Edited version of your written advice

Authorisation Number: 1051354017349

Date of advice: 29 March 2018

Ruling

Subject: Employee share scheme

Issue 1

Income Tax

Question 1

Are the Shares in Company A ordinary shares for the purposes of Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the Employee Share Trust (EST) be an ‘employee share trust’ within the meaning of subsection 130-85(4) of the ITAA 1997 if its activities are limited to obtaining Shares in Company A to satisfy obligations to deliver Shares in Company A under the terms of the Company A Employee Share Plan (ESP)?

Answer

Yes.

Question 3

Is Company A entitled to an income tax deduction in accordance with section 83A-205 of the ITAA 1997 in respect of each $1,000 tax exempt ESP provided to employees?

Answer

Yes.

Question 4

Is Company A entitled to an income tax deduction for irretrievable cash contributions made by Company A or Company B to the Trustee to fund the subscription for, or acquisition on-market of, Shares in Company A on the basis that the amounts are in the nature of employee remuneration costs incurred in carrying on Company A’s business for the purpose of deriving assessable income?

Answer

Yes.

Question 5

If the answer to Question 4 is ‘Yes’, will section 83A-210 of the ITAA 1997 apply to determine that the deduction will be allowable in the income year when the relevant Rights and Shares in Company A are granted to the Participants and the irretrievable cash contributions has been made to the EST to obtain Shares in Company A?

Answer

Yes.

Question 6

Will Company A obtain an income tax deduction pursuant to section 8-1 of the ITAA 1997 in respect of costs incurred in relation to the implementation and on-going administration of the EST?

Answer

Yes.

Question 7

Will the Commissioner of Taxation make a determination that section 177F of the Income Tax Assessment Act 1936 applies to deny, in part or in full, a deduction claimed by Company A for the irretrievable cash contributions made by Company A to fund the subscription for, or acquisition on-market of, the Shares in Company A by the EST?

Answer

No.

Issue 2

Fringe benefits tax

Question 8

Will the irretrievable cash contributions that Company A or Company B will make to the EST to fund the subscription for, or acquisition on-market of, Shares in Company A constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 9

Will the provision of Rights or Shares in Company A at a discount by Company A, Company B or the EST to employees of Company A or Company B constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

Question 10

Will the Commissioner of Taxation seek to apply Section 67 of the FBTAA to the arrangement where Rights or Shares in Company A will be provided to employees at a discount?

Answer

No.

Relevant facts and circumstances

Background

1. Company A is the head company of an Australian income tax consolidated group (TCG) and. Company B is a subsidiary member of the TCG. Company A and Company B employ a number of staff.

2. Company A is an Australian publicly listed company.

3. Company A has one class of shares (Shares) which entitle the shareholders to distributions of profits and a share of capital including on windup.

Employee share plan

4. Company A established the Company A Employee Share Plan (ESP).

5. The ESP enables the Board to offer Eligible Persons an opportunity to acquire Shares in Company A from time to time.

6. Participants will be issued Shares by Company A. The new Shares will be the same as existing Shares.

7. Participation in the ESP does not confer on any Participant the right to continue as an employee or Director or any of its related bodies corporate, and does not affect any rights that Company A or any of its related bodies may have to terminate the employment of any Participant.

8. To attract and retain, and to provide incentives to, employees and executives in line with established market practice, Company A proposes to make annual offers of Shares in Company A under the ESP by way of separate letters to all resident, eligible permanent employees of Company A and Company B:

● $1,000 tax exempt ESP to employees

● Salary sacrifice tax deferred ESP to employees, and

● Rights to Shares in Company A ESP, including performance and service rights to executives.

Employee share trust

9. Company A will establish an employee share trust (the Company A Employee Share Trust) (EST) for the purpose of subscribing for, acquiring and holding Shares in Company A for the benefit of the Participant.

10. Company A’s reasons for using an employee share trust arrangement include:

● From a commercial and governance perspective, an employee share trust provides Company A with flexibility to satisfy its obligations under the ESP through the fresh issue of shares or, alternatively, by transfer, or the trustee of the employee share trust purchasing shares on-market

● An employee share trust provides Company A with capital management flexibility, that is by allowing Company A to decide whether the Trustee should purchase shares on-market or subscribe for shares to hold on behalf of employees or buying shares ahead of delivery date

● Using an employee share trust with an independent trustee acquiring shares in accordance with a settled trust deed allows a company to meet its obligations under the Corporations Act 2001 regarding not dealing in own shares, manage any insider trading issues involved in delivering own company shares and manage obligations in respect of Australian financial services and licensing

● An EST provides a useful means of enforcing time-related vesting and performance conditions or disposal restrictions that may be attached to the shares granted under the ESP, and

● Provides an efficient structure for giving effect to disposal restrictions, forfeiture conditions and other conditions on securities.

11. The EST will be partially funded by Participants (i.e. to the extent of any subscription price for Shares in Company A) and Company A (i.e. the balance) by way of irretrievable cash contributions it makes to the EST.

12. Company A will fund the EST by way of a cash amount, which the trustee of the EST, (Trustee), will use to purchase Shares in Company A, subscribe for Shares in Company A (in which case, Company A will issue those shares to or at the direction of the Trustee) or a combination of purchase, transfer and issue or any one of them.

13. The EST will hold Shares in Company A in trust to the account of the Participants (each of whom will be a beneficial owner of the Shares in Company A) subject to the terms of the ESP, as applicable.

14. Shares in Company A will be delivered in accordance with the terms of the ESP, as relevant.

The EST Deed

15. The EST’s activities include:

(a) Subscribe for, purchase or otherwise acquire and hold Shares in Company A and transfer them to Participants entitled in accordance with the EST Deed

(b) Receive dividends and distributions paid on Shares in Company A and to apply those amounts in accordance with the EST Deed

(c) Sell Shares in Company A and apply the proceeds of sale in accordance with the EST Deed

(d) Sell or take up any Rights and apply the proceeds of sale or resulting Shares in Company A or other securities in accordance with the EST Deed

(e) Sign, draw, endorse, or otherwise execute, as the case may be, all or any:

(i) Cheques, drafts and other negotiable or transferable instruments

(ii) Receipts for money paid to the Trustee, and

(iii) Other documents connected with the due administration of any employee share plan or with the EST Deed

(f) Open and operate any bank or other accounts for the EST as the Trustee thinks fit

(g) Ensuring that Shares in Company A or Rights that are beneficial interests in those Shares in Company A are provided under the ESP to employees, or to associates of employees, of:

(i) Company A, or

(ii) A subsidiary of Company A, and

(h) Other activities that are merely incidental to the activities mentioned in paragraphs (a) to (g).

16. The Trustee is not entitled to receive from the EST any remuneration in respect of its performance of its obligations as trustee. Company A must pay to the Trustee, from Company A’s own resources, any remuneration and reimburse any expenses incurred by the Trustee as Company A and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement received from Company A.

17. The Trustee agrees that the Trust will be managed and administered so that it satisfies the definition of an ‘employee share trust’ within the meaning of section 130-85(4) of the ITAA 1997.

18. In respect of Shares to be provided to a Participant, the Trustee is obliged to:

(a) Authorise Company A to register the Trustee as the legal owner of those Shares in Company A as and when Company A receives a completed application form from the Participant, and

(b) When instructed by Company A in writing and in accordance with the ESP and the other provisions of the EST Deed:

(i) Transfer the legal and, if applicable, the beneficial, title in the relevant Shares in Company A to the Participant

(ii) Conduct the sale of the Shares in Company A on-market, or

(iii) Conduct any such other actions relating to the Shares (including the distribution of proceeds arising from the sale of Shares in Company A to the Participant or as the Participant instructs) as may be required by Company A.

19. Company A must provide the Trustee, or cause the provision to the Trustee of, any funds required by the Trustee in order to comply with its obligations to acquire Shares in Company A. The Trustee must apply the funds received to acquire Shares in Company A and must not repay Company A or any of its related bodies corporate any amount received as funds for the purchase or subscription of Shares in Company A.

20. The Trustee must allocate to a Participant the number of Shares in Company A specified by the Board, on the date specified by the Board. The Trustee will hold Shares in Company A on behalf of the Participant who is the beneficial owner of those Shares in Company A. The Trustee will allocate the Shares in Company A in its books to the relevant separate account maintained in respect of a Participant (Plan Account) for that Participant.

21. Dividends payable by Company A on the Shares which are issued, transferred or allotted for the benefit of the Participant (Allocated Shares in Company A) and are held by the Trustee will be paid to the Trustee and the Trustee will pay such dividends to the Participant without deductions as soon as reasonably practicable.

22. The Trustee will open and maintain a Plan Account in respect of each Participant containing details of:

(a) Allocated Shares in Company A

(b) Shares in Company A transferred from the relevant account to the Participant

(c) Any dividends, interest or other earnings or other amounts credited to the account, and

(d) Any proceeds from the sale or disposal of Allocated Shares in Company A or entitlements arising in connection with those Allocated Shares in Company A in accordance with the ESP or the EST Deed.

23. Participants will at all times hold no more than 10% of Company A Shares.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)(h)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)(ha)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177A

Income Tax Assessment Act 1936 subsection 177C

Income Tax Assessment Act 1936 subsection 177CB

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 subsection 177F

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 paragraph 8-1(2)(a)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-B

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

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

Income Tax Assessment Act 1997 subsection 83A-20(1)

Income Tax Assessment Act 1997 section 83A-35

Income Tax Assessment Act 1997 subsection 83A-35(1)

Income Tax Assessment Act 1997 subsection 83A-35(2)

Income Tax Assessment Act 1997 subsection 83A-35(6)

Income Tax Assessment Act 1997 subsection 83A-35(7)

Income Tax Assessment Act 1997 subsection 83A-45(2)

Income Tax Assessment Act 1997 subsection 83A-45(4)

Income Tax Assessment Act 1997 subsection 83A-45(5)

Income Tax Assessment Act 1997 subsection 83A-45(6)

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 subsection 83A-105(1)

Income Tax Assessment Act 1997 paragraph 83A-105(1)(b)

Income Tax Assessment Act 1997 section 83A-205

Income Tax Assessment Act 1997 subsection 83A-205(3)

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 paragraph 83A-210(a)(i)

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

Income Tax Assessment Act 1997 paragraph 130-85(4)(a)

Income Tax Assessment Act 1997 paragraph 130-85(4)(b)

Income Tax Assessment Act 1997 paragraph 130-85(4)(c)

Income Tax Assessment Act 1997 section 701-1

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

Reasons for decision

In these reasons for decision, all legislation references are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless specified otherwise.

Issue 1

Question 1

Summary

Shares in Company A are ordinary shares for the purposes of Division 83A.

Detailed reasoning

Division 83A provides for the taxation of ESS interests acquired under employee share schemes at a discount.

An ESS interest in a company is defined in subsection 83A-10(1) as a beneficial interest in either a share in the company, or a right to acquire a beneficial interest in a share in the company.

Whether the ESS interest is eligible for the up-front tax concession in Subdivision 83A-B or the deferral concession in Subdivision 83A-C, subsection 83A-45(2) is required to be satisfied (subsection 83A-35(1) for the upfront tax concession and paragraph 83A-105(1)(b) for the deferral concession).

Subsection 83A-45(2) provides that when an ESS interest is acquired, all the ESS interests available for acquisition under the relevant employee share scheme must relate to ordinary shares (‘ordinary shares condition’).

ATO Interpretative Decision ATO ID 2010/62: Income Tax – Employee share scheme: whether interest in a corporate limited partnership are ordinary shares sets out the ATO-view that the relevant inquiry in determining whether (or not) a share is an ordinary share in context, is determined by the rights attached to the share in relation to distributions of profits and capital and on winding up the company, as compared to other shares. The relevant inquiry is whether (or not) preferential rights exist. If preferential rights exist, then the share is not an ordinary share for the purposes of Division 83A.

The Commissioner is satisfied that the ESS interests provided under the ESP relate to (or derive from) Shares in Company A, which are ‘ordinary’ shares for Division 83A purposes.

An ESS interest acquired under the ESP will satisfy subsection 83A-45(2) as the ESS interests available under the ESP will relate to an ordinary share for Division 83A purposes.

Question 2

Summary

The EST is an ‘employee share trust’ within the meaning of subsection 130-85(4) as its activities are limited to acquiring and allocating ESS interests to satisfy obligations to deliver Shares in Company A under the ESP Rules (paragraphs 130-85(4)(a) and 130-85(4)(b)) and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c).

Detailed reasoning

An ‘employee share trust’ is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4).

Subsection 130-85(4) provides that an employee share trust for an 'employee share scheme' (which has the meaning given by subsection 83A-10(2)) 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 beneficial interest in a Share in Company A is an ESS interest within the meaning of subsection 83A-10(1).

An ‘employee share scheme’ is defined in subsection 83A-10(2) 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 ESP is an ‘employee share scheme’ within the meaning of subsection 83A-10(2) as it is a scheme under which either rights to acquire beneficial interests in Shares in Company A are provided to employees in relation to the their employment (Rights), or beneficial interests in Shares in Company A are provided to employees in relation to the their employment.

Under the ESP, Company A will establish the EST for the purpose of subscribing for, acquiring and holding Shares in Company A for the benefit of employees. The beneficial interest in the Share in Company A is itself provided under an employee share scheme as it is provided under the same scheme under which Shares in Company A or Rights are provided to the employee (Participant) in relation to the employee’s employment, being an ‘employee share scheme’ as defined in subsection 83A-10(2).

Therefore, the requirements of paragraphs 130-85(4)(a) and (b) will be satisfied as:

● The EST will acquire Shares in Company A, and

● The EST ensures that ESS interests [as defined in subsection 83A-10(1)] being beneficial interests in those shares, will be provided under an ESS [as defined in subsection 83A-10(2)] by allocating the Shares to the employees in accordance with the EST Deed and relevant ESP Rules.

In undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b), the Trustee will be required to undertake incidental activities that are a function of managing the employee share scheme and administering the EST.

For the purposes of paragraph 130-85(4)(c), activities which are merely incidental, as set out in ATO Interpretative Decision ATO ID 2010/108: Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities include:

● The opening and operation of a bank account to facilitate the receipt and payment of money

● The receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the 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 purposes 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, and

● Receiving and immediately distributing shares under a demerger.

Any activities which 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.

A Clause of the EST Deed is titled ‘Sole activities test’ and provides that Company A and the Trustee:

…agree that the Trust will be managed and administered so that it satisfies the definition of “employee share trust” for the purposes of subsection 130-85(4) of the Tax Act.

Recital A of the EST Deed reinforces this as it states that Company A:

… wishes to establish a trust for the purpose of subscribing for, acquiring and holding … [Shares in Company A] … for the benefit of Participants.

The EST Deed limits the Trustee in using the contributions received from Company A for the acquisition of Shares in Company A for Participants in accordance with the ESP. To this end, the Commissioner accepts that all other duties/general powers listed in the EST Deed are merely incidental to the functions of the Trustee in relation to its dealing with the Shares in Company A which it will acquire for Participants of the ESP.

Accordingly, paragraph 130-85(4)(c) is also satisfied because the EST satisfies the definition of an ‘employee share trust’ in subsection 130-85(4), as the terms of the Trust Deed prevent the Trustee from participating in any activities which are not merely incidental to a function of managing the EST and administering the trust.

Question 3

Summary

Company A is entitled to an income tax deduction in accordance with section 83A-205 in respect of each $1,000 tax exempt ESP provided to employees.

Detailed reasoning

Section 83A-205 provides a specific deduction where an employer (or the holding company of an employer) provides ‘ESS interests’ to employees under certain ‘employee share schemes’.

Section 83A-205 enables an employer to deduct an amount for shares, rights or stapled securities it provides to its employees under an employee share scheme if the employees are eligible for a reduction in their assessable income under section 83A-35. The amount the employer can deduct is equal to that reduction (subsection 83A-205(3)).

Section 83A-35 sets out criteria which must be met for the employee to reduce their taxable income by up to $1000. The criteria include:

● The sum of the employee’s taxable income, reportable fringe benefits total, reportable superannuation contributions and total investment loss for the income year is $180,000 or less (subsection 83A-35(2))

● The scheme is offered in a non-discriminatory way to at least 75% of Australian resident permanent employees of the company who have completed at least three years of service (whether continuous or non-continuous) (subsection 83A-35(6))

● The shares or rights provided are not at real risk of forfeiture (subsection 83A-35(7))

● The ESS interests available for acquisition under the scheme relate to ordinary shares (subsection 83A-45(2))

● The scheme is operated so that employees are not permitted to dispose of the ESS interest, or the beneficial interest in the share acquired as a result of the ESS interest, for a minimum holding period of three years, or when the acquirer of the interest ceases being employed by the employer (subsections 83A-45(4) and (5)), and

● Immediately after acquiring the interest, the employee does not hold a beneficial interest in more than 10% of the shares of the company, or control more than 10% of the voting rights of the company (subsection 83-45(6)).

The $180,000 income cap is disregarded for the purposes of determining eligibility for an employer deduction under section 83A-205, however the other conditions must be satisfied.

The $1,000 tax exempt ESP will be offered in a non-discriminatory basis to at least 75 percent of the permanent employees of Company A and Company B who are Australian residents that have completed at least three years of service with Company A or Company B and will satisfy the subsection 83A-35(6) requirement.

The Shares in Company A will be purchased with after-tax remuneration and an equal number of Shares in Company A will be provided at no cost which have no risk of forfeiture or loss (other than by disposal) and will therefore satisfy the subsection 83A-35(7) requirement.

The Shares in Company A are ordinary shares for the purposes of Division 83A and will satisfy the subsection 83A-45(2) requirement.

The ESP Rules restrict disposal of Shares in Company A for a period of the earlier of three years or when the employee ceases their employment, office or contract with Company A which satisfies the requirements of subsections 83A-45(4) and (5).

As no more than 10% of the total number of Shares in Company A may be held by all Participants, the subsection 83-45(6) requirement is satisfied.

The maximum deduction per employee is $1,000 in accordance with the maximum reduction in assessable income per employee under section 83A-35.

Consequently Company A as head company of the TCG which also includes Company B will be eligible for the specific deduction allowable to employers under section 83A-205.

Question 4

Summary

Company A is entitled to a tax deduction under section 8-1 for irretrievable cash contributions which Company A or Company B makes to the Trustee to fund the subscription for, or acquisition on-market of Shares in Company A, on the basis that the amounts are in the nature of employee remuneration costs incurred in carrying on the Company A business for the purpose of deriving assessable income.

Detailed reasoning

Single entity rule

Pursuant to section 701-1 (the single entity rule) Company A as the head company of the TCG is taken for income tax purposes to make the irretrievable cash contributions to the Trustee which includes contributions made by Company B.

Section 8-1

The irretrievable cash contributions will be deductible under section 8-1 if either of the positive limbs in subsection 8-1(1) are satisfied and the contributions do not fall within any of the negative limbs in subsection 8-1(2).

Positive Limb

Company A and Company B will provide cash contributions to the Trustee to be used in accordance with the EST Deed and ESP Rules for the sole purpose of subscribing for and/or acquiring Shares in Company A for the benefit of Participants. Such contributions will be irretrievable or non-refundable to Company A and therefore Company A will incur a loss or outgoing for the purpose of subsection 8-1(1).

The EST will be established for the sole purpose of obtaining fully paid Shares in Company A for the benefit of eligible employees and executives of Company A and Company B. The purpose of the contributions is to provide an incentive to employees and executives linked to the performance of the business.

Accordingly, there is a sufficient nexus between the contributions that Company A and Company B make to the Trustee and the derivation of Company A’s assessable income (Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay’s) Ltd v FCT (1935) 54 CLR 295; (1935) 3 ATD 288, W Nevill & Co Ltd v FC of T (1937) 56 CLR 290; 4 ATD 187; (1937); 1 AITR 67, Ronpibon Tin NL v FCT (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344; (1956) 6 AITR 379; (1956) 11 ATD 147).

Negative Limbs

The relevant negative limb is paragraph 8-1(2)(a), which denies a deduction to the extent that the expenditure is capital, or of a capital nature.

Dixon J as he then was observed in Sun Newspapers Ltd v FC of T (1938) 61 CLR 337 at 359 that the difference between capital and revenue as follows:

… between the business entity, structure, or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and the returns representing profit or loss.

The identification of what expenditure is calculated to effect involves both a consideration of the character of the expenditure and, in many cases, an examination of the business structure and the operations of the business in the course of which the expenditure has been incurred.

Under the EST Deed, the cash contributions will be irretrievable and made to the EST to fund the subscription for, or acquisition on-market of Shares in Company A for the benefit of employees and executives of Company A and Company B who are Participants of the ESP. The ESP is established to attract and retain, and provide incentives to, employees and executives of the two companies.

In Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745, payments made by an employer company to a trust which was established for the purpose of providing incentive payments to employees were held to be on revenue account and neither capital nor of a capital nature.

Company A will grant Shares in Company A and Rights annually where a vesting event may potentially occur each year which would require Company A to source Shares in Company A to satisfy the Share grants and Rights that vest. Company A’s contributions will both be recurring and made from time to time as and when Shares in Company A are to be subscribed for or acquired pursuant to the EST Deed.

The essential character of the outgoings in question is that of revenue and not capital, for the above-mentioned reasons.

Therefore, we conclude that the contributions are not capital or capital in nature and will not fall within any of the other negative limbs in subsection 8-1(2).

Question 5

Summary

Section 83A-210 will operate to allow Company A an income tax deduction for the irretrievable cash contributions made to the EST to acquire Shares in Company A in the income year when the relevant ESS interest is acquired by a Participant where this is a different income year from that in which Company A or Company B makes the irretrievable contribution.

Detailed reasoning

The deduction for the irretrievable cash contributions under section 8-1 is generally allowable in the income year in which Company A incurs the outgoing. However, under section 83A-210, if a contribution is made to the Trust before a Participant acquires an ESS interest, the deduction is instead deferred until the year of income when the Participant actually acquires the relevant ESS interest.

Section 83A-210 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

Section 83A-210 only applies where the contribution is made ‘under an arrangement’ (subparagraph 83A-210(a)(i)). The term ‘arrangement’ is defined in subsection 995-1(1) to mean:

… any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

Accordingly, the implementation of the ESP, the establishment of the Trust and the provision of money by Company A and Company B to the Trustee constitute an ‘arrangement’ for the purposes of subparagraph 83A-210(a)(i).

ESS interest

An ‘ESS interest’ in a company is defined as a beneficial interest either a share in the company, or in a right to acquire a beneficial interest in a share in the company (subsection 83A-10(1)).

In this case, each Right or Share in Company A provided to a Participant under the ESP is an ESS interest as it is a right to acquire a beneficial interest in Shares in Company A. A beneficial interest in Shares in Company A is also an ESS interest.

Employee share scheme

As discussed in the Detailed reasoning for Question 2 above, the ESP is an ‘employee share scheme’ for the purposes of Division 83A.

Relevant connection between employer contribution and acquisition of ESS interest

Section 83A-210 only applies if there is a relevant connection between the irretrievable cash contribution made by Company A to the Trustee and the acquisition of an ‘ESS interest’ by an employee under an ‘employee share scheme’ (subparagraph 83A-210(a)(ii)).

In this case, the granting of rights, the funds provided by Company A to the Trustee, the Trustee’s acquisition and holding of shares, and the allocation of the Shares to Participants, are all inter-related components of the ESP. Each component of the scheme must be carried out so that the scheme operates as intended. One of the necessary components that enables the scheme to proceed is the contributions made by Company A and Company B to the Trustee.

Accordingly, the Commissioner accepts that the provision of money by Company A and Company B to the Trustee to acquire Shares in Company A for the ESP is for the purpose of enabling eligible employees to acquire ESS interests in Company A.

Where Company A or Company B provides irretrievable contributions to the Trustee before a Participant acquires the relevant ESS interests, section 83A-210 will apply to determine the timing of Company A’s income tax deduction for the irretrievable contributions as outgoings incurred under section 8-1. In this instance, the irretrievable contribution will only be deductible to Company A in the income year when the relevant Rights or Shares in Company A (ESS interests) are acquired by the Participants where this is a different income year from that in which Company A or Company B makes the irretrievable contribution.

This is consistent with the Commissioner’s view set out in ATO Interpretative Decision ATO ID 2010/103: Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust. The Reasons for Decision in ATO ID 2010/103 state that:

…the amount of money used by the trustee to purchase excess shares is intended to meet obligations arising from a future grant of options. The excess payment therefore occurs before the employees acquire the relevant options under the scheme. Section 83A-210 of the ITAA 1997 will apply and the excess payment will be deductible to the employer in the year of income when the relevant options are subsequently granted to the employees.

Question 6

Summary

Company A is entitled to an income tax deduction in respect of employer costs incurred by Company A or Company B in relation to the implementation and on-going administration of the EST pursuant to section 8-1.

Detailed reasoning

Company A will incur costs in relation to establishing and implementing the EST, including costs for applying for this private ruling.

Company A will also incur further costs for services provided by the Trustee in respect of the on-going administration and management of the EST, including, but not limited to:

● Costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to participants)

● Employee plan record keeping

● Production and dispatch of holding statements to employees

● Provision of annual income tax return information to employees

● Management of employee termination, and

● Other Trustee expenses, including the annual audit of the financial statements and annual income tax return of the EST.

These are described collectively as ‘employer costs’.

In accordance with the EST Deed, the Trustee is not entitled to receive from the EST any remuneration in respect of its performance of its obligations as Trustee. Company A may pay to the Trustee from its own resources any remuneration to, and reimburse any expenses incurred by, the Trustee as Company A and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement.

The employer costs incurred by Company A in relation to the implementation and on-going administration of the EST are outgoings under subsection 8-1(1) that are incurred in gaining or producing its assessable income.

The view that the employer costs incurred by Company A (or by Company B) are deductible as outgoings incurred under subsection 8-1(1) is consistent with ATO Interpretative Decision ATO ID 2014/42: Employer costs for the purpose of administering its employee share scheme are deductible which states that such costs are part of the ordinary employee remuneration costs of a taxpayer.

Furthermore, consistent with the Detailed reasoning for Question 4 above, the costs are revenue in nature and not capital on the basis that they are regular and recurrent expenses incurred by Company A or Company B respectively in connection with its employees.

The employer costs are therefore not excluded from being an allowable deduction under paragraph 8-1(2)(a). Also, nothing in the Relevant facts and circumstances suggest that the costs should be excluded as an allowable deduction under the other paragraphs of subsection 8-1(2).

Question 7

Summary

The Commissioner of Taxation will not make a determination under section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) (in respect of a tax benefit arising under or in connection with a scheme to which section 177D of the ITAA 1936 applies) to deny, in part or in full, an income tax deduction claimed by Company A as head company of the TCG for irretrievable cash contributions made by Company A or by Company B to fund the subscription for, or acquisition on-market of, the Shares in Company A by the EST.

Detailed reasoning

For section 177F of the ITAA 1936 to cancel a tax benefit that has been or would be obtained, three requirements must be met:

1. There must be a scheme within the meaning of section 177A of the ITAA 1936

2. A tax benefit (as defined in section 177C of the ITAA 1936) must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred (pursuant to section 177CB of the ITAA 1936), if the scheme had not been entered into or carried out, and

3. Having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies.

Based on our analysis of these three requirements, we do not consider that any party to the scheme has a sole or dominant purpose of enabling Company A to obtain a tax benefit in the form of income tax deductions for its irretrievable contributions to the EST and accordingly section 177F of the ITAA 1936 will not apply.

In particular, the Commissioner accepts that there are commercial reasons for implementing and operating the ESP through an employee share trust structure. Accordingly, the Commissioner will not make a determination under section 177F of the ITAA 1936 (in respect of a scheme to which section 177D of the ITAA 1936 applies) to deny, in part or in full, the income tax deductions which Company A will claim for the irretrievable cash contributions it makes to the Trustee to fund the EST’s acquisition of Shares in Company A either on-market or via a new subscription of shares.

Issue 2

Question 8

Summary

The irretrievable cash contributions which Company A or Company B makes to the Trustee to fund the subscription for, or acquisition on-market of, Shares in Company A will not constitute a ‘fringe benefit’ within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

An employer’s liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA, which provides that the tax is imposed in respect of the ‘fringe benefits taxable amount’ of the 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 is subject to FBT unless a ‘fringe benefit’ is provided.

Broadly, a ‘fringe benefit’ is defined as a benefit provided to an employee or an associate of an employee in respect of the employment of the employee (subsection 136(1) of the FBTAA).

The provision of Rights and Shares in Company A under the ESP

Certain benefits are excluded from the definition of ‘fringe benefit’ (paragraphs (f) to (s) of the definition of ‘fringe benefit’ in subsection 136(1) of the FBTAA).

Relevantly, the definition excludes, among other things:

…

(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’ is in turn defined in subsection 130-85(4) as follows:

… 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).

Company A established the EST to acquire shares in Company A and to allocate those shares to participating employees in order to provide ESS interests which those employees will acquire under the ESP.

Accordingly, the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) are satisfied as:

● The EST acquires shares in a company (being Company A), and

● The EST ensures that ‘ESS interests’ as defined in subsection 83A-10(1) (being Shares in Company A and Rights in Company A) are provided under an ‘employee share scheme’ as defined in subsection 83A-10(2) to participating employees in accordance with the EST Deed and the ESP.

The Trustee may also be required to undertake activities that are incidental to the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b). Undertaking such activities will not cause a trust to fall outside the definition of ‘employee share trust’ (paragraph 130-85(4)(c)).

The EST Deed does not enable the Trustee to participate in any other activities that are not merely incidental to the activities which satisfy paragraphs 130-85(4)(a) and 130-85(4)(b). In addition, the EST Deed provides that the EST will be managed and administered so that it satisfies the definition of ‘employee share trust’ for the purposes of subsection 130-85(4). Accordingly, provided the Trustee administers the EST according to the terms of the EST Deed, the activities of the Trustee will not cause the EST to fall outside the definition of ‘employee share trust’ for the purposes of subsection 130-85(4).

Question 9

Summary

The provision of a Right or Share in Company A by Company A, Company B or the EST to employees of Company A or Company B under the ESP is an ESS interests to which Subdivision 83A-B or 83A-C applies. It follows that the provision of a Right or Share in Company A at a discount under the ESP will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

Relevantly, the definition of ‘fringe benefit’ excludes, among other things:

(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 83A-B or 83A-C of that Act applies;

ESS interest

An ‘ESS interest’ in a company is defined as 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)).

In this case, each Right or Share in Company A provided to a Participant when an offer is made under the ESP is an ESS interest as it is a right to acquire a beneficial interest in a share in Company A. These ESS interests are offered at a discount and in connection with the participating employee’s employment.

Application of Subdivision 83A-B or 83A-C

Broadly, Subdivision 83A-B applies to an ESS interest if it is acquired by a participating employee under an ESS at a discount (subsection 83A-20(1)).

As set out above, the ESP is an ‘employee share scheme’ within the meaning of subsection 83A-10(2) as it is part of a scheme that enables each employee to acquire beneficial interests in shares in Company A in relation to the employee’s employment. Each Right will be acquired for no cost – that is, at a discount. Each Share in Company A will be acquired with either after tax remuneration where Company A will provide Shares in Company A up to the value of $1,000 or pre-tax remuneration that is, at a discount.

Accordingly, Subdivision 83A-B will apply to each Right or Share in Company A provided under the ESP, unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C applies.

Whether a Participant is ultimately taxed upfront on some or all of any discount received (under Subdivision 83A-B), or instead defers the timing of when an amount is included in their assessable income (under Subdivision 83A-C) depends on whether the additional requirements in Subdivision 83A-C are satisfied.

Question 10

Summary

In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the Trust, and to eligible employees by way of the provision of Shares in Company A and Rights under the ESP are excluded from the definition of a ‘fringe benefit’ for the reasons given in the response to Questions 8 and 9 above. Therefore, as these benefits have been excluded from the definition of a ‘fringe benefit’, no FBT will be payable under the ESP.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies

Detailed reasoning

Section 67 of the FBTAA is a general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA of the ITAA 1936 as it:

● requires identification of an arrangement,

● requires 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 Commissioner making a determination.

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

The Commissioner adopts the same approach as to counterfactuals and the sole or dominant purpose test when considering section 67 of the FBTAA as adopted for Part IVA of the ITAA 1936. We note that section 67 of the FBTAA has not been amended.in the same way as Part IVA was in 2013.

The provision of benefits in the form of irretrievable contributions to the Trustee of the EST and to participating employees as Rights or Shares in Company A under the ESP are excluded from the definition of ‘fringe benefit’ set out in the Detailed reasoning for Questions 8 and 9 above. In addition, Shares in Company A allocated to the participating employees on the vesting and exercise of Rights are not ‘fringe benefits’ because these are received for the exercise of the relevant ESS interest, rather than ‘in respect of’ employment: 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. As these benefits are excluded from the definition of ‘fringe benefit’, no fringe benefit will arise and consequently no FBT will be payable under the Trust arrangement.

The Commissioner further considers that as no FBT is payable in the absence of the EST (and that FBT is unlikely to be payable under alternative remuneration plans), the FBT liability is not any less than it would otherwise be but for the arrangement.