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Edited version of private advice
Authorisation Number: 1051518688404
Date of advice: 31 May 2019
Ruling
Subject: Deductions - salary and wages
Question
Can the Company claim a deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for payments made in exchange for the cancellation of options held by its employees under the Employee Share Option Plan (ESOP)?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2019
The scheme commenced on:
1 July 2018
Relevant facts and circumstances
1. The Company is private company incorporated in Australia.
2. The Company is a start-up company for the purposes of section 83A-33 of the ITAA 1997.
3. The Company established an Employee Share Option Plan (ESOP) for its employees.
4. Under the ESOP, no amount is payable by an employee to the Company for the grant of an option.
5. Options have a minimum three year holding period before they can be disposed of, unless the employee ceases employment, at which point they are able to dispose of the interest.
6. As allowed for in the ESOP, the Board is proposing to cancel vested options granted under the ESOP in exchange for consideration, being the fair market value of the options.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 83A-33
Reasons for Decision
Summary
7. The payments are deductible under section 8-1 of the ITAA 1997 as they are necessarily incurred in carrying on the business of the Company and there is nothing to indicate that the contributions are otherwise excluded by subsection 8-1(2) of the ITAA 1997.
Detailed reasoning
8. The Options provided to the participants under the Plan are indeterminate rights as they entitle the participants to acquire either Company shares or cash, determined at a future time at the discretion of the Board. If the Board resolves that the participants are to receive cash, then the Company redeems the Options and pays participants cash equal to the market value of an ordinary share in the Company less the Option's exercise price.
9. ATO ID 2010/142 provides as follows:
Where an employee's indeterminate rights are ultimately satisfied with cash instead of shares, the granting of the rights:
· will be viewed as one of a series of steps in the payment of salary or wages; and
· will not be viewed as a separate benefit to the payment of salary or wages...
10. Therefore the payments by the Company to participants to redeem the Options will be viewed as a payment of salary and wages.
11. Subsection 8-1(1) of the ITAA 1997 provides that a taxpayer can deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing their assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing their assessable income. However, subsection 8-1(2) denies a deduction to the extent that the expenditure is capital, or of a capital nature.
12. In this case the payments have been incurred by the Company as part of carrying on their business to produce the assessable income of the business. There is nothing to indicate that the payments are otherwise excluded by subsection 8-1(2) of the ITAA 1997. As such the payments are deductible to the Company under section 8-1 of the ITAA 1997.