrying on a business

Company A must provide the Trustee with the funds required to enable the Trustee to subscribe for, or acquire, Shares.

The contributions made by Company A to the Trustee are irretrievable as:

•                     all funds received by the Trustee from Company A will constitute accretions to the corpus of the Trust and will not be repaid to Company A and no participant shall be entitled to receive such funds (Clause XX of the Trust Deed).

•                     nothing in the Trust Deed confers, or is intended to confer, on Company A any proprietary right or proprietary interest in the Shares acquired by the Trustee.

Company A is intending to grant ESS interests into the future as part of its incentive program for Participants.

The costs incurred by Company A that fund the acquisition of Shares to satisfy grants of ESS interests arise as part of these continuous remuneration arrangements. The cash contributions to the Trustee to acquire or subscribe for Shares 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 A. Costs incurred are likely to be in relation to more than one grant of Shares, and Company A intends to continue making contributions on a regular basis as part of the ongoing process of remunerating Participants and the Trustee is expected to acquire Shares regularly. This indicates that the irretrievable cash contributions to the Trustee are ongoing in nature and are part of the broader remuneration expenditure incurred by Company A.

While the irretrievable cash 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 comparatively small. Therefore, paragraph 8-1(2)(a) is not satisfied as the costs are not capital, or of a capital nature.

Accordingly, Company A 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 2

Summary

Company A will obtain an income tax deduction pursuant to section 8-1, for costs incurred in relation to the on-going administration of the Plans and the Trust.

Detailed reasoning

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 assessable income, except where the outgoings are of a capital nature.

Company A manufactures and distributes petroleum products to retail and commercial customers in Australia. Company A operates an ESS as part of its remuneration strategy.

Company A 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 costs are of an on-going nature that are not separately deductible under a more specific income tax provision. It is noted that the ongoing administration costs do not include any establishment or amendment costs.

Therefore, Company A's ongoing costs incurred in relation to the administration of the Trust 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 A will be entitled to deduct costs incurred in relation to the on-going administration of the Trust under section 8-1 (see also, Taxation Determination TD 2022/8 Income Tax: deductibility of expenses incurred in establishing and administering an employee share scheme).

Question 3

Summary

The irretrievable cash contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group) to the Trustee, to fund the subscription for, or acquisition on-market of, Shares by the Trust will be deductible at a time worked out in accordance with section 83A-210.

Detailed reasoning

The deduction under section 8-1 is generally allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210.

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 under an ESS in the particular year of income.

The effect of section 83A-210 is to deem the time an employer incurred the outgoing to be the time the ESS interest is acquired by the beneficiary, rather than the time the employer makes the contribution to the trust, if the contribution was made before the ESS interest are acquired (see also, 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 interest in a company is provided to employees of the company in relation to the employee's employment.

An ESS interest in a company in 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. Shares purchased by the Trustee to satisfy its obligation under Company A's ESS, and subsequently granted to Participants pursuant to the Plans, are ESS interests for the purposes of section 83A-210.

The Plans satisfy the definition of an 'employee share scheme' in subsection 83A-10(2) as it is a scheme under which ESS interests are provided to the Participants in relation to their employment with Company A.

The granting of the ESS interest to the Participants, the provision of the cash contributions to the Trustee, the acquisition and holding of Shares by the Trustee and the allocation of Shares to Participants are all interrelated components of the Plans. All the components constitute an arrangement for the purposes of section 83A-210 that must be carried out so that the scheme can operate as intended.

Under the LTI Plan and STI Plan, a Right or Option are able to be cash-settled or equity-settled at the sole discretion of the Company A Board and are therefore considered an indeterminate right at the time they are granted. Although an indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with Shares instead of cash (or when the number of Shares the employee is entitled to receive is determined), the indeterminate right will, pursuant to section 83A-340, be treated as if it had always been an ESS interest.

Section 83A-210 applies equally to contributions made in respect of ESS interests and indeterminate rights. Therefore, an irretrievable cash contribution in respect of an indeterminate right is taken to have been paid at the acquisition time of the ESS interest. If an indeterminate right becomes an ESS interest, deductible contributions made in respect of those rights can be claimed in the income year when the ESS interest is deemed to have been acquired under section 83A-340 (this will be the year in which the indeterminate right was granted to the employee). Once this has been established, such contributions can be matched to ESS interests issued to the employee and where necessary the relevant earlier income year assessments can be amended to allow the deduction (Item 28 of subsection 170(10AA) of the Income Tax Assessment Act 1936 (ITAA 1936)).

It is important to note that an indeterminate right which is satisfied by the provision of cash never becomes an ESS interest and the deduction in relation to the contribution to the Trust in respect of the provision of that right is permanently deferred. However, where that ESS interest is subsequently issued to another participating employee, this employee becomes the 'ultimate beneficiary', and the deduction is available in the income year that this participating employee acquired this ESS interest.

Therefore, where irretrievable cash contributions are made at a time before the Participants acquire the relevant ESS interest, the irretrievable cash contribution can only be deducted from the assessable income of Company A in the income year when the ESS interest is acquired by the Participant under the Plans, as provided by section 83A-210.

Question 4

Summary

The Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of, Shares by the Trustee or costs incurred by Company A in relation to the on-going administration of the Plans and the Trust.

Detailed reasoning

Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F 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 are satisfied.

In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain 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 5

Summary

The consideration received by Company A, as a result of Participants exercising their Options granted under the LTI Plan to acquire Shares in Company A will be included in Company A's assessable income under section 6-5.

Detailed reasoning

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

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

The consideration received by Company A as a result of Participants exercising their Options granted under the LTI Plan is a receipt derived by Company A in the course of operating the ESS as an integral part of its business operations.

As outlined in ATO Interpretative Decision 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.

Accordingly, any consideration (i.e. exercise price) received by Company A, as a result of participants exercising their Options granted under the LTI to acquire Shares in Company A will form part of the assessable income of Company A as ordinary income under section 6-5.

Issue 2: Fringe Benefits Tax

Question 6

Summary

The provision of Shares, in satisfaction of Options and/or Rights or grants of Restricted Shares under the Plans is not a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

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.

As discussed in the Detailed Reasoning in Question 3, the Plans constitute an ESS within the meaning of subsection 83A-10(2) because each Plan is a scheme under which ESS interests in Company A are provided to the employees of Company A in relation to their employment with Company A.

As the Rights or Options to acquire Shares or Restricted Shares granted under the Plans will be acquired by the employees at a discount, they are ESS interests to which Subdivision 83A-B or 83A-C applies.

Accordingly, the provision of Rights or Options to acquire Shares or Restricted Shares by Company A to Participants under the Plans 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 136(1)(h) of the FBTAA.

In addition, when a right to acquire ordinary shares 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 right to acquire shares and not in respect of employment (refer to 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).

For completeness, where the Rights or Options granted under the Plan Rules are ultimately satisfied with cash instead of shares, the granting of the Rights or Options under the Plan Rules will be viewed as a step in the payment of salary or wages, and not a separate benefit to a payment of salary or wages, and not a separate benefit to the 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

Summary

The irretrievable cash contributions by Company A to the Trust in order to subscribe for, or acquire on-market Shares, and/or fund the ongoing administration of the Trust will not be a fringe benefit within the meaning of that term in subsection 136(1) of the FBTAA.

Detailed reasoning

As discussed in the Detailed Reasoning in Question 6, 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 (ha) of the 'fringe benefit' definition excludes a benefit constituted by the acquisition of money or property by an employee share trust within the meaning of subsection 130-85(4).

In order for the irretrievable cash contributions to be excluded from the definition of 'fringe benefit', the Trust must therefore be an 'employee share trust' (EST) 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 Company A that are beneficial interests in those shares or rights are provided under the ESS to employees, or to associates of employees, of Company A or a subsidiary of Company A (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)).

As discussed in the Detailed Reasoning in Questions 3 and 6, the Plans constitute an ESS within the meaning of subsection 83A-10(2) because each Plan is a scheme under which ESS interests in Company A are provided to the employees of Company A in relation to their employment with Company A.

Accordingly, paragraphs 130-85(4)(a) and (b) are satisfied because:

•                     the Trustee acquires shares in a company, namely Company A

•                     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 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 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 not considered to be merely incidental include engaging in trading activities in relation to shares in the employer company, other than purchasing and selling shares to satisfy obligations under the ESS.

In the present case, the objects of the Trust as set out in the Trust Deed 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, the irretrievable cash contributions made by Company A to the Trustee of the Trust, in order to subscribe for, or acquire on-market Shares, and/or fund the ongoing administration of the Trust, will not be a fringe benefit.

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