Edited version of private ruling

Authorisation Number: 1011877609301

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Ruling

Subject: Employee Share Scheme

Question 1

Are contributions by the company to the employee share plan trust deductible by the company?

Yes.

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that:

8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

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

(d) a provision of this Act prevents you from deducting it.

Ongoing and regular contributions of monies to the trustee by the company will be made as part of providing a long term equity incentive structure to deliver equity based benefits to employees. The advantage sought is to provide employees with a wealth creation mechanism linked to their ongoing work and performance with the company.

It is therefore considered that the contributions are incurred in gaining or producing assessable income and deductible under section 8-1 of the ITAA 1997.

Question 2

If so, when are contributions deductible?

At the time the employee acquires the Employee Share Scheme (ESS) interest.

Section 83A-210 of the ITAA 1997 - Timing of general deduction

83A- 210 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, direct 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

* denotes a term defined in the dictionary, starting at Division 995 of the ITAA 1997.

Question 3

Is the company subject to fringe benefits tax in respect of general contributions by the company to the employee share plan trust?

No.

Employee share trust

Subsection 130-85(4) of the ITAA 1997 defines an employee share trust, for an *employee share scheme, as a trust whose sole activities are:

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

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

(i) the company; or

(ii) a *subsidiary of the company: and

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

* denotes a term defined in the dictionary, starting at Division 995 of the ITAA 1997.

ATO Interpretive Decision ATO ID 2010/108: Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities discusses activities that are merely incidental to the operation of an employee share trust. For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental include:

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

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

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

· 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 result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental according to ATOID 2010/108.

The plan rules define financial assistance to include a loan or financial accommodation of any kind, a gift or grant of money or property, a deferral of payment, a waiver of a debt or other liability, a guarantee or indemnity or any other form of financial assistance.

By virtue of the trustee's ability to provide financial assistance under the plan in accordance with rules 4.7 and 4.8 of the plan, the trust's activities cannot be described as solely:

a. to obtain shares; and

b. to ensure that ESS interests that are beneficial interests in those shares are provided under the employee share scheme to employees; and

c. to undertake other activities which are merely incidental to those set out in (a) and (b) above.

The trust is therefore not an employee share trust in accordance with subsection 130-85(4) of the ITAA 1997.

Fringe benefits tax

A 'fringe benefit' is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

The Full Federal Court in Commissioner of Taxation v. Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16 (Indooroopilly Case) held that, for the purposes of determining whether there was a 'fringe benefit', it was necessary to identify, at the time a benefit was provided, a particular employee in respect of whose employment the benefit was provided.

Therefore, it is considered that the general contributions provided by the company to the trustee are not a 'fringe benefit'.

Question 4

Is the company subject to fringe benefits tax in respect of specific contributions by the company to the employee share plan trust?

No.

Employee share trust

Subsection 130-85(4) of the ITAA 1997 defines an employee share trust, for an *employee share scheme, as a trust whose sole activities are:

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

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

(i) the company; or

(ii) a *subsidiary of the company; and

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

* denotes a term defined in the dictionary, starting at Division 995 of the ITAA 1997.

ATO Interpretive Decision ATO ID 2010/108: Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities discusses activities that are merely incidental to the operation of an employee share trust. For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental include:

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

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

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

· 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 result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental according to ATOID 2010/108.

The plan rules define financial assistance to include a loan or financial accommodation of any kind, a gift or grant of money or property, a deferral of payment, a waiver of a debt or other liability, a guarantee or indemnity or any other form of financial assistance.

By virtue of the trustee's ability to provide financial assistance under the plan in accordance with rules X and Y of the plan, the trust's activities cannot be described as solely:

(a) to obtain shares; and

(b) to ensure that ESS interests that are beneficial interests in those shares are provided under the employee share scheme to employees; and

(c) to undertake other activities which are merely incidental to those set out in (a) and (b) above.

The trust is therefore not an employee share trust in accordance with subsection 130-85(4) of the ITAA 1997.

Fringe benefits tax

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

The Full Federal Court in the Indooroopilly Case held that, for the purposes of determining whether there was a 'fringe benefit', it was necessary to identify, at the time a benefit was provided, a particular employee in respect of whose employment the benefit was provided.

In this situation, where a specific contribution under a salary or bonus sacrifice is made, each of the employees is known as there would be an instruction given as to the accounts to which the contributions is to go. Therefore, the factual circumstances in which these contributions are made can be distinguished from the circumstances that existed in the Indooroopilly Case. A 'fringe benefit' would occur if none of the exclusions listed under the definition applied.

As the contribution is '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 contribution is exempt from Fringe Benefits Tax under the definition of a 'fringe benefit' at subsection 136(1) of the FBTAA.

Therefore, it is considered that the specific contributions provided by the Company to the Trustee for the benefit of an employee are not a 'fringe benefit'.

Question 5

Is the company subject to fringe benefits tax in respect of distributions of shares from the employee share plan trust to employees?

No.

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

Subsection 136(1) of the FBTAA excludes from the definition of 'fringe benefit' 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.

Question 6

Is the company subject to fringe benefits tax in respect of gains or losses on shares acquired by employees under the employee share plan and disposed of by them?

No.

There is no nexus between any action of the company and any benefit that an employee may receive once they dispose of their shares.

Question 7

Is the company subject to fringe benefits tax in respect of the trustee of the plan not charging interest to employees on shares acquired by them from the trustee?

No.

Section 19 of the FBTAA allows a reduction in the taxable value of a loan fringe benefit through the operation of the otherwise deductible rule. Section 19 applies to reduce the taxable value of a loan fringe benefit to the extent to which interest that would otherwise have been payable on the loan would have been allowable as an income tax deduction to the employee.

Question 8

Is the company subject to fringe benefits tax in respect of balances of accounts paid to employees when employees leave the employee share plan through ceasing employment with the company (e.g. through death, retirement or disability)?

No.

The distribution of surplus amounts from a ceasing employee's member account is not a fringe benefit. The benefit that arises to the employee from receiving the balance of account has not been provided to the employee in respect of their employment relationship, rather the proceeds have been provided as a result of an arrangement between the trustee and the ceasing employee.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 130-85

Fringe Benefits Tax Assessment Act 1986 Section 19

Fringe Benefits Tax Assessment Act 1986 Section 136

Relevant facts

The company proposes to co-operate with its employees in fostering their own employee ownership share plan. The share trust will be established by deed and by and for the employees. The company is not a party to the employee share ownership plan trust deed and will have no power to direct the trustee. The trustee in exercising its duties, discretions or powers under this trust deed or under the employee share ownership plan rules is not subject to direction by the company, notwithstanding that the company may subsequently agree to become a party to and be bound in part or whole by plan rules made by the trustee.