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Ruling

Subject: Provision of performance rights, options or shares to an employee of a company or one of its wholly owned subsidiary companies constitute a fringe benefit

Question 1

Does the provision of performance rights, options or shares to an employee of Company A or one of its wholly owned subsidiary companies constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Advice/Answers

No

Question 2

Will the irretrievable cash contributions made by Company A or one of its wholly owned subsidiary companies to the Trustee of the Trust, to fund the subscription for or acquisition on market of Company A shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Advice/Answers

No

Question 3

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company A or one of its wholly owned subsidiary companies by the amount of tax benefit gained from irretrievable cash contributions made by Company A or one of its wholly owned subsidiary companies to the trustee of the trust, to fund the subscription for or acquisition on-market of Company A shares.

Advice/Answers

No

This ruling applies for the following period

Fringe benefits Tax

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

Year ended 31 March 2016

The scheme commenced on

1 July 2011

Relevant facts

The following documents form part of the relevant facts:

· Application for Private Ruling.

· Incentive Plan Rules (Rules).

· Employee Share Plan Trust Deed and Deed of Amendment of Employee Share Plan Trust Deed (together referred to be below as the Trust Deed).

Company A is the head company of a tax consolidated group, comprising a number of FBT employers.

Employee share plans have been established by Company A to allow employees to share in the ownership of the company and to promote its long term success as a goal shared by all employees.

Company A is offering an Incentive Plan (Plan) comprised of both options (Options) and performance rights (Rights) which provide eligible executives with an opportunity to acquire an ownership interest or exposure to an ownership interest in the company.

Operation of the Plan

Company A may, at the discretion of the board, offer or issue Options or Rights which are rights to be issued, transferred or allocated a share upon the satisfaction of specified vesting conditions.

Certain clauses of the Rules require that any offer and corresponding acceptance must be made in writing to the employee and Company A respectively prior to the offer closing date stipulating the key terms and conditions of the offer.

Further, the awards held by a Participant (as defined in the Trust Deed) will vest in and become exercisable by that Participant upon the satisfaction of any vesting conditions specified in the offer or the Rules.

Options also require the payment of an exercise price; rights have a nil exercise price. The Options or Rights are Restricted Awards until they are exercised or expire and an offer may specify a restriction period for shares issued, transferred or allocated on the exercise of the Options or Rights.

Operation of the EST

The applicant has noted the following commercial benefits of using an EST:

Greater flexibility for Company A to accommodate the long term incentive arrangements both now and into the future as the group continues to expand operations and therefore employee numbers.

Capital management flexibility for Company A, in that the EST can use the contributions made by Company A either to acquire shares in Company A on market, or alternatively to subscribe for new shares in Company A.

Providing an arm's-length vehicle through which shares in Company A can be acquired and held in the company on behalf of the relevant employee. This assists Company A to satisfy corporate law requirements relating to a company dealing in their own shares.

The EST has been established with the sole purpose to subscribe, acquire, allocate, hold and deliver shares under the Plan for the benefit of eligible UXC employees, as outlined in a clause of the Trust Deed.

As per clause another clause of the Trust Deed, Company A may direct the Trustee to purchase shares to be held on behalf of a Participant, or subscribe for shares in Company A.

How the EST will facilitate the provision of Options and Rights under the Plan is summarised as follows:

Step 1 - Company A grants an award of Options or Rights to eligible employees.

Step 2 - Company A will, following validation that the vesting criteria have been satisfied:

contribute the required funds to the EST to enable the EST to either purchase shares on-market, or subscribe for shares, at market value, in Company A, and

send a written notice to the Trustee giving directions as to how shares are to be acquired (ie on-market or new subscription).

Step 3 - The Trustee will then use the cash and act upon the written instructions to acquire the shares. Where the Trustee subscribes for new shares, Company A will receive cash consideration equal to the market value of the shares. Where the Trustee acquires shares on-market, the Trustee will disperse the funds for the shares acquired to the vendor shareholder, such that Company A will not receive any cash.

Step 4 - On exercise of the Option or vesting date of the Rights or Shares, the eligible employees contribute the exercise price, if any to Company A.

Step 5 - The shares acquired will be allocated to the Participant concerned. The shares can continue to be held in the name of the Trustee albeit that the Participant will have a beneficial interest in the shares with rights to vote and receive dividends, etc. At the same time restrictions can be imposed on sale of the shares through the requirements of the participant to provide Company A with a withdrawal notice.

Further, the applicant has stated that it is not intended that the Trustee will buy shares in advance of exercise however clause 5.3 of schedule 1 and 2 of the Rules provide that shares may be acquired by the Trustee on behalf of Participants by purchasing shares on the ASX or by the company issuing shares to the Trustee.

Further, the company will issue or cause to be transferred to the Trustee the number of shares required as soon as practical after the exercise of the Option or Right.

Trust Deed

Additional key features of the Trust Deed relevant to the current Plan are:

A clause of the Trust Deed provides that Company A may direct the Trustee to acquire, hold and allocate shares for Participants.

Under another clause of the Trust Deed, Company A may provide the EST with funds for the purpose of acquiring shares in Company A in accordance with another clause of the EST Deed.

Another clause of the Trust Deed provides that funds provided to the EST pursuant to another clause of the Trust Deed will not be refundable to Company A, a Group Company or a Participant.

Another clause of the Trust Deed provides that shares allocated by the Trustee for a Participant will be held by the Trustee on behalf of the relevant Participant, who is the beneficial owner of the shares and all interests and benefits are strictly personal to that Participant.

As per a subclause of the Trust Deed, all contributions by Company A to the EST for the purpose of acquiring Company A shares constitute accretions to the corpus of the EST.

A clause of the Trust Deed provides a Sole Purpose Test limiting the objectives of trust to acquiring shares on behalf of Eligible Employees under the Company A Employee Share Plans as interpreted in ATO ID 2007/179.

No consideration is paid up front for the options or performance rights issued under the Incentive Plan. Consequently, the discount on the options or rights is deferred until they are exercised.

There is a risk of forfeiture due to vesting condition requirements before the options or rights are exercisable (minimum three year employment period).

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 - Section 66

Fringe Benefits Tax Assessment Act 1986 - Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 - Paragraph 136(1)(h)

Fringe Benefits Tax Assessment Act 1986 - Paragraph 136(1)(ha)

Fringe Benefits Tax Assessment Act 1986 - Paragraph 136(1)(hb)

Fringe Benefits Tax Assessment Act 1986 - Section 67

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

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

Income Tax Assessment Act 1997 - Section 83A-5

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

Income Tax Assessment Act 1997 - Subsection 83A -20(2)

Income Tax Assessment Act 1997 - Subsection 83A -102

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

Income Tax Assessment Act 1997 - Part IVA

Reasons for decision

Issue 1

Question 1

Does the provision of performance rights, options or shares to an employee of Company A or one of its wholly owned subsidiary companies constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Options issued on or after 1 July 2009

An employer's 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 for the relevant 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.

In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee.

However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

Paragraph (h) of the definition of 'fringe benefit' 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.

Subsection 83A - 10(1) defines an ESS interest as:

83A - 10(1) An ESS interest, in a company, is a beneficial interest in:

· a share in the company

· a right to acquire a beneficial interest in a share in the company

Subsection 83A - 10(2) defines an employee share scheme as:

83A - 10(2) An employee share scheme is a scheme under which ESS interests in a company are provided to employees, or associates of employees, including past or prospective employees of:

· the company, or

· subsidiaries of the company

· in relation to the employees employment.

It is accepted that the plans described in this private ruling comprise an employee share scheme and incorporate the use of an EST that is an employee share trust within the meaning of subsection 130-85(4) of the ITAA 1997.

Accordingly, the acquisition of ESS interests pursuant to the plans will not be subject to fringe benefits tax on the basis that they are part of an employee share scheme and thereby excluded from the definition of 'fringe benefit' pursuant to subsection 136(1) of the FBTAA.

Transitional Provisions for options and rights issued prior to 1 July 2009

Options and rights that satisfy subsection 83A-5(1) or subsection 83A-5(2), of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997), are excluded from being a fringe benefit under paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA as they are an acquisition of an ESS interest under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies.

Subsection 83-A5(1) and subsection 83A-5(2) of the IT(TP)A 1997 is satisfied for rights or options that were acquired before 1 July 2009 where:

They are qualifying rights or options under the old rules, and

The employee has not elected to be taxed up front under the old rules (section 139E election was not made), and

A cessation time has not happened to the rights or options before 1 July 2009 under the old rules.

The provision of shares

Subsection 83A - 20(2) of the ITAA 1997 provides:

83A-20(2) However, this subdivision does not apply if the ESS interest is a beneficial interest in a share that you acquire as a result of exercising a right, if you acquired a beneficial interest in the right under an employee share scheme.

Essentially, this means that Company A shares granted under the plan, to satisfy rights or options exercised, are not ESS interests acquired under an employee share scheme. Consequently, the acquisition of the shares (as a result of exercising the options and rights) it is not excluded from being a fringe benefit by virtue of the definition of fringe benefit in subsection 136(1) of the FBTAA.

However, for a benefit to be a fringe benefit, it must be provided 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. The court at ATC 4158 said:

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, casual connection or relationship between the benefit and the employment.

The situation is similar to that which existed in FC of T 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. The full Federal Court 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 accepts to participate in the plan, they obtain a right to acquire a beneficial interest in a share in Company A 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.

Therefore, the benefit that arises to an employee upon the exercise of an option or right under the incentive plan will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee.

Question 2

Will the irretrievable cash contributions made by Company A or one of its wholly owned subsidiary companies to the Trustee of the Trust, to fund the subscription for or acquisition on market of Company A shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit 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);

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) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides that an EST for an employee share scheme (having the meaning given by subsection 83A -10(2) of the ITAA 1997) is a trust whose sole activities are:

· obtaining shares or rights in a company; and

· 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:

· the company; or

· a subsidiary of the company; and

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

A payment of money by Company A to the EST is therefore not subject to FBT provided that the sole activities of the trust are obtaining shares or rights to acquire shares in Company A.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85)4)(b) of the ITAA 1997 will also require that the trustee undertake incidental activities that are a function of managing the option plans and administering the EST.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, ATO ID 2007/179 sets out the Commissioners views on when an employee share trust satisfies the sole activities test. In particular, the Commissioner considers that activities that are a necessary function of managing an employee share scheme and administering a trust will satisfy the sole activities test. Such activities include:

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

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

· 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 purpose 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.

· 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.

Relevant subclauses of the Trust Deed provide a sole purpose test in respect of the trust deed:

Based on the sole purpose test, it is accepted that the EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997. The functions of the trustee of the EST (acquiring and allocating ESS interests) are limited to those activities mentioned in paragraphs 130-85(4)(a) and (b) of the ITAA 1997, or are merely incidental activities as referred to in paragraph 130-85(4)(c) of the ITAA 1997.

As paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the EST from being a fringe benefit, Company A will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the EST to fund the acquisition of Company A shares in accordance with the Trust Deed.

Former Division 13A of the ITAA 1936

Contributions to the EST in relation to options issued prior to 1 July 2009 to which the former Division 13A of the ITAA 1936 applies should also not be subject to FBT on the basis that the sole activities of the EST are "obtaining shares or rights to acquire shares" for employees or their associates.

The analysis above regarding the sole activities test is equally relevant to the application of the former provision, paragraph 136(hb) of the FBTAA.

Former paragraph 136(1)(hb) excluded from the definition of a "fringe benefit' the following:

a benefit constituted by the acquisition by a trust of money or other property where the sole activities of the trust are obtaining shares, or rights to acquire shares, in a company or a holding company, and providing those shares or rights:

(i) to employees, or associates of employees, of the first mentioned company

(ii) to persons who are engaged in foreign service (within the meaning of section 139GBA of the ITAA 1936) for the first mentioned company, or associates of those persons

To the extent it is determined that the former paragraph 136(1)(hb) of the FBTAA should be applied in respect of contributions in relation to rights and options issued to which the former Division 13A of the ITAA 1936 still applies, it is accepted that the EST will satisfy the requirements in this provision such that these payments would also not be subject to FBT.

Question 3

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company A or one of its wholly owned subsidiary companies by the amount of tax benefit gained from irretrievable cash contributions made by Company A or one of its wholly owned subsidiary companies to the trustee of the trust, to fund the subscription for or acquisition on-market of Company A shares.

Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA of the ITAA 1936, in that the section requires the identification of an arrangement, a tax benefit obtained by the employer that was the sole or dominant purpose for a person entering into the arrangement and is activated by the making of a determination by the Commissioner.

PS LA 2005/24 provides guidance on the application of section 67 of the FBTAA. Paragraphs 145-148 state:

145. 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.

146. 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 an other employer(s) to obtain a tax benefit.

147. 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 differs from paragraph 177D(b) 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.

148 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 and or could reasonably be expected to be included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

The Commissioner will only make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement.

In Miscellaneous Taxation Ruling MT 2021 under the heading "Appendix, Question 18" on the application of section 67, the Commissioner states:

…As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement…

ATO Practice Statement - Law Administration PS LA 2005/24 provides instructions and practical guidance to tax officers on the application of Part IVA and other General Anti Avoidance rules. Paragraph 151 of PS LA 2005/24 states:

151. the approach outlined in this practice statement (refer to paragraph 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

Under the Company A employee incentive plans, the benefits provided to the trustee by way of irretrievable cash contributions to the EST and to participants by way of the provision of options, rights and shares under the Plans will not be subject to FBT. Consequently, no amount could reasonably be expected to be included in the aggregate fringe benefits amount, attributable to the scheme, if the arrangement had not been entered into. Therefore, the fringe benefits tax is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of Company A or its subsidiaries in relation to a tax benefit obtained under the Plans.