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Ruling
Subject: Option Share Trust
Questions
1. Will the contributions of monies by the contracting entity to the trustee pursuant to the trust deed in respect of arm's length contractors of the contracting entity constitute an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes.
2. Will the loans of monies by the contracting entity to the trustee pursuant to the trust deed constitute an income tax deduction under section 8-1 of the ITAA 1997?
No.
3. Will the payment of administration fees by the contracting entity to the administrator of the plan be deductible under section 8-1 of the ITAA 1997?
Yes.
4. Will the operating costs associated with the administration of the plan incurred by the contracting entity be deductible under section 8-1 of the ITAA 1997?
Yes.
5. Will the general anti-avoidance provisions under Part IVA of the Income Tax assessment Act 1936 (ITAA 1936) apply to the scheme described?
No.
Relevant facts and circumstances
The contracting entity intends to establish a plan for the purpose of providing a long term equity incentive structure to deliver equity based benefits to its employees/contractors.
Assumptions
The contractor is not an 'employee' of the contracting entity within the common law meaning of that term.
For the purposes of Part 2-42 of the ITAA 1997, the contractor receives payments for the rendering of personal services or for the production of a result from the provision of personal services.
For the purposes of Part 2-42 of the ITAA 1997, the contractor and the contracting entity derive their personal services income in the course of carrying on a personal services business.
For the purposes of section 21A of the ITAA 1936, the contractor is carrying on a business for the purpose of gaining or producing assessable income.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 21A
Income Tax Assessment Act 1936 Part IVA
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Subsection 8-1(1)
Income Tax Assessment Act 1997 Subsection 8-1(2)
Income Tax Assessment Act 1997 Part 2-42
Reasons for decision
1. Will the contributions of monies by the contracting entity to the trust deed in respect of arm's length contractors of the contracting entity constitute an income tax deduction under section 8-1 of the ITAA 1997?
Yes.
Section 8-1 of the 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.
The contributions of monies by the contracting entity to the trustee in respect of arm's length contractors with the contracting entity will be linked to the contracting entity's contract with the arm's length contractors and their performance. The contributions represent a cost or outgoing to or in connection with the operation of the plan, and are relevant to the production of the assessable income of the contracting entity.
The contributions are therefore incurred in gaining or producing assessable income and are deductible under section 8-1 of the ITAA 1997.
2. Will the loans of monies by the contracting entity to the trustee pursuant to the trust deed constitute an income tax deduction under section 8-1 of the ITAA 1997?
No.
A loan is not a loss or outgoing for the purposes of section 8-1 of the ITAA 1997.
3. Will the payment of administration fees by the contracting entity to the administrator of the plan be deductible under section 8-1 of the ITAA 1997?
Yes.
Pursuant to the plan administration agreement, the administrator has agreed to provide certain administration services to the trustee and the contracting entity has agreed to pay administration fees for these services.
The administration fees payable by the contracting entity under the plan agreement for the provision of administration services represent a cost or outgoing to or in connection with the operation of the plan. Accordingly they are deductible under section 8-1 of the ITAA 1997 in the year that they are incurred.
4. Will the operating costs associated with the administration of the share plan incurred by the contracting entity be deductible under section 8-1 of the ITAA 1997?
Yes.
The contracting entity incurs costs operating the plan. These costs include general administration costs such as accounting fees, bank charges, interest fees, preparation and lodgement of tax returns, rental of office space, office furniture and machinery and computer leases and other ongoing administrative expenses necessarily incurred in running the plan.
The operating costs associated with the administration of the plan represent a cost or outgoing to or in connection with the operation of the plan. Accordingly they are deductible under section 8-1 of the ITAA 1997 in the year that they are incurred.
5. Will the general anti-avoidance provisions under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the scheme described?
No.
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 in respect of the contracting entity.