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Ruling

Subject: Employee share plan

Question 1

Is the provision of options and shares to employees pursuant to the SEOP subject to fringe benefits tax?

Answer

No

Question 2

Are irretrievable contributions of money to the Trustee of an Employee Share Trust (EST) to fund the acquisition of shares subject to fringe benefits tax?

Answer

No.

This ruling applies for the following periods:

Year ending 31 March 2012

Year ending 31 March 2013

Year ending 31 March 2014

Year ending 31 March 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The scheme the subject of this Ruling has been ascertained from the following documents:

§ Application for Private Ruling

§ The SEOP Rules

§ The Trust Deed of the EST

Relevant legislative provisions

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1936

Section 83A-10 of the Income Tax Assessment Act 1997

Section 83A-20 of the Income Tax Assessment Act 1997

Section 83A-105 of the Income Tax Assessment Act 1997

Section 130-85 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

A fringe benefit is defined in subsection 136(1) of the FBTAA as follows:

"fringe benefit", in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the "arranger") other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, of the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:…

Paragraphs (f) to (r) of the definition of fringe benefit contain a number of exclusions from this definition. Paragraph (h) of the definition of a fringe benefit contained in subsection 136(1) of the FBTAA specifically excludes from the definition of a 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;

An ESS interest in a company is 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 (subsection 83A-10(1) of the ITAA 1997). An employee share scheme is a scheme under which ESS interests in the company are provided to employees (or associates of employees) of the company or subsidiaries of the company, in relation to the employee's employment. (Subsection 83A-10(2) of the ITAA 1997)

The Commissioner accepts that the scheme described in the facts is an employee share scheme under which relevant ESS interests (being beneficial interests in rights to acquire beneficial interests in shares) are acquired by employees (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to the employment of those employees. Therefore, the provision of those rights will not be subject to fringe benefits tax because they are specifically excluded from the definition of fringe benefit.

However shares granted to employees under the SEOP to satisfy the rights acquired on acceptance of participation in the SEOP are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 apply (see subsection 83A-20(2) of the ITAA 1997 and paragraph 83A-105(1)(a) of the ITAA 1997). Therefore the providing of these shares will not be specifically excluded from the definition of fringe benefits under paragraph (h) of the definition in subsection 136(1) of the FBTAA.

As stated above, a fringe benefit will only arise under subsection 136(1) of the FBTAA where the benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee.

Under the SEOP, the benefit (beneficial interest in shares) that arises upon the end of the vesting period is considered to be provided as a result of the employee exercising rights (previously obtained upon acceptance to participate in the SEOP).

The situation mentioned above is considered to be analogous to that stated in ATO Interpretative Decision ATO ID 2003/316 which refers to the case of FC of T v. McArdle 89 ATC 4051;(1988) 19 ATR 1901. In that case, an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The 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.

In the present circumstances, when an employee accepts to participate in the SEOP, he or she obtains a right to acquire a beneficial interest in a share in the Company and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received, that is, beneficial interest in shares, would be in respect of the exercise of the right, and not in respect of employment.

Therefore, the benefit that arises to an employee after the vesting period under the SEOP, being the beneficial interest in a share, does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of' the employment relationship.

Question 2

Subsection 136(1) of the FBTAA defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, and paragraph (ha) of that definition 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' 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:

Meaning of employee share trust

130-85(4) an employee share trust, for an employee share scheme, 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 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).

The right to acquire a beneficial interest in an Employer Share is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997.

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

The scheme is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which rights to acquire beneficial interests in shares in the Company are provided to employees in relation to the employee's employment.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require that the Trustee undertake incidental activities that are a function of administering the EST. The incidental activities are covered by paragraph 130-85(4)(c) of ITAA 1997.

The EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such, 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.

Accordingly, the Employer 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 shares in accordance with the EST Deed.