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Edited version of your written advice
Authorisation Number: 1051418208420
Date of advice: 21 September 2018
Ruling
Subject: Employee share scheme
Question 1
Will Company A be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for its irretrievable cash contributions made to the trustee of A Trust (Trustee)?
Answer
Yes.
Question 2
Will Company A be entitled to deduct an amount under section 8-1 of the ITAA 1997 for the costs incurred in relation to the ongoing administration of the Incentive Plan (as defined below) and the A Trust?
Answer
Yes.
Question 3
Under section 83A-210 of the ITAA 1997, is the deduction for Company A in respect of the irretrievable contributions to the Trustee allowed in the year of income when the contribution is made to the Trustee, provided it is in respect of Awards (as defined below) that have previously been granted to employees?
Answer
Yes.
Question 4
Will the Commissioner make a determination under subsection 177F(1) of the Income Tax Assessment Act 1936 (ITAA 1936), as a result of section 177D of the ITAA 1936, to deny, in part or in full, any deduction claimed by Company A in respect of:
(a) the irretrievable cash contributions made by Company A to the Trustee; or
(b) the costs incurred by Company A in relation to the ongoing administration of the Incentive Plan and the Trust?
Answer
No.
Question 5
Will the consideration received by Company A, as a result of participants exercising their options granted under the Incentive Plan to acquire shares in Company A, be included in Company A’s assessable income under section 6-5 of the ITAA 1997?
Answer
Yes.
Question 6
Is the provision of shares to the Participants in satisfaction of the Awards, a ‘fringe benefit’ within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?
Answer
No.
Question 7
Will the contribution of funds by Company A to the Trustee in order to:
(a) subscribe for, or acquire on-market, Shares; and/or
(b) fund the ongoing administration of the Trust
be a ‘fringe benefit’ within the meaning of that term in subsection 136(1) of the FBTAA?
Answer
No.
This ruling applies for the following periods in respect of questions 1 to 5:
1 July 2018 to 30 June 2024
This ruling applies for the following periods in respect of questions 6 and 7:
1 April 2018 to 31 March 2024
Relevant facts and circumstances
1. Company A is an Australian resident company. It operates an employee share plan (the Incentive Plan) as part of its remuneration strategy. The Incentive Plan is operated according to a number of governance documents.
2. Under the Incentive Plan, eligible employees (Participants) are granted rights and options (together referred to as ‘Awards’) to acquire shares in Company A subject to certain conditions being met.
3. The Incentive Plan operates as follows:
● Company A settled A Trust to facilitate the acquisition, holding of, and allocation of shares to Participants.
● Company A makes irretrievable cash contributions to the Trustee to enable the Trustee to acquire shares in Company A in order to satisfy the Awards. The contributions will be determined in accordance with certain protocols.
● The Awards are offered by Company A to the Participants subject to certain conditions. When the conditions of the Awards are satisfied by a Participant, shares are released by the Trustee to the Participant.
● Once the shares are transferred to the Participants, the Participants are entitled to dispose of their shares (subject to complying with certain policies of Company A) according to their own wishes.
4. Company A is not a beneficiary of A Trust. It does not have any legal or beneficial entitlement to any of the shares forming part of the trust fund at any time, and it cannot acquire such an interest.
Relevant legislative provisions
Fringe Benefits Tax Assessment Act 1986 subsection 136(1)
Income Tax Assessment Act 1936 Part IVA
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 83A-10
Income Tax Assessment Act 1997 section 83A-210
Income Tax Assessment Act 1997 subsection 130-85(4)
Reasons for decision
Questions 1 and 2
Company A’s irretrievable cash contributions to the Trustee and the costs it incurs in relation to the ongoing administration of A Trust are expenses directly related to the production of Company A’s assessable income. They are not outgoings of capital or of a capital nature. Therefore, Company A is entitled to deduct them under section 8-1 of the ITAA 1997.
Question 3
Under section 83A-210 of the ITAA 1997, the deduction for Company A in respect of the irretrievable contributions to the Trustee will be allowed in the year of income when the contribution is made to the Trustee, provided it is in respect of options and rights to acquire shares that have previously been granted to employees.
Question 4
The Commissioner will not make a determination under subsection 177F(1) of the Income Tax Assessment Act 1936 (ITAA 1936), as a result of section 177D of the ITAA 1936, to deny, in part or in full, any deduction claimed by Company A in respect of the:
(a) irretrievable cash contributions made by Company A to the Trustee; or
(b) costs incurred by the Company in relation to the ongoing administration of the Incentive Plan and A Trust.
Question 5
The consideration received by Company A, as a result of Participants exercising their options granted under the Incentive Plan to acquire shares, will be included in Company A’s assessable income under section 6-5 of the ITAA 1997 as ordinary income of Company A.
Questions 6 and 7
The provision of shares to the Participants in satisfaction of the Awards is not a ‘fringe benefit’ because it satisfies the exclusion in paragraph (h) of the definition of ‘fringe benefit’ in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).
The contribution of funds by the Company to the Trustee in order to:
(a) subscribe for, or acquire on-market, shares; and/or
(b) fund the ongoing administration of A Trust
will satisfy the exclusion in paragraph (ha) of the definition of ‘fringe benefit’, and will not constitute a ‘fringe benefit’ within the meaning of subsection 136(1) of the FBTAA.