Edited version of private advice

Authorisation Number: 1052403279592

Date of advice: 04 June 2025

Ruling

Subject: Employee share scheme

Question 1

Will irretrievable cash contributions made by Company X, as head company to the Company X income tax consolidated group, to the Trustee for the Employee Share Trust (Trust) to fund the acquisition of Company X shares (Shares) to be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Question 2

Will irretrievable contributions made by Company X to the Trustee to fund the acquisition of Shares, which are made before the acquisition of the relevant ESS interests, be deductible to Company X at a time determined by section 83A-210 of the ITAA 1997?

Answer 2

Yes

Question 3

Will irretrievable contributions made by Company X to the Trustee, to fund the acquisition of Shares, made on or after the acquisition of the relevant ESS interest, be deductible to Company X in the income year in which the contribution is made under section 8-1 of the ITAA 1997?

Answer 3

Yes

Question 4

Will the Commissioner make a determination under section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) to deny, in any part or in full, any deduction claimed by Company X for irretrievable contributions made to the Trustee to fund the acquisition of Shares?

Answer 4

No

Issue 2: Fringe benefits tax

Question 5

Will the provision of Shares or Rights to Shares by Company X to the Participants under the Plan constitute a "fringe benefit" under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer 5

No

Question 6

Will the irretrievable contributions made by Company X to the Trustee to fund the acquisition of Shares issued pursuant to the Plan be a "fringe benefit" within the meaning of that term in subsection 136(1) of the FBTAA?

Answer 6

No

Question 7

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company Z (Employer Entity) by the amount of the fringe benefit gained from irretrievable cash contributions made by Company X to the Trustee to fund the acquisition of Shares by the Trustee pursuant to the Plan?

Answer 7

No

This ruling applies for the following periods:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

In a particular income year

Relevant facts and circumstances

1.              Company X provides services in a specific industry.

2.              Company X is the head company of an income tax consolidated group comprising itself and a number of wholly-owned Australian resident subsidiaries, including Company Z, which is the Employer Entity for the group.

The plan

Background

3.              Company X has implemented the Plan whereby rights to Company X shares (Rights) are issued for no consideration, which upon vesting entitle participating Company X employees (Participants) to receive shares in Company X (Shares).

4.              The purpose of the Plan is, among other things, to provide market competitive compensation to attract, motivate and retain talent across diverse employment segments. The Plan operates broadly to provide Participants with the opportunity to acquire Shares.

5.              In order to receive Shares, the Participant must satisfy all relevant criteria outlined in the:

•                relevant offer letters and documentation

•                the Plan Rules.

Operation of the Plan

6.              The Plan Rules outline that the Plan is structured to operate as follows:

•                Participation in the Plan is by annual invitation. Participants will be nominated annually having regard to performance, future potential, and retention risk. Eligibility is determined by the Company X Board.

•                Participants will be awarded Rights which convert to Shares upon satisfaction of the Vesting Conditions at the Vesting Date unless the Board determines in its absolute discretion to pay the participant a cash consideration in lieu of the issue or transfer of Shares equal to the participant's entitlement.

•                No issue price will be payable by the participant upon grant of the Right or on vesting of the Share.

•                Rights do not carry any rights to receive dividends prior to the Vesting Date.

•                Rights will vest and convert into a Share subject to the continued employment of the participant at the relevant Vesting Date.

•                Unless otherwise specified in the Invitation, 100% of the total number of Shares will vest four years from the date after the grant dates of the Right is approved by the Board (or such other period prescribed by law or regulatory authority).

•                Unless otherwise determined by the Board and specified in the Invitation, Rights do not carry any rights to receive dividends prior to the Vesting Date. However, unless otherwise determined by the Board acting reasonably, on the Vesting Date, the participant will be entitled to receive a dividend equivalent payment in cash (less any applicable statutory deductions) for the relevant number of Rights to Shares that vest.

•                On resignation or termination, the participant will lose their eligibility to Rights that have not met relevant Vesting Conditions. In the case of redundancy or retirement (and in any other circumstances), the participant will retain their eligibility to receive Rights that have not met relevant Vesting Conditions.

•                Section X of the Rules outlines various considerations relevant to participation in the Plan. Relevantly, these include:

o        While each Right entitles the participant, upon vesting of the Right, to acquire one Share, a Righ is not a Share and is at risk of lapsing or being forfeited, in the circumstances specified in the Plan rules.

o        If a Right lapses or is forfeited (for example, because the participant resigns prior to the Vesting Date), all the participant's rights under the Plan in respect of that Right (including the participant's right to acquire a Share) will be forfeited.

o        Whether the Rights granted to the participant will vest will depend on the Vesting Conditions being satisfied or waived by the Board.

Employee share trust

7.              Company X established the Trust to facilitate opportunities to align the interests of its executive employees with, and to enable employees to be involved and participate in, the future growth and profitability of Company X, including by administering and holding Shares for the benefit of employees who participate in the Plan.

8.              Company X will make contributions to the Trustee in order to facilitate the Trust's acquisition of Shares on behalf of the Participants in respect of the Plan. Company X has and will continue to fund the Trustee to pay the broker buying Shares on behalf of the Trust.

9.              Shares acquired by the Trustee are held on trust for all Participants as beneficiaries in accordance with the Trust Deed.

10.          Company Y, which is an independent third party, has agreed to act as Trustee of the Trust in accordance with the terms of the Trust Deed.

11.          The Trust uses contributions to either acquire Shares on-market, or subscribe for new Shares.

Operation of the Trust

12.          Broadly, the Trust operates as follows:

•                The Trustee must not charge any fees or charges for administering the Trust, other than reasonable disbursements charged to the Trust or amounts charged to Company X. (Clause XXX)

•                Subject to clause XXX, the Trustee holds the Trust Fund on trust for all Beneficiaries (General Trust Property) and in the manner required by the Plan Rules. (Clause XXX)

•                The Trustee must comply with any direction of the Board to acquire Shares on behalf of a Participant in accordance with the relevant Rules and must apply any amount paid to it by a Group company or a Participant pursuant to the relevant Rules in accordance with any such direction of the Board. (Clause XXX)

•                At the request of the Board, the Trustee will set aside and hold for the benefit of identified Participants identified parts of the Trust Fund (Allocated Trust Property) upon such terms and subject to such conditions as may be required by the relevant Rules or, to the extent not inconsistent with the relevant Rules, as the Board may stipulate from time to time. (Clause XXX)

•                Where any Allocated Trust Property is forfeited, it will be held as General Trust Property. (Clauses XXX)

•                Participants who are Allocated Trust Property Beneficiaries are entitled to receive all dividends and other distributions, bonus issues or other benefits payable to the Trustee in respect of those Shares. (Clause XXX)

•                The Trustee may direct Company X to pay dividends and other distributions or benefits directly to the Allocated Trust Property Beneficiary. (Clause XXX)

•                If the Trustee acquires Shares after taking up rights on behalf of an Allocated Trust Property Beneficiary under clause XXX, the Trustee must, as soon as reasonably practicable, transfer those Shares to the Allocated Trust Property Beneficiary (Clause XXX)

•                The balance (if any) of Distributable Income of the Trust to which no Beneficiary is presently entitled immediately prior to the end of the relevant Year of Income after the application of clauses XXX will be accumulated by the Trustee and form part of the Trust Fund. (Clause XXX)

•                Company X will keep the Trustee in funds necessary to do any act requested by the Board. (Clause XXX)

•                Company X acknowledges that it, and each Group company, is not a Beneficiary and has no entitlement to any Shares forming part of the Trust Fund at any time. (Clause XXX)

Assumptions

•                Company X, the Trustee and the Trust are currently all residents of Australia under the income tax laws of Australia and no other jurisdiction, and are assumed to remain residents of Australia.

•                Company X will not have any charge, lien, or other proprietary right or interest in the Shares acquired by the Trustee according to the Trust Deed at any time.

Reasons for decision

All legislative references in these reasons are to the Income Tax Assessment Act 1997 unless otherwise specified.

Issue 1: Income Tax

Question 1

Summary

Yes. The irretrievable cash contributions made by Company X, as the head company of the Company X income tax consolidated group, to the Trustee to fund the acquisition of Shares will be deductible under section 8-1.

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 X provides services in a specific industry.

Incurred in carrying on a business

Company X must provide the Trustee with the funds required to enable the Trustee to acquire Shares.

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

•                all funds received by the Trustee from Company X will form part of the corpus of the Trust and will not be repaid to Company X.

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

The irretrievable cash contributions by Company X to the Trust for the acquisition of Shares to satisfy grants of ESS interests 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 employee share scheme (ESS) for employees. Costs incurred are likely to be in relation to more than one grant of Shares, and contributions will be made on a regular basis as part of the ongoing process of remunerating Participants and the Trust is expected to acquire Shares periodically. This indicates that the irretrievable cash contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure for Company X.

While the 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, the payments are not capital, or of a capital nature, and paragraph 8-1(2)(a) is not satisfied.

Accordingly, irretrievable cash contributions made by Company X will be deductible under section 8-1.

Question 2

Summary

Yes. The irretrievable contributions made by Company X to the Trustee to fund the acquisition of Shares, which are made before the acquisition of the relevant ESS interests, will be deductible to Company X at a time determined by section 83A-210.

Detailed reasoning

A Share is an ESS interest as it represents a share in Company X. A Right that vests and is settled with a Share is a right to acquire beneficial interest in a Share and is therefore also an ESS interest (subsection 83A-10(1)).

The Plan is 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.

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 Plan. 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.

Section 83A-210 applies to determine the timing of the deduction of contributions provided under an ESS arrangement, but only if the contribution to the Trust is made before the ESS interest is acquired by the ultimate beneficiary under the 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, (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).

Indeterminate rights

As Rights can be settled by payment of a cash equivalent amount, at the time the rights or options are acquired by the employee are not rights to acquire a beneficial interest in a share, but are indeterminate rights pursuant to section 83A-340.

Once the Board determines that it will not exercise its discretion to pay a cash equivalent amount but will satisfy the Rights with Shares, section 83A-340 will operate to treat the indeterminate right as if it had always been a right to acquire a beneficial interest in shares, and therefore an ESS interest for the purposes of section 83A-210.

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 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 Rights are acquired (and they do subsequently become ESS interests by virtue of section 83A-340), section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1 to be the income year in which participants originally acquired the Rights.

Question 3

Summary

Yes. Consistent with the reasons provided in Question 2, the irretrievable contributions made by Company X to the Trustee to fund the acquisition of Shares, made on or after the acquisition of the relevant ESS interest, will be deductible in the income year in which the contribution is made under section 8-1.

Question 4

Summary

No. The Commissioner will not make a determination under section 177F of the ITAA 1936 to deny, in any part or in full, any deduction claimed by Company X for irretrievable contributions to the Trustee to fund the acquisition of Shares.

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 met.

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 X to obtain a tax benefit.

Issue 2: Fringe Benefits Tax

Question 5

Summary

No. The provision of Rights by Company X to the Participants under the Plan will not constitute a "fringe benefit" under subsection 136(1) of the 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.

The Plan constitutes an ESS within the meaning of subsection 83A-10(2) because it is a scheme under which ESS interests in Company X are provided to employees in relation to their employment.

As the Rights granted under the Plan will be acquired by the employees at a discount, they are ESS interests to which Subdivision 83A-B applies.

Accordingly, the provision of Rights will not be subject to FBT as they are excluded from being a fringe benefit by virtue of paragraph 136(1)(h) of the FBTAA.

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

For completeness, where the Rights are ultimately satisfied with cash instead of Shares, the granting of the Rights will be viewed as a step in the 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 (refer to ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits).

Question 6

Summary

No. The irretrievable cash contributions made by Company X to the Trustee to fund the acquisition of Shares issued pursuant to the Plan will not be a "fringe benefit" within the meaning of that term in subsection 136(1) of the FBTAA.

Detailed reasoning

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

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

In particular, paragraph (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) 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 are relevant. To qualify as an employee share trust, a trustee's activities must be limited to:

•                obtaining shares or rights in a company (paragraph 130-85(4)(a))

•                ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the ESS to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph 130-85(4)(b))

•                other activities that are merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and (b) (paragraph 130-85(4)(c)).

The Plan is an ESS as a Right granted under the Plan is an ESS interest under subsection 83A-10(1) of the ITAA 1997, being a right to acquire a beneficial interest in Shares to which Subdivision 83A-B of the ITAA 1997 applies because a Participant acquires the ESS interest under an ESS for nil consideration, which is at a discount.

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

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'?

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

Therefore, the irretrievable cash contributions made by Company X to the Trustee, to fund the acquisition of Shares will not be a fringe benefit.

Question 7

Summary

No. The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to the Employer Entity by the amount of the fringe benefit gained from irretrievable cash contributions made by Company X to the Trustee to fund the acquisition of Shares by the Trustee pursuant to the Plan.

Detailed reasoning

Section 67 involves arrangements to avoid or reduce fringe benefits tax. Essentially, it is the general anti-avoidance provision in the FBTAA and its operation is comparable to Part IVA of the ITAA 1936, in that the section requires the identification of an 'arrangement' and a 'tax benefit', includes a sole or dominant purpose test, and is activated by the making of a determination by the Commissioner.

As determined above, the irretrievable cash contributions made by Company X to the Trustee do not constitute fringe benefits within the meaning of subsection 136(1), nor would the grant of ESS interests (or cash payments) to Participants under the Plan if the Trust was not used. Therefore, the fringe benefits liability is not any less than it would have been but for the existence of the arrangement (i.e., the Trust).

Therefore, the Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to the Employer Entity by the amount of tax benefit gained from irretrievable cash contributions made by Company X to the Trustee to fund the acquisition of Shares.

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