Edited version of private advice

Authorisation Number: 1052383623481

Date of advice: 10 April 2025

Ruling

Subject: Employee share scheme

Question 1

Will the Company be entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 for the irretrievable cash contributions that are made to the Trustee of the Trust to fund the subscription for, or acquisition of, ordinary shares in the Company for the Trust to satisfy ESS interests issued to participants pursuant to the Plan?

Answer 1

Yes.

Question 2

If the irretrievable cash contributions are made to the Trustee of the Trust before participants acquire the relevant ESS interests under the Plan, will the contributions be deductible under section 8-1 of the Income Tax Assessment Act 1997 at the time determined by section 83A-210 of that Act?

Answer 2

Yes.

Question 3

If the irretrievable cash contributions are made to the Trustee of the Trust when, or after, participants acquire the relevant ESS interests under the Plan, will the contributions be deductible under section 8-1 of the Income Tax Assessment Act 1997 in the year they are made?

Answer 3

Yes.

Question 4

Will the Commissioner seek to make a determination under section 177F of the Income Tax Assessment Act 1936 that Part IVA of that Act applies to deny, in part or in full, any deduction claimed by the Company for the irretrievable cash contributions that are made to the Trustee of the Trust to fund the subscription for, or acquisition of, ordinary shares in the Company for the Trust to satisfy ESS interests issued to participants pursuant to the Plan?

Answer 4

No

Question 5

Will the provision of ordinary shares in the Company or rights to acquire ordinary shares in the Company by the Company to its employees, or employees of a subsidiary member of the group, under the Plan constitute a 'fringe benefit' within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer 5

No.

Question 6

Will the irretrievable cash contributions made by the Company, or a subsidiary member of its tax consolidated group, to the Trustee of the Trust under the Trust Deed (prior to the Trust Deed amendments), to fund the subscription for, or acquisition of, ordinary shares in the Company for the Trust to satisfy ESS interests issued to participants pursuant to the Plan, constitute a 'fringe benefit' within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer 6

No.

Question 7

Will the irretrievable cash contributions made by the Company, or a subsidiary member of its tax consolidated group, to the Trustee of the Trust under the Trust Deed (as amended by the Trust Deed amendments), to fund the subscription for, or acquisition of, ordinary shares in the Company for the Trust to satisfy ESS interests issued to participants pursuant to the Plan, constitute a 'fringe benefit' within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer 7

No.

Question 8

To the extent the Company is a private company for the purposes of the Income Tax Assessment Act 1936 in a given income year, will the irretrievable cash contributions that are made by the Company, or a subsidiary member of its tax consolidated group, to the Trustee, to fund the acquisition of shares in the Company by the Trust for the purposes of the Plan in respect of rights granted to participants, be treated as a deemed dividend within the meaning of Division 7A of the Income Tax Assessment Act 1936?

Answer 8

No.

This ruling applies for the following periods:

The income years ending 30 June 20XX to 30 June 20YY

The scheme commenced on:

In a particular income year

Relevant facts and circumstances

The Company is an Australian company with its shares listed on the Australian Securities Exchange.

The Company is an Australian resident for tax purposes and is the head company of a tax consolidated group that carries on a business.

The Company is currently the only employer entity within the group but any one of the subsidiary members of the Company's tax consolidated group may also become an employer entity.

The Company operates an employee share plan as part of its remuneration and reward program for its employees (the Plan). The Plan is governed by the Plan Rules.

Under the Plan, participants are granted rights to acquire shares in the Company for no consideration. The rights are subject to vesting conditions until the relevant vesting date. Upon vesting, the shares to which the rights relate are held within the Trust on behalf of the participants until a participant directs the transfer of legal ownership of the shares to themselves.

The Trustee of the Trust is an independent third party.

The Company, or a subsidiary member of the consolidated group, will make cash contributions to the Trustee from time to time to fund the acquisition of shares in the Company. These contributions are irretrievable and non-refundable because the Company and its subsidiaries are not beneficiaries of the Trust and are not entitled to any part of the Trust fund (including shares held by the Trustee). The cash contributions form part of the corpus of the Trust.

On a particular date, the Trust Deed was amended and the amended Trust Deed took effect from that date onwards. The amended Trust Deed removed certain powers or duties that were considered not merely incidental to those activities described in paragraphs 130-85(4)(a) and (b) of the Income Tax Assessment Act 1997. The Trustee confirmed that up to the date of amendment, the Trustee had not undertaken any of the powers or duties that had been removed by the amended Trust Deed.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 83A-210

Fringe Benefits Tax Assessment Act 1986 section 136

Reasons for decision

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

Question 1

Detailed reasoning

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

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

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

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

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

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

Contributions made to the Trustee are an outgoing incurred by the Company

For the cash contributions made by the Company to the Trustee to be deductible under section 8-1, the contributions must be a permanent loss or outgoing to which the Company has definitively committed itself and there should be no circumstance in which the Company can retrieve any of the contributions (Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339 and Spotlight Stores Pty Ltd v Commissioner of Taxation [2004] FCA 650).

Under the Trust Deed:

•                     the Company and the subsidiary members of the tax consolidated group are not beneficiaries of the Trust and will have no interest in the shares held by the Trust

•                     any funds provided to the Trustee will constitute accretions to the Trust's corpus and will not be repayable by the Trustee; and

•                     on termination of the Trust, the Trustee must not pay any of the surplus assets to the Company or any subsidiary members.

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

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

For an outgoing to be deductible under section 8-1, a nexus must exist between the outgoing and a business carried on for the purpose of gaining or producing assessable income (paragraph 8-1(1)(b)) (Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15).

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

The Plan is an employee remuneration plan designed to directly link executive and senior managers' remuneration to the growth in long term shareholder wealth.

The Trust was established to facilitate the acquisition, holding and allocation of shares in connection with employee equity plans that the Company operates from time to time, including the Plan. The cash contributions that the Company, or a subsidiary member of the consolidated group, makes to the Trustee are to enable the Trustee to acquire the necessary shares to hold on trust for participating employees of the Plan.

Under the terms of the Trust Deed, the Trustee will use the cash contributions to purchase, or subscribe for, shares on behalf of the relevant participants. The shares are later provided to a participant after the expiry of the restriction Period when the participant provides a withdrawal notice to the Trustee.

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

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

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

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

The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit and loss (Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73).

Further, according to Sun Newspapers Limited,when considering whether an outlay is revenue or capital in nature the following matters are relevant:

(a)          the character of the advantage sought

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

(c)          the means adopted to obtain it.

What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view (Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34). The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid (GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) [1990] HCA 25, Commissioner of Taxation v Citylink Melbourne Limited [2006] HCA 35).

It is evident that the advantage sought by the Company through the contributions that it, or a subsidiary member of the consolidated group, makes to the Trustee is to align the interests of its executives and senior managers with those of its shareholders and expected to result in the betterment of the Company's business.

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

Further, the contributions made by the Company, or a subsidiary member of the consolidated group, are expected to be recurrent and subject to continuous demand, so long as the Plan is in operation.

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

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

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

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

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

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

Question 2

Detailed reasoning

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

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

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

The Plan is considered to be a scheme under which rights to acquire a beneficial interest in the Company's shares (which are 'ESS interests' under subsection 83A-10(1)) are provided to the employees of the Company and its subsidiaries in relation to their employment. Accordingly, the Plan is an 'employee share scheme' as defined under subsection 83A-10(2).

Where the Company, or a subsidiary member of the consolidated group, makes irretrievable cash contributions to the Trustee before the rights are granted (that is, before a participant acquires the ESS interests), section 83A-210 will apply for the purpose of determining the income year in which the Company can deduct those irretrievable contributions. This is because the contributions are made before the 'acquisition time' as required by section 83A-210.

Accordingly, such contributions will be deductible under section 8-1 in the income year in which the rights are granted to the participants.

Question 3

Detailed reasoning

The requirements for section 83A-210 were set out in Question 2.

Where the Company, or a subsidiary member of the consolidated group, makes irretrievable cash contributions to the Trustee when or after the rights are granted (that is, after a participant acquires the ESS interests), section 83A-210 will not apply for the purpose of determining the income year in which the Company can deduct those irretrievable contributions. This is because the contributions are not made before the 'acquisition time' as required by section 83A-210.

Accordingly, such contributions will be deductible under section 8-1 in the income year in which those contributions are made.

Question 4

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 of the ITAA 1997 are met.

In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the employee share trust arrangement.

Therefore, having regard to the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling the Company to obtain a tax benefit.

Question 5

Detailed reasoning

An employer is subject to fringe benefits tax in respect of their fringe benefits taxable amount for the year (subsection 66(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)). The fringe benefits taxable amount is determined based on fringe benefits provided during the year.

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

Rights provided under the Plan are not fringe benefits due to paragraph 136(1)(h)

The definitions of 'ESS interest' and 'employee share scheme' were set out in Question 2A.

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

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

As rights are provided to participants of the Plan for no consideration, they are acquired by those participants at a discount and Subdivision 83A-B would apply to those ESS interests (unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C would apply instead).

Accordingly, the provision of rights will not constitute fringe benefits due to the exclusion under paragraph 136(1)(h).

Shares provided under the Plan are not provided in respect of employment

The provision of shares to participants occur as a result of the exercise of rights granted under the Plan. Accordingly, they are not provided in respect of a participant's employment and are not fringe benefits (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 6

Detailed reasoning

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

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

Subsection 130-85(4) defines an 'employee share trust', for an employee share scheme, as a trust whose sole activities are:

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

(b)           ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of:

(i)           ;  the company; or

(ii)          ;   a subsidiary of the company; and

(c)           other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b).

Paragraphs 130-85(4)(a) and (b) of the definition of an employee share trust are satisfied because the Trustee:

•                     acquires shares in the Company, and

•                     ensures those shares (which are 'ESS interests' under subsection 83A-10(1)) are provided under the Plan (which is an 'employee share scheme' as defined in subsection 83A-10(2)) to participants (who are employees of the Company or a subsidiary member of the consolidated group) by allocating those shares to the participants in accordance with the Trust Deed and the Plan's rules.

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

Whether a trust is an 'employee share trust' for the purposes of subsection 130-85(4) requires an analysis of what the trustee actually does, not only the powers and duties that are prescribed in the trust's deed.

While the original Trust Deed contained certain powers or duties that were considered not merely incidental to those activities described in paragraph 130-85(4)(a) and (b), the Trustee confirmed that up to that date of amendment, the Trustee had not undertaken any of the powers or duties that had been removed by the amended Trust Deed.

Accordingly, the Commissioner considers that paragraph 130-85(1)(c) is satisfied and that the Trust is an 'employee share trust' for the purposes of subsection 130-85(4).

As the Trust is considered an employee share trust, the irretrievable contributions made by the Company, or a subsidiary member of the consolidated group, will not constitute a 'fringe benefit' by virtue of the exclusion under paragraph 136(1)(ha) of the FBTAA.

Question 7

Detailed reasoning

The criteria for a trust to be an 'employee share trust' were set out in Question 6.

The amended Trust Deed contains only powers and/or obligations that are merely incidental as required by paragraph 130-85(4)(c).

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

As the Trust is considered an employee share trust, the irretrievable contributions made by the Company, or a subsidiary member of the consolidated group, will not constitute a 'fringe benefit' by virtue of the exclusion under paragraph 136(1)(ha) of the FBTAA.

Question 8

Detailed reasoning

Division 7A of the ITAA 1936 treats certain amounts as dividends paid by a private company, making those amounts assessable income of the shareholder or associate under section 44 of the ITAA 1936.

Subsection 109C(1) of the ITAA 1936 states that a private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either:

(a)           the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or

(b)           a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time.

'Entity' is defined in section 109ZD of the ITAA 1936 as having the meaning given by section 960-100 of the ITAA 1997 and includes a trust and a trustee of a trust (subsections 960-100(1) and 960-100(2)).

However, Division 7A does not apply to a payment made to a shareholder, or an associate of a shareholder, in their capacity as an employee (as defined in the Fringe Benefits Tax Assessment Act 1986 (FBTAA)) or an associate of such an employee (subsection 109ZB(3) of the ITAA 1936).

An 'employee' is defined in subsection 136(1) of the FBTAA to mean a current employee (a person who receives, or is entitled to receive, salary or wages), a future employee (a person who will become a current employee), or a former employee (a person who has been a current employee).

'Associate' is defined in section 109ZD as having the meaning given by section 318 of the ITAA 1936. Under subsection 318(1), an associate of an entity that is a natural person (otherwise than in the capacity of trustee) includes a trustee of a trust where the entity benefits under the trust.

The irretrievable cash contributions that are made by the Company, or a subsidiary member of the group, to the Trustee would satisfy subsection 109C(1) if the Trustee held shares at the time the contributions are made.

However, the participants of the Plan are employees (as defined in subsection 136(1) of the FBTAA) and they receive rights in their capacity as employees. Upon the exercise of their rights, the participants become beneficiaries of the Trust. As the participants benefit under the Trust, the Trustee is considered an associate of the participants.

As the contributions that are paid to the Trustee from time to time as part of the Plan are made to the Trustee in its capacity as an associate of the participants, the contributions will fall within the exception under subsection 109ZB(3).

Accordingly, where the Company is a private company in a given income year, the irretrievable cash contributions it, or a subsidiary member of the group, makes to the Trustee will not be deemed to be dividends under Division 7A.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).