Edited version of private advice

Authorisation Number: 1051663086689

Date of advice: 13 August 2020

Ruling

Subject: Employee share scheme

Question 1

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

Answer

Yes

Question 2

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

Answer

Yes

Question 3

Will the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of Company Shares to satisfy employee share scheme (ESS) interests issued pursuant to the Plan, be deductible to the Company under section 8-1 of the ITAA 1997 in the income year the irretrievable cash contributions are made, if the irretrievable cash contributions are made after the relevant ESS interests are acquired?

Answer

Yes

Question 4

Will the Commissioner 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 in respect of the:

a)    irretrievable cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of, Company Shares by the Trustee to satisfy the Awards, or

b)    costs incurred by the Company in relation to the on-going administration of the Plan and the Trust?

Answer

No

Question 5

Will the consideration received by the Company, as a result of Participants exercising their Options granted under the Plan to acquire Shares in the Company, be included in the Company's assessable income under section 6-5 of the ITAA 1997?

Answer

Yes

Question 6

Is the provision of Shares, in satisfaction of those Awards to Participants under the Plan, 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 irretrievable cash contribution made by the Company to the Trustee in order to:

a)    subscribe for, or acquire on-market Company 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

The rulings for questions 1 to 5 applies for the following periods:

Income tax year ended 30 June 20XX

Income tax year ended 30 June 20XX

Income tax year ended 30 June 20XX

Income tax year ended 30 June 20XX

Income tax year ended 30 June 20XX

Income tax year ended 30 June 20XX

The rulings for questions 6 and 7 apply for the following periods:

Fringe benefits tax year ended 31 March 20XX

Fringe benefits tax year ended 31 March 20XX

Fringe benefits tax year ended 31 March 20XX

Fringe benefits tax year ended 31 March 20XX

Fringe benefits tax year ended 31 March 20XX

Fringe benefits tax year ended 31 March 20XX

Relevant facts and circumstances

The Company incurs on-ongoing administration costs for operating the ESS such as:

·         accounting

·         tax compliance

·         legal compliance, and

·         share transaction costs.

This Ruling only applies to Participants who are Australian residents for tax purposes.

Plan Rules

The Trust will only be used to facilitate the requirements of any equity-based Awards granted under the Plan. The Trust will not be used to settle any cash-based remuneration arrangements under the Plan.

The purpose of the Plan is to provide Eligible Employees with an opportunity to share in the growth in value of the Shares and to encourage them to improve the performance of the Company and its return to Shareholders.

The issue of Rights, Options and Shares be subject to the deferred taxation regime in Division 83A.

Issue of Rights and Options

The Board may from time to time determine that the Company will offer Awards to an Eligible Employee.

For each invitation to each Eligible Employee to participate under the Plan, the Board must give that Eligible Employee an Offer Document to complete, sign and return to the Company, which includes the following information:

·         the number of Rights or Options to which the invitation relates, or

·         the basis on which the number of Rights or Options to which the invitation relates is to be determined

·         the Vesting Date and the Last Exercise Date, or

·         the basis on which the Vesting Date and the Last Exercise Date are to be determined

·         in the case of Options only:

-        the Exercise Price, or

-        the basis on which the Exercise Price is to be determined

·         the Performance Conditions attaching to the Rights or Options (if any)

·         whether a Holding Lock will apply to the Shares issued on exercise of the Rights or Options and, if so, the period not exceeding 2 years from the First Exercise Date for which that Holding Lock will apply

·         any other terms and conditions relating to the grant of the Rights or Options or the delivery of any Shares on exercise of the Rights or Options which, in the opinion of the Board, are fair and reasonable but not inconsistent with the Plan

·         a summary or a copy of the Plan, and

·         any other information or documents that the Applicable Laws require the Company to give to the Eligible Employee.

On the issue of an Award, the Eligible Employee becomes a Participant.

An Award will be issued for consideration comprising the services that are expected to be provided by an Eligible Employee, but no further monetary or other consideration will be payable in respect of the issue of the Award.

Each Option confers the entitlement, upon exercise of the Option, to subscribe for and be issued one Share at the Exercise Price, and each Right confers the entitlement, upon exercise of the Right to be issued one Share.

A Participant has no interest in a Share until the Share is issued to that Participant under the Plan.

Vesting of Rights and Options

Vesting of an Award held by a Participant is subject to the following conditions being satisfied:

·         the Participant must have been an employee of a company within the Group between the Date of Grant and the Vesting Date

·         the Performance Conditions relating to the Award, and

·         any other conditions included in the Specific Terms.

Where an Accelerated Vesting Event occurs while a Participant is employed with the Group prior to the Vesting Date, the Board may, bring forward the vesting of all Rights or Options, and waive or vary any Vesting Conditions in regard to any Award at any time.

Where Vesting Conditions are not satisfied before 5pm on the Vesting Date, Awards will lapse.

Exercise of Rights and Options

Subject to the Plan, and terms of issue, an Award maybe exercised at any time during the Exercise Period for that Award.

Subject to the Plan, an Award may be exercised before the Exercise Period if a resolution for a members voluntary winding up is proposed.

An Award which has not lapsed may be exercised by the Participant giving to the Company:

·         a Notice of Exercise signed by the Participant

·         the Certificate for the Option and

·         in the case of Options only, a cheque or electronic funds transfer payable to the Company for the Exercise Price for the number of Options being exercised.

Once the Notice of Exercise becomes effective, the Company must transfer or issue the number of Shares specified in the Notice of Exercise to the Participant, cancel the Certificate for the Awards being exercised and if applicable, issue a new Certificate for any remaining Awards.

Shares allocated on exercise of Awards rank pari passu in all respects with Shares previously issued, in particular, entitlement to dividends declared after the date of allotment, and all issues of securities made or offered pro rata to holders of Shares.

Lapse of Rights and Options

An Award which has vested with the Participant lapses on the earlier of the Last Exercise Date or the date determined by the Board after the date of termination of employment of the Participant.

If a Participant is a Bad Leaver, then on the date of cessation of employment of that Participant all Awards held by the Participant will be automatically forfeited and will lapse. All rights, title and interests in all Awards held will be automatically forfeited.

If a Participant fails for any reason to exercise all the Awards registered in the Participant's name before the occurrence of a circumstance those Awards that the Participant would have been entitled to exercise and may have had an entitlement to have vested in lapses and all rights of a Participant under the Plan in respect of those Awards ceases .

Dealings with Rights and Options

Except as permitted by the Plan, an Award is personal to the Participant and may not be exercised by another person, nor Dispose of or otherwise deal with. Any purported Disposal or dealing is not recognised in any manner.

Dealings with Shares

Participants must comply with the Share Trading Policy at all times.

A Holding Lock will be applied to Shares issued on exercise of Awards. If a Holding Lock applies, the Shares will not be transferable, and Participants may not encumber the Shares (unless an exception applies).

Administration of the Plan

The Plan is administered by the Board. The Board has power to determine appropriate procedures and make regulations for the administration of the Plan, as well terminate or suspend the operation any time, provided that the termination or suspension does not adversely affect or prejudice the rights of Participants holding Awards at that time.

Subject to the clauses in the Plan, the Company must pay all expenses, costs and charges incurred in the administration of the Plan in the amounts and proportions as they shall agree.

The Trust Deed

Establishment of the Trust

The Trust has been established for the purpose of acquiring and holding Plan Shares and holding any other Trust Property for the benefit of Participants in accordance with the Deed.

The Company must pay all Trust Expenses.

Plan Trustee

Subject to the Trust Deed, the Trustee has all of the powers in respect of the Trust that it is legally possible for a trustee to have as though it were the absolute owner of the Trust Property and acting in its personal capacity.

The Trustee is not entitled to receive from the Trust any remuneration in respect of its performance of its obligations as trustee of the Trust. The Company must pay the Trustee, from its own resources, such fees and reimburse such expenses incurred by the Trustee as the Company and the Trustee agree in writing. The Trustee is entitled to retain for its own benefit any fee or reimbursement agreed to in writing.

The Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" (EST) for the purposes of section 130-85(4) of the ITAA 1997.

Operation of the Trust

The Company may contribute money to the Trustee to fund the acquisition or subscription of Shares for the purposes of the Plan. Any such contributions to the Trustee by the Company for the acquisition or subscription of Shares are irretrievable by the Company.

The Trustee must, if directed by the Company acquire Shares in the ordinary course of trading, or by way of an off-market transaction, and/or subscribe for new Shares issued by the Company. The Company must provide the Trustee with any funds required by the Trustee in order to comply with its obligations.

All funds received by the Trustee from the Company will constitute Accretions to the corpus of the Trust and will not be repaid to the Company and, unless the Trust Deed or the Plan Rules state otherwise, no Participant shall be entitled to receive such funds.

Where an amount paid by the Company to the Trustee in respect of the subscription or acquisition of Shares for the benefit of a Participant or Participants is in excess of the amount required by the Trustee to meet its obligations, the Trustee must deposit the amount into any account opened and operated by the Trustee to be used for the Trustee to apply such amounts to subscribe for, acquire, and/or allocate and deliver Shares in accordance with the Deed or the Plan Rules. The Trustee must not sell or otherwise dispose of any Shares other than in accordance with the Deed or under the relevant Plan Rules.

Unless and until Shares are allocated to a Participant or transferred to a Participant, the Trustee will hold those Shares on trust for the benefit of Participants generally from time to time in accordance with the terms and conditions of the Deed.

Upon Shares being allocated to a Participant, the Participant becomes beneficially entitled to such Shares, subject to the relevant Plan Terms.

During any Restrictive Period, the Trustee must not assign, transfer, sell, grant an Encumbrance over or otherwise deal with Allocated Plan shares. The Company may apply arrangements it considers necessary to enforce restrictions including applying a holding lock on Allocated Plan Shares. At any time after a Restrictive Period and subject to securities trading policy and Applicable Law, a Participant may request transfer of legal title to those Allocated Plan Shares.

Forfeited Shares

A Participant may forfeit any right or interest in their Allocated Plan Shares or Shares in respect of which the Participant is the registered holder, in accordance with the Plan under which those Allocated Plan Shares or Shares were allocated or provided to the Participant.

When Shares where a Participant is the registered holder, become Forfeited Shares, the Board may at its discretion, direct the Trustee to purchase and otherwise accept a transfer of those Forfeited Shares.

The Trustee must, if directed by the Company, reallocate any Forfeited Shares (or the proceeds of sale of such Forfeited Shares), for the benefit one or more other Participants or for the benefit of, one or more Participants under any Company Plan in respect of which the Trustee is trustee.

Unless the Company cancels Forfeited Shares, the Trustee must hold Forfeited Shares (or the proceeds of sale of such Forfeited Shares) for the benefit of Participants as though they were Unallocated Shares unless and until it receives a notice from the Company.

Dividends

Subject to the Trust Deed, if the Trustee holds Allocated Shares on a Participant's behalf, the Participant is entitled to receive all Dividends and other distributions paid in respect of their Allocated Shares and the Trustee must pay all Cash Dividends received in respect of the Participant's Allocated Shares to the Participant. No Participant may waive any Dividend entitlement due to it.

Income and capital distributions

A Participant is presently entitled to so much of the Net Income of the Trust for a Year of Income which is attributable to the Allocated Shares held by the Trustee on behalf of the Participant and the proceeds of sale arising from the sale of Share Rights or Shares by the Trustee on behalf of the Participant.

The balance of the Net Income of the Trust for a Year of Income to which no Participant is presently entitled in accordance may be applied in payment of any necessary and incidental costs and expenses incurred by the Trustee in the execution of the Trust, or accumulated by the Trustee as an Accretion to the Trust.

Termination of the Trust

Upon termination of the Trust, if there is any Trust Property remaining in the Trust following the distribution to Participants of any Allocated Shares and any Net Income attributable to Participants and the application of any capital of the Trust, that Trust Property must be applied in whole or in part for the benefit of one or more of Termination Beneficiaries as the Trustee thinks fit. The Trustee must not pay any balance to the Company.

Reasons for Decision

All legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.

Question 1

Summary

The Company is entitled to deduct an amount under section 8-1 for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Company share to satisfy ESS interests issued pursuant to the Plan to Participants.

Detailed reasoning

Subsection 8-1(1) allows you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, pursuant to subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature.

The Company operates an ESS as part of its remuneration strategy.

Under the Plan, the Company grants Rights and Options (Awards) to employees (Participants) and makes irretrievable cash contributions to the Trust (in accordance with the Plan and the Trust Deed) which the Trustee will use to acquire Shares (either on-market or by subscription) for allocation to Participants.

Incurred in carrying on a business

The Company must provide the Trustee with all the funds required to enable the Trustee to subscribe for or acquire those Company Shares.

The contributions made by the Company are irretrievable and non-refundable to the Company in accordance with the Trust Deed as:

·         All funds received by the Trustee from the Company will constitute Accretions to the corpus of the Trust and will not be repaid to the Company, and

·         On termination of the Trust, the Company does not have any entitlement to any part of the Trust Property.

The Company has granted Awards under the Plan as part of its remuneration and reward program for Participants. The costs incurred by the Company for the acquisition of Shares to satisfy Awards arise as part of these remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees.

Not capital or of a capital nature

The costs will be an outgoing incurred for periodic funding of a bona fide ESS for employees of the Company. Costs incurred are likely to be in relation to more than one grant of Awards and the Company intends to continue satisfying outstanding Awards using shares acquired by the Trust. This indicates that the irretrievable contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure of the Company.

While the contributions may secure an enduring or lasting benefit for the employer that is independent of the year to year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be sufficiently small. Therefore, the payments are not capital, or of a capital nature.

Question 2

Summary

The Company will obtain an income tax deduction pursuant to section 8-1 in respect of the costs incurred in relation to the on-going administration of the Plan and the Trust.

Detailed Reasoning

Section 8-1 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, incurred in producing exempt or non-assessable non-exempt income or where a provision of the tax law prevents the deduction.

The Company operates an ESS as part of its remuneration strategy.

The Company incurs on-ongoing administration costs for operating the ESS such as:

·         accounting

·         tax compliance

·         legal compliance, and

·         share transaction costs.

These costs are regular and recurrent employment expenses which are deductible under section 8-1 as they are costs necessarily incurred in running the ESS while carrying on its business for the purpose of gaining or producing its assessable income.

Relevantly, these costs are not capital or of a capital nature as the loss or outgoings are regular and recurrent and are part of the ordinary employee remuneration costs of the company. (ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible).

Question 3

Summary

The irretrievable cash contributions made by the Company, to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Company Shares to satisfy ESS interests issued pursuant to the Plan, will be deductible to the Company under section 8-1 if the contributions are made after the acquisition of the relevant ESS interests.

Detailed reasoning

Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to the Trust to purchase Shares in excess of the number required to grant the relevant Awards to the employees arising in the year of income from the grant of options, under an employee share scheme. Further information is available 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 Plan is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests (i.e. a beneficial interest in a share or a beneficial interest in a right to acquire a beneficial interest in a share) are provided to employees (i.e., Participants) in relation to their employment with the Company.

The Plan contains a number of interrelated components which includes the provision of irretrievable cash contributions by the Company to the Trustee of the Trust. These contributions enable the Trustee to acquire Company Shares for the purpose of enabling each Participant, indirectly as part of the Plan, to acquire ESS interests.

The deduction for the irretrievable cash contribution can only be deducted from the assessable income of the Company in the income year when the relevant beneficial interest in a share in the Company, or beneficial interest in an Award to a beneficial interest in a Share in the Company, is acquired by a Participant under the Plan. As the contribution is made after the acquisition of the relevant ESS interest they will be deductible in the income year in which the contribution is made.

Question 4

Summary

The Commissioner will not make a determination that Part IVA 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, Company shares by the Trustee, and costs incurred by the Company in relation to the on-going administration of the Plan and the Trust.

Detailed Reasoning

Part IVA is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained (or would, but for section 177F) by a taxpayer in connection with a scheme to which Part IVA applies.

The Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust where the conditions of Division 83A are met.

In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the employee share trust (EST) arrangement.

Therefore, having regard to the eight factors set out in subsection 177D(2), the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling the Company to obtain a tax benefit.

Question 5

Summary

The consideration received by the Company, as a result of Participants exercising their Options granted under the Plan to acquire Shares in the Company, will be included in the Company's assessable income under section 6-5.

Detailed Reasoning

Ordinary Income

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income.

The receipt by an employer of the exercise price paid by the employee to acquire a share under the ESS is properly regarded as either a product of, or incidental to, the conduct of the employer's business and is included in the employer's assessable income as income according to ordinary concepts under section 6-5. Further information is available in ATO Interpretative Decision ATO ID 2010/155 Employee Share Scheme Assessability to an employer of the option exercise price paid by an employee.

Under the Plan, the Company may offer or issue options which are rights to be issued a Share upon payment of the Exercise Price and satisfaction of certain conditions. The exercise price paid by the employee to the Company will be included in the Company's assessable income under section 6-5 as the receipt of the payment is a product of the Company's business or is incidental to the conduct of the Company's business.

Question 6

Summary

The provision of Shares, in satisfaction of those Awards to Participants under the Plan, will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Detailed Reasoning

An employer's liability to fringe benefits 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.

In general terms, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

In particular, paragraph (h) of subsection 136(1) of the FBTAA excludes the following from being a 'fringe benefit':

(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;

The Commissioner accepts that the Plan is an ESS, the options and rights for the Company Shares provided under the Plan are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of ESS interests for Company shares under the Plan will not be subject to FBT on the basis that they are acquired by Participants under an ESS (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

In addition, when an Award is later exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the Award and not in respect of employment (refer 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).

Question 7

Summary

The irretrievable cash contribution made by the Company to the Trustee in order to:

a) subscribe for, or acquire on-market Company Shares, and/or

b) fund the ongoing administration of the Trust

will not be a fringe benefit within the meaning of that term in subsection 136(1) of the FBTAA.

Detailed Reasoning

One benefit excluded from being a 'fringe benefit', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an EST within the meaning of the Income Tax Assessment Act 1997.

In examining whether the requirements of subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that is relevant. To qualify as an EST, a trustee's activities must be limited to those described in paragraphs 130-85(4)(a), (b) and (c).

Paragraph 130-85(4)(a) and (b) are satisfied because:

·         the Trust acquires shares in a company, namely the Company, and

·         the Trust ensures that ESS interests as defined in subsection 83A-10(1) (being Rights and Options in the Company) are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust and the Plan.

Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'?

Activities that 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 to be merely incidental.

In the present case, the objects of the Trust are for the sole purpose of undertaking activities that are in line with the definition of an EST under section 130-85(4) (clause 4.2 of the Trust Deed) including paragraph 130-85(4)(c) as the other activities undertaken by the Trustee are merely incidental to managing the Plan.

Therefore, the irretrievable cash contribution made by the Company to fund the subscription for or acquisition on-market of Company Shares, or the ongoing administration of the Trust will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA.