Edited version of your written advice

Authorisation Number: 1051489234578

Date of advice: 11 March 2019

Ruling

Subject: Employee share scheme

Issue 1: Income tax

Question 1

Will the company be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made to the Trustee of the Employee Share Trust (the Trust) to fund the subscription for, or acquisition on-market of, ordinary shares in the company to satisfy Employee Share Scheme (ESS) interests issued pursuant to the company’s Performance Equity Plan (the Plan)?

Answer

Yes.

Question 2a

Will the irretrievable cash contributions made by the company, to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares by the Trustee to satisfy ESS interests issued pursuant to the Plan, be deductible to the company under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997, if the contributions are made before the acquisition of the relevant ESS interests by the ultimate beneficiaries?

Answer

Yes.

Question 2b

Will the irretrievable contributions made by the company to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares by the Trustee to satisfy ESS interests issued pursuant to the Plan, be deductible to the company under section 8-1 of the ITAA 1997 in the income year when the contributions are made, if the contributions are made after the acquisition of the relevant ESS interests by the ultimate beneficiaries?

Answer

Yes.

Question 3

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

Answer

No.

Issue 2: Fringe benefits tax

Question 4

Will the provision of ESS interests to employees of the company or any subsidiary member of the tax consolidated group under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

Will the irretrievable cash contributions made by the company or any subsidiary member of the tax consolidated group, to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares pursuant to the Plan, constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

This ruling applies for the following periods:

Income tax years:

1 July 20XX to – 30 June 20XX

For Fringe Benefits Tax years:

1 April 20XX – 31 March 20XX

Relevant facts and circumstances

The company established the Plan with shareholder approval to grant Awards to employees (Participants) pursuant to the Plan Rules.

The company established an employee share trust (Trust) under the terms of Trust Deed (the Trust Deed), with the trustee (Trustee).

The Trust Deed allows the Trustee to acquire, hold, and allocate Shares to Participants (as defined in the Plan). The Trust is established to assist the company with capital management for the Plan, to facilitate the acquisition of newly issued or market purchased Shares to satisfy Awards granted under the Plan.

The company made irretrievable contributions in the form of cash to the Trust, and the Trustee has agreed to use this money to acquire Shares to satisfy Awards granted Participants in accordance with the terms of the Trust Deed and the Plan Rules.

The Plan is operated in accordance with the Trust Deed (definition of “Plan” in clause 1.1 of the Trust Deed)

The Plan

Under the Plan, employees are offered non-transferable Awards for nil consideration which are subject to service and/or performance-based vesting conditions.

On the exercise of vested Awards, Participants are allocated one Share for each vested Award that is exercised.

On the exercise of vested Options Shares are allocated to Participants within 15 days of the Company receiving a signed notice of exercise and receiving payment of the exercise price from the Participant.

Grant of Awards

The vesting conditions that apply to grants of Rights include:

● Performance hurdles – Rights may only be eligible to vest if a share price hurdle is met.

● Service condition – Rights may only be eligible to vest if the Participant remains in employment with the company for the relevant vesting period.

Lapse of Awards

If the Participant ceases to be company’s employee before their Rights have been settled, the Participant’s Rights will lapse on cessation of employment, subject to the Board determining that an alternative treatment should apply.

If the Participant ceases to be company’s employee (except by reason of the Participant’s death or disablement), the Participant’s unvested and vested Options will lapse on the earlier of the Participant tendering their resignation and the date they cease to be an employee, subject to the Board determining that an alternative treatment should apply.

On settlement of Awards

Once vested Awards are exercised and Shares are allocated to Participants. Participants are entitled to dispose of their Shares from the date of allocation (subject to complying with the Company’s securities trading policy). The Company uses the Trust to acquire and hold Shares to satisfy exercised Awards granted under the Plan.

Employee Share Trust

The company established the Trust to facilitate the acquisition, holding of, and allocation of Shares to Participants in accordance with the Plan.

The Trust is an independent legal entity and is not part of the company and the company cannot be a beneficiary of the Trust.

The company will only make contributions to the Trust to fund the acquisition of Shares once Awards have been granted.

Obligations of the Trustee

Under the Trust Deed, the sole activities of the Trustee are to acquire and hold Shares for the purpose of providing them to Participants of the Plan on exercise of Awards, and the administration of the Trust. All other activities of the Trust are incidental to the Trustee undertaking its sole activities.

The Trust will be managed and administered so that it satisfies the sole activities test for the purpose of subsection 130-85 of the ITAA 1997.

Allocating Shares to the Trust

Under the terms of the Trust Deed, the company will instruct the Trustee to subscribe for, purchase or allocate a number of Shares specified in the notice. This instruction may occur at any time, depending on the company’s capital management strategy.

The Trustee will, in accordance with instructions received and pursuant to the Trust Deed acquire, deliver and allocate Shares to Participants provided that the Trustee receives sufficient payment from the company to subscribe for or purchase Shares and/or has sufficient unallocated Shares available in the Trust.

Contributions to the Trustee

The company must make irretrievable contributions to the Trust as required under the Trust Deed.

All funds received by the Trustee from the company in the form of irretrievable contributions will constitute accretions to the corpus of the Trust and no Participant will be entitled to receive a distribution of or from such funds.

The funds will not be returned or repayable to the company except where they are used for subscribing for Shares in the company (that is the contributions will be irretrievable).

The Trustee will not be permitted to do the following:

● acquire any Share or allocate any Share to any participant, if to do so would contravene applicable law (including rules around insider trading)

● carry out activities that are not matters or things which are necessary or expedient to administer and maintain the Trust

● carry out activities which result in the Participants being provided with additional benefits other than the benefits that arise under the Trust Deed.

The company is not a beneficiary under the Trust Deed and any funds it contributes to the Trust, cannot be refunded, repaid or returned to the company other than by way of the Trustee paying the issue price where it subscribes for Shares in the company.

The company will have no interest in the Shares held by the Trust.

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)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 83A

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)

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

Reasons for decision

Legislative references in this ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.

Issue 1 Income tax

Question 1

Section 8-1 allows a deduction for a loss or outgoing that satisfies one of the positive limbs in subsection 8-1(1). However, even if a positive limb is satisfied, a deduction is not permitted under subsection 8-1(2) (the ‘negative limbs’) to the extent that the loss or outgoing is capital or of a capital nature or it is private or domestic in nature; is incurred in gaining or producing exempt income or non-assessable non-exempt income; or another provision of the ITAA 1997 or ITAA 1936 prevents the deduction.

The purpose of the Plan is to grant Awards as part of the remuneration and reward program for employees of the company. The irretrievable cash contributions that the company makes to the Trustee are employee remuneration costs directly related to the production of the company’s assessable income. Therefore, subsection 8-1(1) is satisfied.

In Pridecraft Pty Ltd v FCT; FCT v Spotlight Stores Pty Ltd [2004] FCAFC 339; 2005 ATC 4001, the Full Federal Court held (at [95] – [100] per Sackville J, with whom Ryan and Sundberg JJ agreed) that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account, and not outgoings of capital or of a capital nature.

The irretrievable cash contributions that the company makes to the Trustee are not outgoings of capital or of a capital nature. Therefore, paragraph 8-1(2)(a) is not satisfied.

Accordingly, the company will be entitled to deduct an amount under section 8-1for its irretrievable cash contributions to the Trustee of the Trust to fund the acquisition of newly issued or on-market Shares to satisfy Awards granted to Participants pursuant to the Plan Rules.

Question 2(a) and 2(b)

The deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which the entity incurs the outgoing. However, under certain circumstances the timing of the deduction is governed by section 83A-210.

Section 83A-210 will only apply if there is a relevant connection between the money provided to the trustee and the acquisition of ESS interests (directly or indirectly) by the Participants in an employee share scheme (ESS) in relation to the employee’s employment.

The establishment of the Plan, the settlement of the Trust under the Trust Deed and the provision of money by the company to the Trustee to subscribe for or otherwise acquire Shares on behalf of the Participants together constitute an ‘arrangement’ for the purposes of subparagraph 83A-210(a)(i).

The company will provide the irretrievable contributions to the Trustee in accordance with the terms of the Trust Deed. The terms of each offer and the Trust Deed set out the arrangement under which the Awards are acquired by the Participants, and Shares allocated to Participants.

The terms ‘ESS interest’ and ‘employee share scheme’ are defined in section 83A-10.

The Participants will hold an ‘ESS interest’ in the company under subsection 83A-10(1). This ESS interest is provided to Participants under the Plan in relation to their employment. Therefore, the Plan is an ‘employee share scheme’ under subsection 83A-10(2).

The provision of cash contributions by the company to the Trustee of the Trust is for the purpose of enabling the employees (each an ‘ultimate beneficiary’ as defined in paragraph 83A-210(a) to acquire, directly or indirectly, an ESS interest under an employee share scheme (the Plan) in relation to the ultimate beneficiary’s employment.

If the cash contributions are provided by the company (or a subsidiary member of the Group) to the Trustee of the Trust before the time the ultimate beneficiary acquires the ESS interest, section 83A-210 will apply. The effect is that the Company can only deduct the amount of the cash contributions in the income year when the Participants acquire the ESS interest.

However, section 83A-210 will not apply to a deduction for cash contributions provided by the Company (or a subsidiary member of the Group) to the Trustee of the Trust if the contributions are made at or after the time the ultimate beneficiary acquires the ESS interest. The effect is that those cash contributions can be deducted by the Company under section 8-1 in the income year in which the contributions are made to the Trustee of the Trust.

Question 3

Part IVA contains a number of anti-avoidance provisions which give the Commissioner discretion to cancel a tax benefit that has been obtained, or would but for section 177F be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

However, before the Commissioner can make the determination under subsection 177F(1), the following requirements must be met:

● there must be a ‘scheme’ as defined in section 177A

● a ‘tax benefit’, as defined in section 177C, was obtained or would be obtained in connection with the scheme but for subsection 177F(1), and

● having regard to the matters in subsection 177D(2), the person or persons who entered into or carried out any part of the scheme did so for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme.

In this case, the Plan constitutes a ‘scheme’ for the purposes of section 177A, and the deduction claimed by the company is a tax benefit obtained in connection to the scheme under paragraph 177C(1)(b).

However, on the basis of the ‘Relevant facts and circumstances’ in this private ruling, it cannot be objectively concluded that the person or persons who entered into or carried out any part of the scheme did so for the dominant purpose of enabling the Company to obtain that tax benefit in connection with the scheme.

Therefore, the Commissioner will not make a determination under section 177F, as a result of section 177D, to deny, in part or in full, any deduction claimed by the company for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or other acquisition of, Shares by the Trustee, pursuant to the Plan.

Issue 2 Fringe benefit tax

Question 4

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

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

The Plan is an employee share scheme to which Subdivision 83A-C applies.

Therefore, the provision of rights to acquire Shares to employees of the company under the Plan will satisfy the exclusion in paragraph (h) of the definition of ‘fringe benefit’, and will not constitute a ‘fringe benefit’ within the meaning of subsection 136(1) of the FBTAA.

Question 5

Pursuant to paragraph 136(1)(ha) of the FBTAA, a fringe benefit is defined to exclude:

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’ for an ‘employee share scheme’ is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4) which 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).

As previously determined in answer to Question 2(a) and 2(b) above, the Plan administered by the Trust constitutes an ‘employee share scheme’ under subsection 83A-10(2).

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

Therefore, the irretrievable cash contributions made by the company to the Trustee of the Trust to fund the subscription for, or other acquisition of, Shares by the Trustee pursuant to the Plan 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.