Edited version of your written advice

Authorisation Number: 5010055129318

Date of advice: 17 December 2018

Ruling

Subject: Employee share scheme

Question 1

Is the Company entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition on-market of, ordinary shares in the Company to satisfy employee share scheme (ESS) interests issued pursuant to the Plan?

Answer

Yes.

Question 2a

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

Answer

Yes.

Question 2b

Are the irretrievable cash contributions made by the Company, to fund the subscription for, or acquisition on-market of, Shares by the Trust to satisfy ESS interests issued pursuant to the Plan, deductible to the Company under section 8-1 of the ITAA 1997, in the income year when the contributions are made, if the contributions are made after the acquisition of the relevant ESS interests?

Answer

Yes.

Question 3

Will the Commissioner seek to 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 the Company for the irretrievable cash contributions made to the Trust to fund the subscription for, or acquisition on-market of Shares, pursuant to the Plan?

Answer

No.

Question 4

Does the provision of Rights and Shares to employees of the Company under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

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

Answer

No.

Question 6

Will the Commissioner seek to apply section 67 of the FBTAA to the proposed arrangements?

Answer

No.

Income tax years:

1 July 20XX to 30 June 20XX

Fringe benefits tax years:

1 April 20XX to 31 March 20XX

Relevant facts and circumstances

The Company is an Australian resident company that operates an ESS (the Plan) as part of its remuneration strategy.

The Plan is currently operating according to a number of governance documents.

Under the Plan, eligible employees (Participants) are granted Awards to acquire the Company’s ordinary shares, subject to certain conditions being met.

The Plan operates as follows:

● the Company established a trust (the Trust) to facilitate the acquisition, holding and allocation of shares to Participants

● the Company makes irretrievable cash contributions to the Trustee to enable the Trustee to acquire the Company’s ordinary shares to satisfy the Awards

● contributions to the Trustee will be determined in accordance with certain protocols, and

● when the Awards vest to Participants, Shares will be released by the Trustee and allocated to the Participants in accordance with the Plan rules.

The Company will not have any legal or beneficial entitlement to any of the Shares forming part of the Trust, at any time, and may not acquire such an interest.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-210

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

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.

Question 1

Summary

The Company will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, the Company’s shares by the Trustee to satisfy the Awards issued pursuant to the Plan Rules.

Detailed reasoning

Section 8-1 allows a deduction for a loss or outgoing that satisfies one of the positive limbs in subsection 8-1(1), whereas a deduction is not permitted under subsection 8-1(2) (the “negative limbs”) to the extent that it is of capital, or a capital nature; or is an outgoing of a private or domestic nature; is incurred in gaining or producing exempt income or non-assessable non-exempt income; or another provision prevents the deduction.

The purpose of establishing the ESS is to reward, retain and motivate employees and to encourage participation by employees through share ownership. The irretrievable cash contributions that the Company makes to the Trustee are employee remuneration costs. They are directly related to the production of the Company’s assessable income. Therefore, subsection 8-1(1) is satisfied.

In Pridecraft Pty Ltd v. FCT; FCT v. Spotlight Stores Pty Ltd [2004] FCAFC 339; 2005 ATC 4001, the Full Federal Court held that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account, and not outgoings of capital or of a capital nature.

The irretrievable cash contributions that the Company makes to the Trustee, and the costs incurred in relation to the ongoing administration of the Trust, are not outgoings of capital or of a capital nature. Therefore, paragraph 8-1(2)(a) is not satisfied.

Accordingly, the Company will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, the Company’s shares by the Trustee to satisfy the Awards issued pursuant to the Plan Rules.

Question 2a

Summary

If cash contributions are provided by the Company to the Trustee before the time the ultimate beneficiaries acquire ESS interests (by being granted Awards), section 83A-210 will apply. The effect is that the Company must delay the deduction of the related cash contributions until the ultimate beneficiaries acquire the ESS interests (the Awards).

Detailed reasoning

The deduction for the irretrievable cash contributions under section 8-1 is generally allowable in the income year in which the entity incurs the outgoing. However, under certain circumstances, the timing of the deduction is specifically governed by section 83A-210.

The establishment of the Plan, the settlement of the Trust under the Trust Deed and the provision of money by the Company to the Trustee, together constitute an ‘arrangement’ for the purposes of subparagraph 83A-210(a)(i).

The terms ‘ESS interest’ and ‘employee share scheme’ are defined in section 83A-10.

An Award is an ‘ESS interest’ in the Company under subsection 83A-10(1), as it is a right to acquire a share in the Company. This ESS interest in the Company is provided to employees under the Plans in relation to their employment. Therefore, the Plans comprise an ‘employee share scheme’ under subsection 83A-10(2).

The provision of cash contributions by the Company to the Trustee of the Trust is for the purpose of enabling the employees (each an ‘ultimate beneficiary’ as defined in paragraph 83A-210(a)) to acquire, directly or indirectly, an ESS interest under an employee share scheme (i.e. the Plans) in relation to the ultimate beneficiaries’ employment.

If the cash contributions are provided by the Company to the Trustee before the time the ultimate beneficiaries acquire the ESS interests (by being granted Awards), section 83A-210 will apply. The effect is that the Company must delay the deduction of the cash contributions until the ultimate beneficiaries acquire the ESS interests (the Awards).

However, section 83A-210 will not apply to a deduction for cash contributions provided by the Company to the Trustee if the contributions are made at or after the time the ultimate beneficiaries acquire the ESS interests (by being granted Awards). The effect is that those cash contributions can be deducted by the Company under section 8-1 in the income year in which they are made to the Trustee.

Question 2b

Summary

If the cash contributions are made at or after the time the ultimate beneficiaries acquire the ESS interests (by being granted Awards), the cash contributions can be deducted by the Company under section 8-1, in the income year in which they are made to the Trustee.

Detailed reasoning

As stated in the answer to Question 2a:

If the cash contributions are made at or after the time the ultimate beneficiaries acquire the ESS interests (by being granted Awards), the cash contributions can be deducted by the Company under section 8-1, in the income year in which they are made to the Trustee.

Question 3

Summary

On the basis of the relevant facts and circumstances in this private ruling and the answers to Questions 1, 2, 4 and 5, it cannot be objectively concluded that the person or persons who entered into or carried out any part of the scheme did so for the dominant purpose of enabling the Company to obtain a tax benefit in connection with the scheme.

Detailed reasoning

Part IVA is a general anti-avoidance provision. It gives the Commissioner the power to cancel a tax benefit that has been obtained by a taxpayer, or would be obtained, but for section 177F, in connection with a scheme to which Part IVA applies.

The following requirements must be met before the Commissioner can make a determination under subsection 177F(1):

(a) a ‘tax benefit’, as defined in section 177C, has been obtained or would (but for subsection 177F(1)) be obtained

(b) the tax benefit was, or would have been, obtained in connection with a ‘scheme’ as defined in section 177A, and

(c) having regard to the matters in subsection 177D(2), the person or persons who entered into or carried out any part of the scheme did so for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme.

In this case, the Plan constitutes a ‘scheme’ for the purposes of section 177A, and under paragraph 177C(1)(b), the two categories of deduction claimed by the Company are a tax benefit obtained in connection with the scheme.

However, on the basis of the relevant facts and circumstances in this private ruling, it cannot be objectively concluded that the person or persons who entered into or carried out any part of the scheme did so for the dominant purpose of enabling the Company to obtain that tax benefit in connection with the scheme.

Therefore, the Commissioner will not make a determination under subsection 177F(1), as a result of section 177D, to deny, in part or in full, any deduction claimed by the Company in respect of irretrievable cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of, the Company’s shares by the Trustee to satisfy the Awards granted under the Plan.

Question 4

Summary

The provision of Rights and Shares to employees under the Plan is not a fringe benefit as defined by subsection 136(1) of the FBTAA.

Detailed reasoning

The liability of an employer 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. Under the FBTAA, the calculation of the fringe benefits taxable amount is made by reference to the taxable value of each fringe benefit provided.

Without the provision of a ‘fringe benefit’, no amount will be subject to FBT.

In general terms, 'fringe benefit' is defined in subsection 136(1) as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee.

The provision of rights

Certain benefits, however, are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition in subsection 136(1).

Paragraph (f) of the definition of ‘fringe benefit’ relevantly states that a fringe benefit does not include:

(f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936; or

Paragraph (h) of the definition of 'fringe benefit' relevantly states that a fringe benefit does not include:

(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 83AB or 83AC of that Act applies.

The Commissioner accepts that the Plan is an ESS, and that the rights are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of rights pursuant to the Plan will not be subject to FBT either on the basis that they are acquired by Participants under an ESS (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

The provision of the Company’s shares

As mentioned above, in general terms, ‘fringe benefit’ is defined in subsection 136(1) as being a benefit provided to an employee or an associate of an employee ‘in respect of’ the employment of the employee. The meaning of the phrase ‘in respect of’ was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. Heerey, Merkel and Finkelstein JJ at page 410 stated:

Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment.

The situation is similar to that which existed in Federal Commissioner of Taxation v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. Davies, Gummow and Lee JJ noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.

When an employee of the Company participates in the Plan, they obtain a right (being a right to acquire a beneficial interest in a share in the Company) and this right constitutes an ESS interest.

When this right is subsequently exercised, any benefit received would be in respect of the exercise of the right, and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax- Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

Therefore, the benefit that arises to an employee upon the exercise of a vested right under the Plan (being the provision of a share in the Company) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee.

Question 5

Summary

The irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of Shares will not constitute a ‘fringe benefit’ within the meaning of that term in subsection 136(1) of the FBTAA.

Detailed reasoning

The definition of ‘fringe benefit’ in subsection 136(1) of the FBTAA relevantly states at paragraph (ha) that it does not include:

(ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997); …

The term ‘employee share trust’ is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4), which states:

An employee share trust, for an employee share scheme, is 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).

As determined in the answer to Question 2a, the Plan administered by the Trust is an ‘employee share scheme’ under subsection 83A-10(2).

Having regard to the ‘Relevant facts and circumstances’, the Trust is an ‘employee share trust’ under subsection 130-85(4).

Therefore, the contribution of funds by the Company to the Trustee in order to:

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

(b) fund the ongoing administration of the Trust

will satisfy the exclusion in paragraph (ha) of the definition of ‘fringe benefit’, and will not constitute a ‘fringe benefit’ within the meaning of subsection 136(1) of the FBTAA.

Question 6

Summary

The Commissioner will not make a determination that section 67 of the FBTAA applies to a tax benefit obtained from the irretrievable cash contributions made by the Company to the Trustee of the Trust.

Detailed reasoning

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement. It succinctly explains how section 67 operates. Most notably, paragraphs 185-188 of PS LA 2005/24 provide as follows:

185. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, 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. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

186. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

187. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 of the FBTAA differs from subsection 177D(2) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

188. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

The Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement.

Further, paragraph 191 of PS LA 2005/24 provides:

The approach outlined in this practice statement (refer to paragraphs 75 to 150) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant (except that amendments corresponding to the 2013 amendments of Part IVA have not been made to section 67) and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

Under the existing Plan, if a trust were not used, no fringe benefits tax would be payable and nor is it likely that benefits provided to employees under alternative remuneration plans would result in fringe benefits tax being payable.

In addition, under the Plan (with the Trust), the benefits provided by way of irretrievable contributions to the Trust and the provision of Rights (and the Shares received on their vesting) to eligible employees are excluded from the definition of a fringe benefit for the reasons given in the responses to questions 4 and 5 above.

Therefore, as these benefits have been excluded from the definition of a fringe benefit, no fringe benefit arises and no fringe benefits tax will be payable by using a trust with the Plan. Also, as it’s unlikely fringe benefits tax would be payable under alternative remuneration plans, the fringe benefits tax liability is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not make a determination that section 67of the FBTAA applies, to include an amount in the aggregate fringe benefits amount, in relation to a tax benefit obtained from the irretrievable cash contributions made by the Company to the Trustee of the Trust, to fund the subscription for or acquisition on-market of the Company’s shares.

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).