Edited version of private ruling

Authorisation Number: 1011596359811

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Ruling

Subject: Salary Sacrifice Share Plan

Questions

1. Will the contributions of monies by the Employer to the Trustee pursuant to the Trust Deed be included as assessable income of the Employee under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No

2. Will the contributions of monies by the Employer to the Trustee pursuant to the Trust Deed be included as assessable income of the Employee under section 15-2 of the ITAA 1997?

Answer: No

3. Will the plan constitute an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997?

Answer: Yes

4. Will the shares acquired by the Employee be subject to the provisions of Division 83A of the ITAA 1997?

Answer: Yes

5. Will the shares to be acquired by the Employee under the plan constitute ESS interests as referred to in section 83A-105 of the ITAA 1997?

Answer: Yes

6. Will the shares to be acquired by the Employee under the plan meet the requirements of section 83A-105 of the ITAA 1997 and enable the Employee to access the $5,000 salary sacrifice tax deferral concession in subsection 83A-105(4) and section 83A-115 of the ITAA 1997?

Answer: Yes

7. Will the conditions prohibiting the disposal of shares contained in the Trust Deed be sufficient for the purposes of meeting the salary sacrifice tax deferral conditions of section 83A-115 of the ITAA 1997?

Answer: Yes

8. Will the discount on the shares be equal to their market value at the time of their acquisition by the Employee?

Answer: Yes

9. Will the cost base of the Employee's shares for the purpose of Part 3.1 of the ITAA 1997 be determined by reference to Subdivision 110-A of the ITAA 1997?

Answer: Yes

10. Will the amount to be included in the Employee's assessable income under section 83A-110 of the ITAA 1997 for the income year in which the ESS deferred taxing point for their shares occurs equal the market value of those shares at the ESS deferred taxing point?

Answer: Yes

This ruling applies for the following periods:

Income Tax Year ended 30 June 2011

Income Tax Year ended 30 June 2012

Income Tax Year ended 30 June 2013

The scheme commences on:

29 March 2010

Relevant facts and circumstances

The Employer intends to implement an employee share plan which is designed to assist in the retention and motivation of its employees by providing them with an opportunity to acquire beneficial ownership of shares and access the salary sacrifice deferred taxation concession available under section 83A-105 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 15-2.

Income Tax Assessment Act 1997 Division 83A.

Income Tax Assessment Act 1997 Subdivision 83A-B.

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

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

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

Income Tax Assessment Act 1997 Subsection 83A-35(3).

Income Tax Assessment Act 1997 Subsection 83A-35(4).

Income Tax Assessment Act 1997 Subsection 83A-35(5).

Income Tax Assessment Act 1997 Subsection 83A-35(9).

Income Tax Assessment Act 1997 Subdivision 83A-C.

Income Tax Assessment Act 1997 Section 83A-105.

Income Tax Assessment Act 1997 Subsection 83A-105(2).

Income Tax Assessment Act 1997 Subsection 83A-105(3).

Income Tax Assessment Act 1997 Subsection 83A-105(4).

Income Tax Assessment Act 1997 Subparagraph 83A-105(4)(b)(i).

Income Tax Assessment Act 1997 Section 83A-110.

Income Tax Assessment Act 1997 Section 83A-115.

Income Tax Assessment Act 1997 Subsection 83A-115(3).

Income Tax Assessment Act 1997 Subsection 83A-115(4).

Income Tax Assessment Act 1997 Subsection 83A-115(5).

Income Tax Assessment Act 1997 Subdivision 110-A.

Income Tax Assessment Act 1997 Section 112-20.

Income Tax Assessment Act 1997 Subsection 130-80(4).

Income Tax Assessment Act 1997 Subsection 130-85(4).

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Will the contributions of monies by the Employer to the Trustee pursuant to the Trust Deed be included as assessable income of the Employee under section 6-5 of the ITAA 1997?

No.

The Employee will not derive assessable income in respect of contributions of monies by the Employer to the Trustee pursuant to the Trust Deed under section 6-5 of the ITAA 1997 as the amounts contributed to the Trustee are not actually received by the Employee or taken to have been received by them.

Question 2

Will the contributions of monies by the Employer to the Trustee pursuant to the Trust Deed be included as assessable income of the Employee under section 15-2 of the ITAA 1997?

No.

The contributions of monies by the Employer to the Trustee pursuant to the Trust Deed do not constitute statutory income of the Employee under section 15-2 of the ITAA 1997 as the contributions do not constitute allowances, gratuities, compensation, benefits, bonuses or premiums provided to the Employee or applied or dealt with in any way on the Employee's behalf or as the Employee directs.

Question 3

Will the plan constitute an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997?

Yes.

An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 to include a scheme under which ESS interests in a company are provided to employees of that company or a subsidiary of that company, in relation to the employees' employment.

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 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 definition of an ESS interest under subsection 83A-10(1) of the ITAA 1997 includes interests which provide economic benefit, regardless of whether they are legally held by the recipient of the economic benefit, or whether they are held in a trust relationship for them (paragraph 1.276 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009).

Participants under the plan are employees of the Employer (a subsidiary of the ultimate holding company of the Employer) and are provided with a beneficial interest in shares in the ultimate holding company of the Employer (i.e. an ESS interest) legally held by the Trustee on their behalf and in relation to their employment with the Employer.

The plan therefore constitutes an employee share scheme within subsection 83A-10(2) of the ITAA 1997.

Question 4

Will the shares acquired by the Employee be subject to the provisions of Division 83A of the ITAA 1997?

Yes.

The shares to be acquired by the Employee under the plan will be ESS interests in a company for the purposes of subsection 83A-10(1) of the ITAA 1997 acquired under an employee share scheme for the purposes of subsection 83A-10(2) of the ITAA 1997 at a discount.

The shares to be acquired by the Employee will therefore be subject to Division 83A of the ITAA 1997.

Question 5

Will the shares to be acquired by the Employee under the plan constitute ESS interests as referred to in section 83A-105 of the ITAA 1997?

Yes.

Pursuant to section 83A-105 of the ITAA 1997, Subdivision 83A-C of the ITAA 1997 applies to an ESS interest that is a beneficial interest in a share in a company if:

(a) Subdivision 83A-B of the ITAA 1997 would, apart from section 83A-105 of the ITAA 1997, apply to the interest; and

(b) subsections 83A-35(3),(4),(5) and (9) of the ITAA 1997 apply to the interest; and

(c) subsection 83A-105(2) of the ITAA 1997 applies to the interest, and subsection 83A-105(3) or (4) of the ITAA 1997 applies to the interest.

Subdivision 83A-B of the ITAA 1997 would, but for the application of Subdivision 83A-C of the ITAA 1997, apply to ESS interests acquired under an employee share scheme at a discount (subsection 83A-20(1) of the ITAA 1997).

Where consideration for an ESS interest is provided on a pre-tax basis (such as under an effective salary sacrifice arrangement), the employee is treated for the purposes of Division 83A of the ITAA 1997 as having acquired the ESS interest at a discount.

Despite the Trustee having to pay full market value consideration for the shares of the ultimate holding company of the Employer, as those shares are acquired under the plan on behalf of the Employee in lieu of their pre-taxed remuneration, they will be treated as having been acquired at a discount (i.e. for no consideration) for the purposes of Subdivision 83A-B of the ITAA 1997.

At the time the Employee will acquire the ESS interest under the plan, all the ESS interests available for acquisition under the plan will relate to ordinary shares in the ultimate holding company of their current employer, thereby satisfying subsections 83A-35(3) and 83A-35(4) of the ITAA 1997.

The predominant business of the Employer and its associated companies is not the acquisition, sale or holding of shares, securities or other investments, thereby satisfying subsection 83A-35(5) of the ITAA 1997.

Immediately after the Employee will acquire the ESS interests, they will not hold a beneficial interest in more than 5% of the shares in the ultimate holding company of the Employer or be in a position to cast or control the casting of more than 5% of the maximum number of votes that may be cast at a general meeting of that company, thereby satisfying subsection 83A-35(9) of the ITAA 1997.

At the time the Employee will acquire the ESS interests under the plan, at least 75% of Australian resident permanent employees of the Employer who have completed at least 3 years service with the Employer will be entitled to acquire ESS interests under the plan, thereby satisfying subsection 83A-105(2) of the ITAA 1997.

Subsection 83A-105(4) of the ITAA 1997 is also satisfied as the ESS interest to be acquired by the Employee under the plan at a discount:

(a) will be provided under agreement in lieu of a reduction in their remuneration that would not have happened apart from the agreement; and

(b) at the time those ESS interests are acquired:

i. the discount will equal the market value of the ESS interests; and

ii. all of the ESS interests available for acquisition under the plan are beneficial interests in shares; and

iii. the Trust Deed governing the plan expressly states that Subdivision 83A-C of the ITAA 1997 applies to the plan; and

(c) the total market value of the ESS interests in the ultimate holding company of the Employer that the Employee will acquire during the year under the plan and any other employee shares scheme(s) to which Subdivision 83A-C and subsection 83A105(4) of the ITAA 1997 apply does not exceed $5,000.

As the Employee will acquire ESS interests under the plan:

(a) that are beneficial interests in shares in a company at a discount;

(b) in which subsections (3), (4), (5) and (9) of section 83A-35 of the ITAA 1997 apply; and

(c) in which subsections 83A-105(2) and (4) of the ITAA 1997 apply,

they will constitute ESS interests referred to in section 83A-105 of the ITAA 1997.

Question 6

Will the shares to be acquired by the Employee under the plan meet the requirements of section 83A-105 of the ITAA 1997 and enable the Employee to access the $5,000 salary sacrifice tax deferral concession in subsection 83A-105(4) and section 83A-115 of the ITAA 1997?

Yes.

The shares to be acquired by the Employee under the plan will be:

(a) beneficial interests in shares in a company at a discount;

(b) in which subsections (3), (4), (5) and (9) of section 83A-35 of the ITAA 1997 apply; and

(c) in which subsections 83A-105(2) and (4) of the ITAA 1997 apply.

Those shares will therefore constitute ESS interests that satisfy the requirements of section 83A-105 of the ITAA 1997 and enable them to defer the payment of tax on their ESS interests until the ESS deferred taxing point for those interests arises, as determined under section 83A-115 of the ITAA 1997.

Question 7

Will the conditions prohibiting the disposal of shares contained in the Trust Deed be sufficient for the purposes of meeting the salary sacrifice tax deferral conditions of section 83A-115 of the ITAA 1997?

Yes.

Section 83A-115 of the ITAA 1997 determines the ESS deferred taxing point for ESS interests constituted by a beneficial interest in shares. Subject to subsection 83A-115(3) of the ITAA 1997, the deferred taxing point for shares is the earliest of when:

· there is no real risk that the employee will forfeit the share, or lose the share other than by disposing of it; and there are no genuine restrictions preventing disposal; or

· when the employee ceases the employment in respect of which they acquired the share; or

· seven years after the employee acquired the share.

ESS interests acquired under an employee share scheme and constituted by a beneficial interest in shares referred to in subsection 83A-105(4) of the ITAA 1997 are only entitled to a deferred taxing time under section 83A-115 where, at the time the shares are acquired, the scheme genuinely restricts the shares being immediately sold. The deferral requires that the shares be subject to genuine restrictions on disposal for the duration of the deferral (up to a maximum deferral period of 7 years).

Under the Trust Deed governing the plan, participants allocated shares under the plan will not be permitted to dispose of their shares before the earlier of three years after the date of acquisition of those shares and cessation of their employment with the Employer.

These conditions prohibiting the disposal of shares will therefore be sufficient for the purposes of meeting the tax deferral conditions of section 83A-115 of the ITAA 1997.

Question 8

Will the discount on the shares be equal to their market value at the time of their acquisition by the Employee?

Yes.

The value of the discount given in relation to an ESS interest is the market value of the discount.

The market value of the discount on the shares provided to the Employee under the plan will equal the market value of the shares at the time of their acquisition.

Question 9

Will the cost base of the Employee's shares for the purpose of Part 3.1 of the ITAA 1997 be determined by reference to Subdivision 110-A of the ITAA 1997?

Yes.

The cost base of the shares acquired by the Employee will be determined by reference to Subdivision 110-A of the ITAA 1997.

Question 10

Will the amount to be included in the Employee's assessable income under section 83A-110 of the ITAA 1997 for the income year in which the ESS deferred taxing point for their shares occurs equal the market value of those shares at the ESS deferred taxing point?

Yes.

Subject to subsection 83A-115(3) of the ITAA 1997, the ESS deferred taxing point in respect of the shares acquired by the Employee under the plan will occur at the earliest of:

· the time when the plan no longer restricts the Employee from immediately disposing of the shares, i.e. expiration of three years from the date of acquisition of the shares (subsection 83A-115(4) of the ITAA 1997); and

· the time when the Employee ceases their employment with the Employer (subsection 83A-115(5) of the ITAA 1997).

Section 83A-110 of the ITAA 1997 includes in an employee's assessable income for the income year in which the ESS deferred taxing point occurs the market value of the ESS interest at the ESS deferred taxing point, less the cost base of the ESS interest.

The provision of 'consideration' by the Employee for shares in accordance with the Trust Deed in the event that they elect to preserve their shares in the plan will not form part of the cost base of their shares when calculating the amount to be included in their assessable income under section 83A-110 of the ITAA 1997.

Therefore, as:

· the market value substitution rule under section 112-20 of the ITAA 1997 is ignored for the purposes of calculating the cost base of an ESS interest and the amount to be included in assessable income under section 83A-110 of the ITAA 1997 (subsection 130-80(4) of the ITAA 1997);

· the value of the discount on the shares provided to the Employee under the plan is the market value of the shares at the time of their acquisition (subparagraph 83A-105(4)(b)(i) of the ITAA 1997); and

· there is no other amount of money paid, incidental or other costs, or capital expenditure incurred under the plan by the Employee,

the cost base of those shares, as calculated by reference to Subdivision 110-A of the ITAA 1997, will be nil and the Employee's assessable income for the income year in which the ESS deferred taxing point occurs will include the market value of the shares at the ESS deferred taxing point.