Edited version of private advice

Authorisation Number: 1051840910106

Date of advice: 1 July 2021

Ruling

Subject: Application of the single entity rule

Question 1

Will Company A, as the head entity of the Company A income tax consolidated group, be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made to Company B (Company B), as trustee of the trust (EST) established by the Trust Deed (EST Deed), to fund the subscription for, or acquisition on market of, shares in Company A by the Trustee to satisfy ESS interests issued pursuant to the Plan A and Plan B?

Answer

Yes

Question 2

Will the irretrievable cash contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to Company B as trustee of the EST to fund the subscription for, or acquisition on market of, Company A shares by Company B be deductible to Company A 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?

Answer

Yes.

Question 3

Will the irretrievable cash contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to Company B as trustee of the EST be deductible under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the acquisition of the relevant ESS interests?

Answer

Yes.

Question 4

Will Company A, as the head entity of the Company A income tax consolidated group, be entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of costs incurred, other than those which are capital in nature, in relation to the on-going administration of the EST, including expenses relating to the preparation of tax returns and obtaining tax advice for the EST?

Answer

Yes

Question 5

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, the whole or part of, a deduction claimed by Company A for the irretrievable cash contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to fund the subscription for, or acquisition on-market of, shares in Company A by Company B as trustee of the EST?

Answer

No.

The rulings for questions 1 - 5 inclusive each apply for the following periods:

• Income tax year ending 30 June 20XX
• Income tax year ending 30 June 20XX
• Income tax year ending 30 June 20XX
• Income tax year ending 30 June 20XX
• Income tax year ending 30 June 20XX

Question 6

Will the irretrievable cash contributions made to Company B as trustee of the EST to fund the subscription for, or acquisition on-market of, shares in Company A by Company B as trustee of the EST be treated as a fringe benefit within the meaning of section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No.

Question 7

Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount of Company A by the amount of the tax benefit gained from irretrievable cash contributions made to Company B as trustee of the EST to fund the subscription for, or acquisition on-market of, shares in Company A?

Answer

No.

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

Relevant facts and circumstances

Company A has implemented two employee share schemes, the Plan A and Plan B.

Plan A

Company A established Plan A which is governed by the Plan A Rules.

Plan A aims to assist in the recruitment, reward, retention and motivation of senior management by providing the Board of Company A with the ability to offer a long term incentive to selected senior employees in the form of the grant of rights or options under the terms of the Plan A Rules.

Plan A is designed to reward those selected senior employees for outstanding contributions to the business, drive financial results and support long term strategic objectives. Awards are and will be linked to the achievement of certain performance and services conditions aimed at aligning the interests of the participating employees with those of Company A shareholders. Company A provided the Plan A Rules.

Plan B

Company A has established Plan B which is governed by the Plan B Rules.

Plan B aims to assist in attracting talented staff, increase staff loyalty and reduce the staff turnover of Company A by providing the Board of Company A with the ability to offer share ownership to employees of Company A.

Plan B is designed to further the growth and profitability of Company A by encouraging share ownership and thereby aligning the goals of employees with those of Company A shareholders. Company A provided the Plan B Rules.

Employee Share Trust

The Plan A Rules and Plan B Rules both contemplate and are designed to operate in conjunction with an employee share trust (EST). Company A as settlor and Company B as trustee executed the Employee Share Trust Deed (EST Deed).

While Company B is a subsidiary member of the Company A income tax consolidated group, it will be acting solely in its capacity as trustee of the EST for the purposes of this ruling. The scheme to which this ruling relates is in effect an arm's length arrangement.

Questions 1 to 4 - application of the single entity rule in section 701-1

The consolidation provisions of the Income Tax Assessment Act 1997 (ITAA 1997) allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 of the ITAA 1997 the subsidiary members of an income tax consolidated group are taken to be parts of the head company. As a consequence, the subsidiary members cease to be recognised as separate entities during the period that they are members of the income tax consolidated group, with the head company of the group being the only entity recognised for income tax purposes.

The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997.

As a consequence of the SER, the actions and transactions of the subsidiary members of the Company A income tax consolidated group are treated, for income tax purposes, as having been undertaken by Company A as the head company of the Company A income tax consolidated group.

Questions 6 and 7

The SER in section 701-1 of the ITAA 1997 has no application to the FBTAA 1986. The Commissioner has therefore provided a ruling to Company A and each subsidiary member of the Company A income tax consolidated group in relation to questions 6 and 7.

All references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

For present purposes, subsection 8-1(1) 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.

Company A carries on a retail business goods which produces assessable income. Company A operates an employee share scheme as part of its renumeration strategy.

Company A grants options or shares to employees and makes irretrievable contributions to the EST (in accordance with the Plan A rules, Plan B rules and the EST Deed) which Company B will use to acquire shares (either on-market or by subscription) for allocation to Participants to satisfy their options or allocation of shares.

Incurred in carrying on a business

Company A must provide the trustee of the EST (Trustee) with all the funds required to enable the Trustee to subscribe for or acquire those Company A shares.

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

•         On termination of the EST, Company A and any member of the Group do not have any entitlement to any part of the EST Fund, including any shares that form part of the EST Fund, at any time, and;

•         Company A may not acquire any interest in the Capital (or corpus) or be entitled to any income of the EST Fund.

Company A has granted (and will in the future grant) options under both the Plan A and Plan B as part of its renumeration and reward program for Participants. The costs incurred by Company A for the acquisition of shares to satisfy options arise as part of these renumeration arrangements, and contributions to the EST are part of an on-going series of payments in the nature of renumeration of its employees.

Not capital or of a capital nature

The costs will be an outgoing incurred for periodic funding of a bona fide employee share scheme for employees of Company A and the Group. Costs incurred are likely to be in relation to more than one grant of Awards (rather than being one-off), and Company A intends to continue satisfying outstanding Awards using shares acquired by the EST. This indicates that the irretrievable contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure of Company A.

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

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 options 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.

Plan A and Plan B are employee share schemes for the purposes of subsection 83A-10(2) as they are schemes 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 Company A (or the Group).

Plan A and Plan B contain a number of interrelated components which includes the provision of irretrievable cash contributions by Company A to the Trustee of the EST. These contributions enable the Trustee to acquire Company A shares for the purpose of enabling each Participant, indirectly as part of Plan A and Plan B, to acquire ESS interests.

The irretrievable cash contribution can only be deducted from the assessable income of Company A in the income year when the relevant beneficial interest in a share in Company A, or beneficial interest in a Right to a beneficial interest in a share in Company A, is acquired by a Participant under the Plan A and Plan B.

Question 3

Consistent with the analysis in question 2 (above), where the contribution is made after the acquisition of the relevant ESS interests, irretrievable contributions made by Company A to the Trustee of the EST to fund the subscription for or acquisition on-market of shares by the EST to satisfy the ESS interests granted to Participants will be deductible in the income year in which the contribution is made by Company A.

Question 4

Section 8-1 of the ITAA 1997 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.

Company A carries on a business of the retailing which produces assessable income. Company A operates an employee share scheme as part of its remuneration strategy.

Company A incurs on-ongoing administration costs for operating the Employee Share Scheme (ESS) such as

• employee plan record keeping
• the acquisition of shares on market (e.g. brokerage costs and the allocation of shares to Participants),
• preparing the annual audit of the financial statements, and
• preparing the tax returns or obtaining tax advice for the Trust.

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 5

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 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 EST 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 A to obtain a tax benefit.

Question 6

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 'fringe benefit' definition.

In particular, 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;

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

Accordingly, the provision of options for Company A shares under Plan A and Plan B 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 (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986.

In addition, when an option 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 option 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

One benefit excluded from being a 'fringe benefit', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA 1986, is 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.

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 employee share trust, 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:

•         EST acquires shares in a company, namely Company A; and

•         The EST ensures that ESS interests as defined in subsection 83A-10(1) are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Deed and the Plan A and Plan B rules.

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 Draft Taxation Determination TD 2019/D8: 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 activities that the Trustee is permitted to undertake under the Trust Deed, particularly in relation to those listed in the Trust Deed, are indicative of those required to administer an employee share trust and are merely incidental to the primary purposes stated in paragraphs 130-85(4)(a) and (b). This is consistent with the objects of the EST, a clause of the Deed indicates that it is intended that the Trust will be managed and administered in a way that satisfies the requirements of subsection 130-85(4)(c).

Therefore, the cash contribution made by Company A to fund the subscription for or acquisition on-market of Company A shares by the EST will not be a fringe benefit.