Edited version of private ruling

Authorisation Number: 1011674209663

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Ruling

Subject: Employee Share Scheme: Company aspects

Question 1

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by 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 Rights and/or Future Rights issued under the Plan Rules?

Answer Yes.

Question 2

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

Answer Yes.

Question 3

Does section 83A-210 of the ITAA 1997 apply to determine the timing of deductions under section 8-1 of the ITAA 1997 for irretrievable cash contributions made by the Company to the Trustee for the purposes of funding the subscription for, or acquisition on-market of, the Company's shares by the Trustee to satisfy existing obligations of Rights and/or Future Rights granted under the Plan?

Answer No.

Question 4

Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by the Company in respect of the:

(a) 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 Rights and/or Future Rights; or

(b) costs incurred by the Company in relation to the implementation and on-going administration of the Plan and the Trust?

Answer No.

Question 5

Is the provision of Rights, Future Rights and/or Shares in satisfaction of those Rights or Future Rights to employees under the Plan a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer No.

Question 6

Are the irretrievable cash contributions made by the Company to the Trustee to fund:

a) the subscription for, or acquisition on-market of, the Company's shares; or

b) the administration of the Trust,

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

Answer No.

This ruling applies for the following periods

Income Tax Year ended 30 June 2009

Income Tax Year ended 30 June 2010

Income Tax Year ended 30 June 2011

Income Tax Year ended 30 June 2012

Income Tax Year ended 30 June 2013

Income Tax Year ended 30 June 2014

Income Tax Year ended 30 June 2015

Income Tax Year ended 30 June 2016

Fringe Benefits Tax Year ended 31 March 2010

Fringe Benefits Tax Year ended 31 March 2011

Fringe Benefits Tax Year ended 31 March 2012

Fringe Benefits Tax Year ended 31 March 2013

Fringe Benefits Tax Year ended 31 March 2014

Fringe Benefits Tax Year ended 31 March 2015

Fringe Benefits Tax Year ended 31 March 2016

The scheme commences on

30 March 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A company has established a Plan, including an independent trust structure to partly administer the Plan, to reward, retain and provide an incentive to certain Australian resident executives within a group of companies to grow shareholder value.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 83A

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

Income Tax Assessment Act 1997 Section 701-1

Income Tax (Transitional Provisions) Act 1997 Part IVA Subsection 83A-5(2)

Fringe Benefits Tax Assessment Act 1986 Section 66

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by 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 Rights and/or Future Rights issued under the Plan Rules?

Answer Yes.

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. It provides:

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(2) of the ITAA 1997 then provides:

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

· it is a loss or outgoing of capital, or of a capital nature; or

· it is a loss or outgoing of a private or domestic nature; or

· it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

· a provision of this Act prevents you from deducting it.

In Pridecraft Pty Ltd v. FC of T FCAFC 339; 2005 ATC 4001; 58 ATR 210; FC of T v. Spotlight Stores Pty Ltd FCA 650; 2004 ATC 4674; 55 ATR 745, payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature.

The irretrievable cash contributions the Company makes to the Trustee under the Plan Rules are directed to enhancing the profitability of the group's business and producing assessable income.

Accordingly, the irretrievable cash contributions the Company makes to the Trustee to acquire shares, whether by on-market purchase or subscription are allowable deductions.

Question 2

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

Answer Yes.

Detailed reasoning

Under the single entity rule in section 701-1 of the ITAA 1997, the Company and subsidiary are taken to be a single entity for the purposes of working out the Company's income tax liability.

Although the operating costs associated with the administration and implementation of the Plan are made by the Company, there is a clear connection with both its business activity as a holding company and a head company of a consolidated group and that of its wholly owned Australian subsidiary.

The operating costs associated with the administration and implementation of the Plan represent an important incentive in rewarding and retaining employees and motivate them to grow shareholder value. This in turn will generate greater income for the consolidated group.

Accordingly they are deductible under section 8-1 of the ITAA 1997 in the year they are incurred.

Question 3

Does section 83A-210 of the ITAA 1997 apply to determine the timing of deductions under section 8-1 of the ITAA 1997 for irretrievable cash contributions made by the Company to the Trustee for the purposes of funding the subscription for, or acquisition on-market of, the Company's shares by the Trustee to satisfy existing obligations of Rights and/or Future Rights granted under the Plan?

Answer No.

Detailed reasoning

The irretrievable cash contributions the Company makes to the Trustee to acquire shares are allowable deductions, pursuant to section 8-1 of the ITAA 1997.

The deductions under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the Company incurred the outgoing but under certain circumstances, and with effect from 1 July 2009, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.

Section 83A-210 of the ITAA 1997 states:

If:

(a) at a particular time, you provide another entity with money or other property:

(i) under an arrangement; and

(ii) for the purposes of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and

(b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest;

then, for the purposes of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time.

Subsection 83A-10(2) of the ITAA 1997 provides that an employee share scheme (ESS) is a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of;

(a) the company; or

(b) subsidiaries of the company.

In this case the Plan was established to provide, in respect of their employment, Australian resident employees of the Company's wholly owned Australian subsidiary company with Rights and/or Future Rights which are entitlements to shares in the capital of the Company, subject to certain conditions. Therefore the Plan is an ESS.

Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by a Participant under the Plan, in relation to the Participant's employment.

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

Future Rights

When Future Rights are granted to Participants, they (as ultimate beneficiaries of the Trust) acquire rights to acquire beneficial interests in the Company shares. These Future Rights are ESS interests for the purposes of subsection 83A-10(1) of the ITAA 1997 and are ESS interests to which section 83A-210 of the ITAA 1997 would need to be considered in determining the timing of a deduction to the Company for the irretrievable cash contributions made by the Company to the Trustee.

The granting of the Future Rights to acquire beneficial interests in the Company shares, the provision of the money to the Trustee under the arrangement, the acquisition and holding of the shares by the Trustee and the allocation of shares to the Participants are all interrelated components of the ESS. All the components of the scheme must be carried out so that the scheme can operate as intended.

As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed.

Consequently, the provision of money to the Trustee is considered to be for the purpose of enabling the Participants, indirectly as part of the ESS, to acquire a determined number of the Company shares. A deduction for the purchase of shares to satisfy the obligation arising from the Future Rights granted is therefore allowable in the year in which the money was paid to the Trustee, under section 8-1 of the ITAA 1997.

However, if the amount of money provided to the Trustee is used to purchase shares in excess of the ones required to satisfy the Future Rights granted under the Plan in a given income year, Section 83A-210 of the ITAA 1997 will apply and the excess payment will be deductible in the year of income when the relevant Future Rights are granted to the Participants.

Rights

The Rights were acquired by Participants when they were granted.

Provisions of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) extend the application of Division 83A to ESS interests acquired before 1 July 2009, on which tax is deferred beyond 1 July 2009 under the previous regime.

Particularly, under paragraph 83A-5(2)(a) of the IT(TP)A 1997, Subdivision 83A-C of the ITAA 1997 (and the rest of Division 83A of the ITAA 1997 to the extent that it relates to that Subdivision) applies to an ESS interest if:

(i) at the pre-Division 83A of the ITAA 1997 time, subsection 139B(3) of the ITAA 1936 applied in relation to the interest;

(ii) the interest was acquired (within the meaning of the former Division I3A of the ITAA 1936) before 1 July 2009; and

(iii) the cessation time mentioned in subsection 139B(3) of the ITAA 1936, as in force at the pre-Division 83A of the ITAA 1997 time, did not occur before 1 July 2009.

These ESS interests are referred to as transitioned ESS interests.

In this case the Rights are transitioned ESS interests and subject to deferred taxation under Subdivision 83A-C of the ITAA 1997 for the following reasons:

· The Rights are an ESS interest because they are rights to acquire beneficial interests in shares in the Company;

· The Rights were acquired prior to 1 July 2009;

· The Rights are rights to which subsection 139B(3) of the ITAA 1936 applied at the pre-Division 83A of the ITAA 1997 time as:

(a) they are 'qualifying rights' within the meaning of the former Division 13A of the ITAA 1936 as:

(i) the Rights were acquired under an ESS because they were acquired by the relevant Participants:

(A) in respect of, or in relation to, their employment; and

(B) for no consideration;

(ii) the Company is the holding company of the employer of the relevant Participants;

(iii) the Rights are rights to acquire ordinary shares in the Company;

(iv) immediately after the acquisition of the Rights, none of the relevant Participants held a legal or beneficial interest in more than 5% of the shares in the Company;

(v) immediately after the acquisition of the Rights, none of the relevant Participants was in a position to cast, or control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the Company; and

(b) none of the relevant Participants made an election under section 139E of the former Division 13A of the ITAA 1936; and

The cessation time (for the purposes of subsection 139B(3) of the ITAA 1936 as in force at the pre-Division 83A of the ITAA 1997 time) did not occur for any of the Rights before 1 July 2009. This is because none of the relevant Participants disposed of any of the Rights or ceased employment.

Accordingly, Subdivision 83A-C of the ITAA 1997 (and the rest of Division 83A of the ITAA 1997, to the extent that it relates to Subdivision 83A-C of the ITAA 1997) applies to the rights subject to the modifications contained in subsection 83A-5(4) of the IT(TP)A 1997.

Conclusion

In this case the Rights, as transitioned ESS interests, and Future Rights are subject to the new rules in Division 83A of the ITAA 1997 and therefore section 83A-210 of the ITAA 1997 would need to be considered.

A deduction for the purchase of shares to satisfy the obligation arising from the Rights and/or Future Rights granted is allowable in the year in which the money is paid to the Trustee, under section 8-1 of the ITAA 1997.

However, if the amount of money provided to the Trustee is used to purchase shares in excess of the ones required to satisfy the Rights and/or Future Rights granted under the Plan in a given income year, Section 83A-210 of the ITAA 1997 will apply and the excess payment will be deductible in the year of income when the relevant Rights and/or Future Rights are granted to the Participants.

Question 4

Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by the Company in respect of the:

(a) 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 Rights and/or Future Rights; or

(b) costs incurred by the Company in relation to the implementation and on-going administration of the Plan and the Trust?

Answer No.

Detailed reasoning

Provided that the scheme as implemented is materially identical to the scheme described in this ruling, it is considered that part IVA of the ITAA 1936 would not apply.

Question 5

Is the provision of Rights, Future Rights and/or Shares in satisfaction of those Rights or Future Rights to employees under the Plan a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer No.

Detailed reasoning

A 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 of a year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided.

No amount will be subject to FBT unless a fringe benefit is provided.

As far as is relevant in this case the term 'fringe benefit' is defined in subsection 136(1) of the FBTAA to mean benefits provided by an employer, an associate of the employer or an arranger with the employer, to employees, in respect of the employment of the employee.

Rights

The Rights were provided to Participants who were employees when they were granted.

Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes:

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 Rights are ESS interests acquired under an ESS and are subject to the provisions in Subdivision 83A-C of the ITAA 1997.

Therefore, the provision of those Rights is excluded from the definition of fringe benefit and consequently there is no amount subject to FBT.

Future Rights

The Future Rights are ESS interests acquired under an ESS.

Subdivision 83A-B of the ITAA 1997 provides the default mechanism to tax upfront (that is, on acquisition) any discount to the market value of ESS interests in shares or rights provided under an ESS. Under certain circumstances the time the discount is taxed may be deferred to a later time under Subdivision 83A-C.

Since the Future Rights will be acquired for no consideration then there will be a discount subject to either Subdivision 83A-B or 83A-C of the ITAA 1997.

Therefore, the provision of Future Rights is excluded from the definition of fringe benefit and consequently there is no amount subject to FBT.

Shares

In order for a benefit to be a 'fringe benefit' in accordance with the definition in subsection 136(1) of the FBTAA, the benefit must be provided to an employee or an associate of the employee in respect of the employment of the employee.

Thus in order for the Shares issued in respect of the Rights and/or Future Rights to be treated as fringe benefits they must be provided 'in respect of' the employee's employment.

Whilst the expression 'in respect of' has no fixed meaning, it has been considered by the courts in various statutory contexts on numerous occasions.

In J & G Knowles & Associates Pty Ltd v. FC of T (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22, the full Federal Court examined its meaning in relation to FBT and noted 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 Court also suggested that it would be useful to ask 'whether the benefit is a product or incident of the employment'.

In FC of T v. McArdle 89 ATC 4051; (1988) 19ATR 1901, an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The Court ruled 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 rights granted under an ESS are exercised, and shares are allocated under the scheme, it is considered that the benefit that arises comes as a consequence of the employee exercising the rights previously obtained under the scheme, and not in respect of employment.

Therefore, the benefit gained by an employee upon the exercise of Rights and/or Future Rights granted under the ESS does not give rise to a fringe benefit, as no benefit has been provided to the employee in respect of an employment relationship.

Question 6

Are the irretrievable cash contributions made by the Company to the Trustee to fund:

a) the subscription for, or acquisition on-market of, the Company's shares; or

b) the administration of the Trust,

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

Answer No.

Detailed reasoning

Subscription for, or acquisition on-market of, the Company's shares

As far as is relevant in this case, subsection 136(1) of the FBTAA defines the term 'fringe benefit', in relation to an employee, to include a condition that the benefit must be provided in respect of the employment of the employee and paragraph (ha) of that defined term excludes:

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).

An 'employee share trust' (EST) is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4).

Subsection 130-85(4) of the ITAA 1997 states that an EST for an ESS (having the meaning given by subsection 83A-10(2)) 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 ESS 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).

The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997.

The Rights and/or Future Rights are ESS interests acquired under an ESS.

Under the ESS the Company has established the Trust to acquire shares in the Company and to allocate those Shares to Trust Participants to satisfy the Rights and/or Future Rights acquired under the scheme. The beneficial interest in the Shares is also provided under the ESS.

Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

· the Trust acquires shares in the company; and

· the Trust ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those Shares, are provided under an ESS, as defined in subsection 83A-10(2), by allocating those Shares to the Trust Participants in accordance with the governing documents of the Plan.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require the Trustee to undertake incidental activities that are a function of managing the ESS and administering the Trust.

The Trust will satisfy the sole activities test where the activities of the Trustee of the Trust are limited to managing an employee share plan and the general administration of the trust.

The Commissioner considers merely incidental activities of managing an ESS and administering a trust include:

· the opening and operation of a bank account to facilitate the receipt and payment of money;

· the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee;

· the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the ESS;

· dealing with shares forfeited under an ESS including the sale of forfeited shares and using the proceeds of sale for the purposes of the ESS;

· the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares;

· the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and

· receiving and immediately distributing shares under a demerger.

Activities that the Commissioner considers will not satisfy the sole activities test include:

· any activities that are not a necessary function of managing an ESS or administering a trust; and

· any activities which result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares).

In this case, the Trust Deed defines the specific powers of the Trustee by reference to the Plan Rules. The Trust Fund is vested in the Trustee to be applied in accordance with the provisions of the Trust Deed and the Plan. Further, the only specifically identified beneficiaries of the Trust are the Trust Participants. Proposed minor amendments to the definition of 'Trust Participants' in the Trust Deed will reflect the new definition of 'employee share trust' contained in section 130-85(4) of the ITAA 1997.

The provisions of the Trust Deed effectively read down the general powers given to the Trustee so as to ensure that the Trustee can only use the contributions received exclusively for the acquisition of Shares for persons who fall within the meaning of 'Trust Participant' in accordance with the Plan. To this end, all other duties listed in the Trust Deed are consistent with and will therefore support the Trustee solely in relation to its dealing with the Shares to be acquired for the Participants.

Therefore the Trust is an EST as defined in subsection 130-85(4) of the ITAA 1997.

All of the requirements in paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA are satisfied.

Therefore the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of, the Company's shares are excluded from the definition of fringe benefit in subsection 136(1) of the FBTAA and consequently the employer will not be required to pay FBT in respect of those contributions.

The administration of the Trust

As far as is relevant in this case, a fringe benefit as defined in subsection 136(1) of the FBTAA must be a 'benefit' as that term is defined in the same subsection.

The term 'benefit' as defined in subsection 136(1) of the FBTAA:

includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

There is no benefit that arises to the Participants upon the Company making irretrievable cash contributions to the Trustee to fund the administration of the Trust.

Consequently the employer will not be required to pay FBT in respect of those contributions.