Edited version of your written advice

Authorisation Number: 1051281103674

Date of advice: 10 October 2017

Ruling

Subject: Employee Share Plan

Question 1

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (the ITAA 1997), in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition on-market of the Company shares by the Company Employee Incentive Trust (the Trust)?

Answer

Yes.

Question 2

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by the Company in relation to the on-going administration of the Trust?

Answer

Yes.

Question 3

Will irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of the Company shares by the Trust, be deductible to the Company at a time determined by section 83A-210 of the ITAA 1997?

Answer

Yes.

Question 4

If the Trust satisfies its obligation under the Plans by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under section 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (“CGT”) event under Division 104 of the ITAA 1997?

Answer

No.

Question 5

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (the ITAA 1936) applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition on-market of the Company shares by the Trust?

Answer

No.

Question 6

Will the provision of options, rights or shares by the Company to its employees under the Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (the FBTAA)?

Answer

No.

Question 7

Will the irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of the Company shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA)?

Answer

No.

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to the Company by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of the Company shares?

Answer

No.

This ruling applies for the following periods:

income tax years 1 July 20xx – 30 June 20xx, and

fringe benefits tax years 1 April 20xx – 31 March 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1. The Company is listed on the Australian Securities Exchange (ASX). It is head entity of a Tax Consolidated Group.

2. The Company has established a remuneration strategy that supports and drives the achievement of the Company business strategy. As such, it has various incentive plans which provide its employees with the opportunity to participate in equity ownership. The incentive programs are the LTI Plan, the $1000 Plan and the Salary Sacrifice Plan, collectively referred to as the Plans.

3. Under the Plans, eligible employees (Participants) are granted Rights, and the opportunity to receive or acquire the Company shares subject to certain conditions as specified in the Plan rules.

4. The Plans operates as follows:

● The Company established the Trust to facilitate the acquisition, holding of, and allocation of shares to Participants.

● The Company makes irretrievable cash contributions to the Trustee to enable the Trustee to acquire the Company shares to satisfy the Rights, Options or Shares.

● The Rights are offered by the Company to Participants. When the Rights vest to a Participant, shares are released by the Trustee and allocated to the Participants.

● Once Rights vest and shares are transferred to the Participants, the Participants are entitled to dispose of their shares (subject to complying with the Company’s policy) according to their own wishes.

5. The Company is not a beneficiary of the Trust and it has no interest in the shares held by the Trustee.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1936 Part IVA

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1) ‘fringe benefit’

Reasons for decision

All legislative references are to the ITAA 1997 unless stated otherwise.

Questions 1 to 5 – application of the single entity rule in section 701-1 of the ITAA 1997

The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 of the ITAA 1997 the subsidiary members of a consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period they are members of the consolidated group with the head company of the group being the only entity recognised for income tax purposes.

The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90. As a consequence, the actions and transactions of the subsidiary members of the entity’s tax consolidated group are treated for income tax purposes as having been undertaken by the entity as the Australian head company of the entity’s tax consolidated group.

Questions 6 to 8

The SER in section 701-1 has no application to the FBTAA. Accordingly the Commissioner has provided a ruling to each employer entity in relation to questions 6 to 8.

Question 1

The irretrievable cash contributions to the Trustee are employee remuneration costs, directly related to enhancing the profitability of the Company. They are not business outgoings of capital or of a capital nature. Therefore, the Company is entitled to deduct them under section 8-1.

Questions 2

The cost incurred by the Company in relation to the implementation and on-going administration of the Trust is deductible under section 8-1. The costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses.

Question 3

The irretrievable cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of the Company shares by the Trust, may be deductible to the Company at the time determined under section 83A-210 if the contributions are made before the acquisition of the relevant ESS interest.

Question 4

If the Trust satisfies its obligations under the Plans by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under either section 6-5 or 20-20 or trigger a CGT event under Division 104.

Question 5

Part IVA is a general anti-avoidance provision. It gives the Commissioner the discretion to cancel a tax benefit that has been obtained, or would but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

Having regard to the relevant circumstances of the present case, it cannot be concluded that the scheme was entered into for the dominant purpose of enabling the Company to obtain a tax benefit. Therefore, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company for the irretrievable cash contributions made to the Trustee.

Question 6

The provision of options, rights or shares by the Company to its employees under the Plans will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

When an employee of the Company participates in one of the Plans, they obtain a Right/option (being a right/option to acquire a beneficial interest in a share in the Company) that constitutes an ESS interest. When this Right/option is subsequently exercised, any benefit received would be in respect of the exercise of the right/option, and not in respect of employment. This conclusion is consistent with ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme.

Accordingly, the benefit gained by an employee upon the exercise of a vested right or option under one of the Plans (being the provision of a share in the Company) will not give rise to a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA because a benefit has not been provided ‘in respect of’ the employee’s employment relationship.

Question 7

The irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of the Company shares will not be treated as a fringe benefit within the meaning of section 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);

In order to establish whether this exception applies, it is necessary to consider whether the Trust is an ‘employee share trust’ as defined.

Subsection 995-1(1) states that the expression an ‘employee share trust’ has the same meaning given by subsection 130-85(4).

Subsection 130-85(4), in turn, states:

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 Rights or Shares granted are an ‘ESS interest’ and the Company Plans constitutes an ‘employee share scheme’ for the purposes of section 83A-10.

Based on the information provided and the activities undertaken by the Trustee, the Trust will meet the definition of an ‘employee share trust’ under subsection 130-85(4).

Accordingly, contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of, the Company shares, will not constitute a fringe benefit by virtue of paragraph (ha) of the definition of ‘fringe benefit’ in subsection 136(1) of the FBTAA.

Question 8

The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to the Company by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of the Company shares.

As discussed in the answer to question 5, Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) provides guidance on the application of Part IVA and other general anti-avoidance rules to an arrangement, including in a private ruling. The operation of section 67 of the FBTAA is explained at paragraphs 185-188.

The Commissioner will only seek to 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 addition, paragraph 151 of PS LA 2005/24 states:

151. The approach outlined in this practice statement (refer to paragraphs 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 1986.

In the present case, the provision of benefits to the Trustee as irretrievable contributions to the Trust, and to Participants as Performance Rights under LTI Plan, and shares granted under the other Plans are excluded from the definition of ‘fringe benefit’ for the reasons given in response to questions 6 and 7 above. It follows that no FBT will be payable under the Trust arrangement. As no FBT is payable without the use of the Trust (and nor likely would FBT be payable under alternative remuneration plans), the FBT liability is not any less than it would have been but for the arrangement. In addition, our analysis in response to question 5 above does not suggest that Part IVA of the ITAA 1936 would apply in the circumstances. Accordingly, the Commissioner will not seek to make a determination that section 67 of the FBTAA.