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You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1051756697109

Date of advice: 25 September 2020

Ruling

Subject: Employee share scheme

Question 1

Will Company X be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) for irretrievable cash contributions made by Company X to the trustee (Trustee) of the Employee Share Trust (Trust) to fund the subscription for, or acquisition on-market of, ordinary shares in Company X (Shares) to satisfy employee share scheme (ESS) interests issued pursuant to the Equity Incentive Plan Rules (Plan)?

Answer

Yes

Question 2A

Will the irretrievable cash contributions made by Company X 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 Company X 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 cash contributions made by Company X 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 Company X 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 (Cth) (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company X 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

Question 4

Will the provision of ESS interests to employees of the Group under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTAA 1986)?

Answer

Question 5

Will the irretrievable cash contributions made by the 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 1986?

Answer

This ruling applies for the following periods:

For ruling questions 1 to 3, the income tax years ended 30 June 20XX to 30 June 20XX.

For ruling questions 4 to 5, the ruling period is the fringe benefit tax years ended 31 March 20XX to 31 March 20XX.

The scheme commences on: date of execution of the Trust Deed

Relevant facts and circumstances

Company X is listed on the Australian Stock Exchange, reporting to a financial year ending 30 June.

Company X is the head entity of a consolidated group for income tax purposes (the Group).

Company X carries on a business which produces assessable income.

Company X established the Plan (as subsequently amended and adopted by the Board) as the equity component of eligible employees' remuneration.

Under the Plan:

a) The Board may grant eligible employees (Participants) rights to acquire Shares (Rights), for nil consideration;

b) Rights granted under the Plan are subject to vesting conditions;

c) Rights do not confer any right or interest, whether legal or equitable, in the Shares until vested and the Rights have been exercised;

d) Rights that have vested may be exercised by a Participant at any time, for nil consideration;

e) Upon exercise of vested Rights, the Board may:

(i) Issue or procure the transfer of Shares in respect of the vested Rights to the Participant or a trustee who holds the Shares on behalf of the Participant (Equity Settled); or

(ii) Pay a cash amount in full satisfaction of the Shares that would otherwise have been allocated on exercise of the Right (Cash Settled);

f) The Board may instruct a Trustee to either subscribe for new Shares or acquire Shares on the market to be held on a Participant's behalf, subject to the Trustee receiving from Company X sufficient funds to subscribe for or acquire the Shares;

g) Shares issued or transferred on the exercise of vested Rights rank equally in all respects with other Shares on issue and may be subject to Disposal Restrictions;

h) If the Participant ceases to be an employee of the Group:

- Any unvested Rights may lapse; and

- Any Shares subject to Disposal Restrictions may be forfeited;

i) Where the Participant acts fraudulently or dishonestly:

- Unvested Rights shall lapse;

- Vested Rights are forfeited;

- Any Shares held by the Participant following exercise of Rights are forfeited;

- Where Rights have been Cash Settled, the cash amount paid to the Participant must be repaid to Company X; and/or

- Where Shares that have been allocated to the Participant following exercise of Rights have been sold, all or part of the net proceeds of such a sale must be repaid to Company X;

j) A trust may be used to facilitate the allocation of Shares to a Participant;

k) The Trustee may acquire the Shares on market in advance of exercise of a Right.

Pursuant to the Plan, Company X makes the following offers of Rights to Participants:

a) Long-term incentive offers - Participants are offered Rights for nil consideration subject to service-based and performance-based vesting conditions. Rights which vest may be exercised by the Participant (or in some instances, vested Rights are exercised automatically upon vesting) and, upon valid exercise, the Participant is allocated one Share for each Right that is exercised (or receives a cash payment of equivalent value). No exercise price is payable by the Participant to exercise vested Rights.

b) Employee Share Offer - Participants are invited to elect to sacrifice up to $X amount of their pre-tax salary or wages over the relevant 12-month period (Participation Period) in return for a grant of Rights to the equivalent value. Rights are subject to an exercise restriction during the Participation Period. At the end of the Participation Period (Conversion Date), Rights are automatically exercised and the Participant is allocated one Share for each Right. No exercise price is payable by the Participant on the automatic exercise of Rights. Participants are not permitted to transfer or otherwise dispose of the Shares following automatic exercise of Rights until the earlier of two (2) years from the Conversion Date or such longer period elected by the Participant.

While the Plan is not restricted to Australian tax-resident employees, the scope of this ruling is limited to Rights granted under the Plan to Australian tax-resident employees only who engage in activities that derive income assessable in Australia.

Pursuant to the Trust Deed (Trust Deed), Company X established the Employee Share Trust (Trust) for the purposes of acquiring, holding and allocating shares in connection with the Plan for the benefit of its employees.

The trustee of the Trust is neither a subsidiary nor a related body corporate of Company X.

Broadly, the Trust operates as follows:

a) The objects of the Trust are for the sole purpose of:

- Acquiring, holding and transferring Shares or rights to acquire Shares;

- Providing beneficial interests in those Shares or rights to acquire Shares under the Plan to Beneficiaries; and

- Conducting other activities that are merely incidental to those noted above;

b) Where there is any inconsistency between the Trust Deed and the Plan, the Trust Deed prevails to the extent of the inconsistency;

c) The Trustee holds General Trust Property on trust for all Beneficiaries;

d) Company X may not acquire any interest in the Capital (or corpus) and may not become entitled to any Income of the Trust Fund;

e) The Trustee holds Allocated Trust Property for the benefit of identified Participants (Allocated Trust Property Beneficiary);

f) If Shares are held on trust for a specified Allocated Trust Property Beneficiary, the Allocated Trust Property Beneficiary is absolutely entitled to the Shares as against the Trustee;

g) Where any Allocated Trust Property is forfeited, it will be held as General Trust Property;

h) The Trustee's powers are subject to the objects of the Trust, and includes the power to sell or otherwise dispose of Shares or rights to acquire Shares which the Trustee is authorised by the Trust Deed to acquire;

i) The Trustee's responsibility to subscribe for or purchase Shares is subject to Company X providing the Trustee sufficient funds for the subscription or purchase;

j) Company X covenants to keep the Trustee in funds necessary to do any act requested by the Group;

k) No amendment to the Trust Deed may be made which confers on Company X, nor any member of the Group, any right to any money or Shares already in the hands of the Trustee at the time the alteration is made;

l) On termination of the Trust, no part of the balance of the Trust Fund can be repaid by the Trustee to Company X or any member of the Group, and neither Company X nor any member of the Group is a Beneficiary or has any entitlement to any part of the Trust Fund, including any Shares that form part of the Trust Fund, at any time.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 83A-10

Income Tax Assessment Act 1997 section 83A-210

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

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Question 1

Summary

Yes, Company X will be entitled to a deduction under section 8-1 of the ITAA 1997 in respect of the irretrievable cash contributions made by Company X to the Trustee of the Trust to fund the subscription for, or acquisition on-market, of Shares as the contributions are part of an on-going series of payments in the nature of remuneration of Company X's Australian-based employees.

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 will allow 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.

Taxation Ruling TR 2018/7 Income tax: employee remuneration trusts (TR 2018/7) provides the Commissioner's view on a broad range of taxation issues for employers, trustees and employees who participate in an employee remuneration trust arrangement (ERT).[1] According to TR 2018/7, a contribution made by an employer is deductible to the employer under section 8-1 of the ITAA 1997 where all of the following apply:

- it is an irrevocable payment of cash, made at a time when the employer carries on a business for the purpose of gaining or producing assessable income

- the employer reasonably expects their business to benefit from the contribution via an improvement in employee performance, morale, efficiency or loyalty, and

- the contribution is intended to be permanently and entirely dissipated in remunerating employees of that business within a relatively short period of the contribution being made (other than employees who are wholly engaged in affairs of capital of the business).[2]

Company X carries on a business which produces assessable income.

Company X established the Plan as the equity component of eligible Australian-based employees' remuneration. Under the Plan, Company X grants Rights to employees and upon the exercise of vested Rights, the Participants are allocated one Share for each vested Right. The Plan provides for the use of a trust to facilitate the allocation of Shares to a Participant.

In accordance with the Trust Deed, Company X must provide the Trustee with all the funds required to enable the Trustee to subscribe for, or acquire, the Shares for allocation to Participants upon exercise of vested Rights.

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

a. Company X may not acquire any interest in the Capital (or corpus) and may not become entitled to any Income of the Trust Fund;

b. Where any Allocated Trust Property is forfeited, it will be held as General Trust Property;

c. No amendment to the Trust Deed may be made which confers on Company X, nor any member of the Group, any right to any money or Shares already in the hands of the Trustee at the time the alteration is made; and

d. On termination of the Trust, no part of the balance of the Trust Fund can be repaid by the Trustee to Company X or any member of the Group, and neither Company X nor any member of the Group is a Beneficiary or has any entitlement to any part of the Trust Fund, including any Shares that form part of the Trust Fund, at any time.

Therefore, the costs incurred by Company X for the acquisition of Shares by the Trustee to satisfy its obligations under the Plan arise as part of Company X's remuneration arrangements with its employees. The cash contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. Nothing in the facts suggests any intention for any contribution to be retained in the Trust for an extended period of time. As such, it is incurred in the process of carrying on a business for gaining or producing Company X's assessable income.

While the cash 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.

Consequently, Company X will be entitled to a deduction under section 8-1 of the ITAA 1997 in respect of the irretrievable cash contributions made by Company X to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Shares to satisfy its obligations under the Plan.

Question 2A

Summary

Yes, pursuant to section 83A-210 of the ITAA 1997, where irretrievable cash contributions are made at a time before the acquisition of the relevant ESS interests by the ultimate beneficiary, the irretrievable cash contribution can only be deducted from the assessable income of Company X in the income year when the relevant ESS interests are acquired by the Participant under the Plan.

Detailed reasoning

It is often the case that an outgoing will be both incurred and paid in the same year of income, and as such, the amount is deductible in that income year for the purposes of section 8-1 of the ITAA 1997.[3]

However, section 83A-210 of the ITAA 1997 modifies this rule in respect of contributions provided by an employer to a trust to purchase shares under an ESS arrangement in specific circumstances. The effect of section 83A-210 is to deem the timing an employer incurred the outgoing to be the time when the ESS interest is acquired by the ultimate beneficiary, rather than the time when the employer makes the contribution to the trust, if the contribution was made before the ESS interests are acquired. Further information is available in ATO Interpretative Decision ATO ID 2010/103Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

The Plan is an employee share scheme 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) in Company X are provided to employees of Company X in relation to their employment with Company X.

The granting of the ESS interest to the Participants, the provision of the irretrievable cash contributions to the Trustee, the acquisition and holding of Shares by the Trustee and the allocation of Shares to Participants are all interrelated components of the Plan. All the components constitute an arrangement for the purposes of section 83A-210 that must be carried out so that the scheme can operate as intended.

Therefore, the irretrievable cash contributions can only be deducted from the assessable income of Company X in the income year when the relevant beneficial interest in a Share, or beneficial interest in a Right to a beneficial interest in a Share, is acquired by the employees under the Plan, as provided by section 83A-210 of the ITAA 1997.

Question 2B

Summary

Yes, pursuant to section 8-1 of the ITAA 1997, where irretrievable cash contributions are made at a time after the acquisition of the relevant ESS interests by the ultimate beneficiary, the irretrievable cash contribution can be deducted from the assessable income of Company X in the income year in which the contribution is made.

Detailed reasoning

As discussed in Question 2A (above), section 83A-210 only modifies the time an amount is incurred in the specific circumstances as described in that provision.

In circumstances where money is provided by an employer at a time other than before the employees acquire the ESS interest, the general rule under section 8-1 of the ITAA 1997 applies to determine the income year in which the amount is deductible.

Therefore, irretrievable cash contributions made by Company X to the Trustee of the Trust to fund the subscription for or acquisition on-market of Shares by the Trust, and made after the acquisition of the relevant ESS interest by the ultimate beneficiary will be deductible in the income year in which the contribution is made by Company X.

Question 3

Summary

No, Part IVA of the ITAA 1936 will not apply to deny, in part or in full, any deduction claimed by Company X in respect of the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for or acquisition on-market of Shares by the Trustee of the Trust.

Detailed reasoning

Part IVA of the ITAA 1936 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, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

The Commissioner generally accepts that a deduction may be available where an employer provides money or other property to an employee share trust where the conditions of Division 83A of the ITAA 1997 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 arrangement.

Therefore, having regard to the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling Company X to obtain a tax benefit.

Question 4

Summary

No, the provision of Rights granted under the Plan will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986 as they are excluded by paragraph 136(1)(h) of the FBTAA 1986 as ESS interests acquired under an 'employee share scheme'.

Detailed reasoning

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA 1986, 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 1986 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 definition.

Paragraph (h) of subsection 136(1) of the FBTAA 1986 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;

An 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 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 employee's employment.

An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company. The Rights to acquire Shares in Company X granted under the Plan are ESS interests for the purposes of section 83A-210.

Therefore, the Plan constitutes an 'employee share scheme' within the meaning of subsection 83A-10(2) because it is a scheme under which ESS interests in Company X are provided to the employees of Company X in relation to their employment with Company X.

As the Rights granted under the Plan will be acquired by the Australian-based employees for nil consideration, they are ESS interests to which subdivision 83A-B or 83A-C of the ITAA 1997 applies.

Accordingly, the provision of Rights under the Plan will not be subject to FBT on the basis that they are acquired by Participants under an 'employee share scheme' (to which subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph 136(1)(h) of the FBTAA 1986.

In addition, when a Right 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 Right and not in respect of employment (refer ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

Question 5

Summary

No, the irretrievable cash contributions made by the Group to the Trustee pursuant to the Trust Deed, to fund the subscription for or acquisition on-market of Shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986 by virtue of the exclusion for employee share trusts in paragraph 136(1)(ha) of the FBTAA 1986.

Detailed reasoning

Paragraph (ha) of subsection 136(1) of the FBTAA 1986 excludes from the definition of 'fringe benefit':

(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);

Therefore, for the irretrievable cash contributions to be excluded from the definition of 'fringe benefit', the Trust must be an 'employee share trust' as defined in subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) provides that 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

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'? (TD 2019/13).

In the present case, the Trust established by the Trust Deed satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 because:

a. The Trust acquires Shares in a company;

b. The Trust ensures that ESS interests as defined in subsection 83A-10(1) are provided under an employee share scheme (discussed above in Question 4) by allocating Shares acquired upon the exercise of vested Rights to the employees of the Group in accordance with the Trust Deed and the Plan; and

c. The Trust Deed only contains powers and/or duties that are merely incidental to the acquisition, holding and allocation of the Shares.

As such, the irretrievable cash contributions made by the Group to fund the subscription for or acquisition on-market of Shares by the Trust pursuant to the Trust Deed will be excluded as a fringe benefit by virtue of paragraph 136(1)(ha) of the FBTAA 1986.

[1] Paragraph 3 of TR 2018/7 makes it clear that the ruling does not intend to apply to an employee shares scheme if either Subdivisions 83A-B or 83A-C of the ITAA 1997 applies to an ESS interest under that scheme. However, the law and principles set out in the draft ruling in relation to the application of section 8-1 should have general application and are not limited to the ERTs.

[2] Paragraph 9 of TR 2018/7.

[3] Paragraph 15 of TR 97/7.

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