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Ruling

Subject: Contributions and Deductions

Question 1:

Will the irretrievable contributions made by the taxpayer to the Trustee of the taxpayer's Employee Share Plan Trust (the Trust), to fund the subscription for or acquisition on-market of the taxpayer's shares by the Trust, be an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

Question 2:

Will the taxpayer obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, for contributions made to the Trust for the payment of reasonable administrative expenses of the Trust?

Answer:

Yes.

Question 3:

Are irretrievable contributions made by the taxpayer to the Trustee of the Trust, to fund the subscription for or acquisition on-market of taxpayer's shares by the Trust to satisfy ESS interests, deductible to the taxpayer at a time determined by section 83A-210 of the ITAA 1997 where the contributions are made before the acquisition of the relevant ESS interests?

Answer:

Yes.

This ruling applies for the following periods:

30 June 2012

30 June 2013

30 June 2014

30 June 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The taxpayer is an Australian listed company.

The taxpayer has established and operates an employee share plan (the Plan) which is governed by the Plan Rules.

The taxpayer has established the Employee Share Plan Trust (the Trust) for the purposes of operating the Plan. The Trust is established by a trust deed (the Trust Deed).

The taxpayer has formed a tax consolidated group with each of its 100% owned Australian subsidiary companies (the Consolidated Group). As such, any contributions made to the Trust by a subsidiary member of the Consolidated Group will be treated as contributions made by the taxpayer itself for Australian income tax purposes.

All participants in the Plan are employed by various entities within the Consolidated Group.

The Trustee of the Trust is an independent party in the business of acting as trustee for company share plan trusts in return for arm's-length remuneration.

The Plan

The Plan Rules provide that the Plan has been established to:

· provide a long term incentive for Participants to remain in their employment in the long term;

· recognise the ability of Participants and their contribution over the long term to the performance and success of the taxpayer; and

· provide Participants with the opportunity to acquire an ownership interest in the taxpayer, in accordance with the Plan Rules.

The Plan Rules, the Trust Deed and advice from the applicant establish that the Plan operates as follows:

· a Participant may be offered an option or right for nil consideration (both an option and right are each referred to as a Plan Interest).

· a Plan Interest entitles a Participant to acquire one fully paid ordinary share in the taxpayer.

· a Plan Interest held by a Participant may be subject to performance criteria which must be satisfied during a performance period.

· a Plan Interest is automatically exercised for nil consideration once it vests in the Participant.

· a Plan Interest will be forfeited if the performance criteria are not satisfied during the performance period.

· the Trustee of the Trust will receive a contribution from the taxpayer on or before a Plan Interest being exercised to enable it to acquire a share in the taxpayer (either through subscription for a new share or through acquisition of a share on-market) which is then held in the Trust for the benefit of the Participant (a share held in the Trust is known as a Share).

· the taxpayer and members of the Consolidated Group are not permitted to recover funds contributed to the Trust.

A Participant cannot sell, transfer, mortgage, charge or otherwise dispose of, deal with, grant any interest in or encumber any interest in any Plan Interest (or Share held by the Trust for the benefit of the Participant) until they have vested in the Participant.

The applicant has advised that the Plan does not satisfy the definition of a non-discriminatory scheme under subsection 83A-35(6) of the ITAA 1997.

The applicant has also advised that the Trust satisfies the definition of an employee share trust under sub-section 130-85(4) of the ITAA 1997 as its sole activities are:

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

· providing ESS interests that are beneficial interests in the above shares or rights to employees or associates of employees of the company or its subsidiaries, under the relevant employee share scheme; and

· other activities that are merely incidental to the above, such as payment of dividends and account keeping.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Section 83A-20 and

Income Tax Assessment Act 1997 Section 83A-210.

Reasons for decision

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

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. 

Subsection 8-1(2) of the ITAA 1997 then states:

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.

Losses or outgoings

The Trust Deed provides that Shares and Trust Property are vested in the Trustee upon trust for the benefit of Participants as set out in the Trust Deed.

The Trust Deed provides that the taxpayer or any member of the Consolidated Group may from time to time contribute any amount of money to the Trustee to fund the acquisition of shares for the purposes of the Plan.

The Trust Deed provides that the Trustee must apply money contributed in accordance with the Trust Deed to acquire and hold shares in the taxpayer for the purposes of the Plan.

The Trust Deed provides that in the event excess Shares are disposed of then the proceeds must not be paid to or held for the benefit of the taxpayer or any member of the Consolidated Group.

The Trust Deed provides that in the event that Forfeited Shares are disposed of then the proceeds must not be paid to the taxpayer or any member of the Consolidated Group.

The Trust Deed provides that in the event that the Trust is terminated the balance of any capital or income remaining to which no Participant is entitled must not be paid to the taxpayer or any member of the Consolidated Group.

The Trust Deed provides that neither the taxpayer nor any members of the Consolidated Group is, may become or may otherwise hold any beneficial interest in the Trust.

The above clauses make it clear that contributions made to the Trust will be irretrievable and non-refundable to the taxpayer and therefore are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997.

Relevant nexus

The Plan Rules establish that the purpose of the taxpayer in establishing and making irretrievable contributions to the Trust is to provide benefits in the form of shares, provided certain conditions are satisfied, to certain Participants.

The contributions made by the taxpayer to the Trust for these purposes are part of the overall employee remuneration costs of the taxpayer.

Ultimately, the benefits provided to Participants are designed to drive continuing improvement, encourage employee retention and to align the rewards and interests of eligible employees with the longer term growth and success of the taxpayer.

Accordingly, a sufficient nexus exists between the outgoings (being the contributions made to the Trust) and the derivation of assessable income (Herald & Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113; Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295; W Nevill & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290; Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47; and Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344).

Capital or revenue?

The taxpayer will make recurring contributions from time to time to the Trust in order that the taxpayer's shares may be subscribed for or acquired by the Trustee of the Trust for the purposes of the Plan.

In Spotlight Stores Pty Ltd v Federal Commissioner of Taxation (2004) 55 ATR 745 and Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 58 ATR 210 (Pridecraft) it was determined that payments by an employer company to an employee share trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature.

This accords with the view expressed in ATO ID 2002/1074 that a company will be entitled to a deduction for irretrievable contributions made to the trustee of its employee share scheme under section 8-1 of the ITAA 1997.

In addition, nothing in the facts suggests that contributions made by the taxpayer to the Trust are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1936 or the ITAA 1997.

Question 2:

Detailed reasoning

As discussed in question 1 above, section 8-1 of the ITAA 1997 provides that 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.

The taxpayer will incur costs associated with the services provided by the Trustee of the Trust. These costs are considered to be part of the ordinary recurring cost to the taxpayer of remunerating its employees and are therefore deductible under section 8-1 of the ITAA 1997. This is consistent with the ATO view expressed in ATO ID 2002/961.

However, it is noted that, unlike the irretrievable contributions made to the Trust to acquire shares, these payments do not form part of the corpus of the Trust and would be included in the assessable income of the trust.

Question 3:

Detailed reasoning

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.

Arrangement

The establishment of the Plan, the Plan Rules and the Trust, constitutes an arrangement in these circumstances for the purposes of paragraph 83A-210(a)(i) of the ITAA 1997 and contributions to the Trustee necessarily allow the scheme to proceed.

Acquiring an ESS interest '…directly or indirectly...'

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

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

Plan Interests granted under the Plan

Under the Plan, a participant will acquire an ESS interest under an employee share scheme because the conditions of section 83A-10 of the ITAA 1997 are satisfied.

The deductibility of money provided to employee share trusts is considered in ATO ID 2010/103. The facts described in ATO ID 2010/103 are comparable to the Plan. The reasoning in ATO ID 2010/103 is therefore relevant to consideration of the Plan as explained immediately below.

A Plan Interest granted to an employee under the Plan will be an ESS interest as each Plan Interest represents a right to acquire a beneficial interest in a share in a company. The ESS interest will also be granted under an employee share scheme as they are granted in relation to the employee's employment. A share acquired by the Trustee to satisfy a right to acquire a share, granted under the employee share scheme to an employee in relation to the employee's employment, is itself provided under the same scheme.

The granting of a Plan Interest, a contribution to the Trustee by the taxpayer under the arrangement, acquisition and holding of a share by the Trustee and the allocation of shares to the participating employees are all interrelated components of the Plan. All the components of the scheme must be carried out so that the scheme can operate as intended. As one of those components, a contribution to the Trustee necessarily allows the scheme to proceed.

Accordingly, a contribution to the Trustee to acquire the taxpayer's shares is considered to be for the purpose of enabling the participating employees, indirectly as part of the Plan, to acquire ESS interests.

Timing - acquisition time

Contribution made in an income year prior to the income year that Plan Interests are acquired

The acquisition time for the purposes of paragraph 83A-210(b) of the ITAA 1997 will occur when Plan Interests (that is, ESS interests) are granted to participants. Accordingly, when the taxpayer makes a contribution to the Trustee in an income year before the income year in which the acquisition time for the ESS interests occurs, the timing of the deduction allowable under section 8-1 of the ITAA 1997 will be determined by section 83A-210 of the ITAA 1997 as being the later income year in which the ESS interests are granted (acquired).

It should be noted that if any amount of money is provided to the Trustee to purchase excess shares intended to meet a future obligation arising from a future grant of a Plan Interests under the Plan, the excess payment will occur before the employees acquire the relevant Plan Interests (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will also apply in that case and the excess payment will only be deductible to the taxpayer in the later year of income when these ESS interests are subsequently granted to (acquired by) participants.

Contribution made after the income year in which the Plan Interests are acquired

Section 83A-210 of the ITAA 1997 will not apply if the taxpayer makes contributions in an income year that is later than the income year in which Plan Interests are granted. In this case, the contribution will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is properly incurred (i.e. in the later income year).