Edited version of private advice

Authorisation Number: 1051884312342

Date of advice: 18 August 2021

Ruling

Subject: Employee share scheme

Question 1

Will the Company be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 for irretrievable cash contributions made to the Trustee to acquire Company shares for the Trust to satisfy grants of ESS interests made under the scheme?

Answer

Yes

Question 2

Will irretrievable contributions made by the Company to the Trustee to fund the acquisition of Company shares, which are made before the participant acquires the relevant ESS interests, be deductible to the Company at a time determined by section 83A-210 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 3

Will irretrievable contributions made by the Company to the Trustee to fund the acquisition of Company shares, made on or after the participant acquires the relevant ESS interests, be deductible to the Company in the income year in which the contributions are made under section 8-1 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 4

Will irretrievable contributions made by the Company to the Trustee to fund the acquisition of Company shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No

Question 5

Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 applies to deny, in any part or in full, any deduction claimed by the Company for irretrievable contributions made by the Company to the Trustee for the purpose of acquiring Company shares to satisfy grants of ESS interests under the scheme?

Answer

No

Question 6

Will the Commissioner make a determination under section 67 of the Fringe Benefits Tax Assessment Act 1986 to include an amount in the aggregate fringe benefits amount of the employer, by the amount of tax benefit gained from contributions made to the Trustee, to fund the acquisition of Company shares?

Answer

No

This ruling applies for the following periods:

For ruling questions 1, 2, 3 and 5, the income years ending 30 June 20XX to 30 June 20YY

For ruling questions 4 and 6, the fringe benefit tax years ending 31 March 20XX to 31 March 20YY.

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

The Company has ordinary shares listed on the Australian Securities Exchange.

The Company is the head company of a tax consolidated group comprising itself and its wholly owned Australian subsidiary companies.

Sub Co is the employer entity of the group and is a subsidiary member of the Company's tax consolidated group.

The Company has an employee share scheme (ESS) in place that is governed by the Plan rules. Under the Plan, participants have the opportunity to receive an award subject to achieving key performance indicators in the relevant financial year. The award includes Company shares that are allocated and held in the Trust on behalf of the participant until the relevant vesting date.

The Trust was established to facilitate the provision of ESS interests to participants under the Plan.

The Trustee of the Trust is an independent third party.

The Company will make contributions to the Trust to fund the acquisition of Company shares by making cash payments to the Trust. These contributions are irretrievable and non-refundable because:

•                 no group entity is a beneficiary or has any entitlement to any part of the Trust's funds at any time

•                 during the life of the Trust, the Trustee can only deal with the Trust's funds and property for the benefit of the beneficiaries; and

•                 where the Trust is terminated and wound up, no group entity is entitled to any of the Trust's funds.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 83A-210

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 section 136

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997), unless otherwise indicated.

Question 1

Detailed reasoning

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.

The Company carries on a business which produces assessable income. The Company operates an ESS as part of its remuneration strategy.

Under the Plan, the Company grants awards to employees and makes irretrievable cash contributions to the Trust (in accordance with the Plan) and the Trust Deed which the Trustee will use to acquire Company shares (on-market or by subscription) for allocation to participants to satisfy their awards.

Incurred in carrying on a business

The Company provides the Trustee with all the funds required to enable the Trustee to subscribe for or acquire the Company shares.

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

•                 no group entity is a beneficiary or has any entitlement to any part of the Trust's funds at any time

•                 during the life of the Trust, the Trustee can only deal with the Trust's funds and property for the benefit of the beneficiaries; and

•                 where the Trust is terminated and wound up, no group entity is entitled to any of the Trust's funds.

The Company has granted (and will in the future grant) awards under the Plan as part of its remuneration and reward program for participants. The costs incurred by the Company for the acquisition of Company shares to satisfy the 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 Sub Co. Costs incurred are likely to be in relation to more than one grant of awards (rather than being one-off), and the Company intends to continue satisfying outstanding awards using Company 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

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 ESS interests under an ESS that occurs before the ultimate beneficiary acquires the ESS interest. 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 beneficial interests in the Company shares (and are ESS interests under subsection 83A-10(1)) are granted to Sub Co employees as a result of their employment with the Group.

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 is acquired by a participant under the Plan.

Question 3

Detailed reasoning

For irretrievable contributions made on or after the participant acquires the relevant ESS interests, section 83A-210 will not apply for the purpose of determining the income year in which the Company can deduct those irretrievable contributions. This is because the contributions are not made before the 'acquisition time' as required by section 83A-210.

Accordingly, such contributions will be deductible for the Company in the income year in which they are incurred under section 8-1.

Question 4

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 (ha) of subsection 136(1) of the FBTAA excludes a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning given under subsection 130-85(4) of the ITAA 1997) from being a 'fringe benefit'.

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:

•                 the Trust acquires shares in the Company, and

•                 the Trust 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 Trust Deed and the 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 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 employee share trust under section 130-85(4) including paragraph 130-85(4)(c) as the other activities undertaken by the Trustee are merely incidental to managing the ESS.

Therefore, the irretrievable cash contribution made by the Company to the Trustee to fund the acquisition of Company shares to satisfy grants of ESS interests will not be a fringe benefit.

Question 5

Detailed reasoning

Part IVA is a general anti-avoidance provision, it 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 employee share trust 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 6

Detailed reasoning

Section 67 of the FBTAA is a general anti-avoidance provision in the FBTAA. Subsection 67(1) of the FBTAA is satisfied where a person, or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer, or the eligible employer and another employer, to obtain a tax benefit.

The Commissioner will only make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement.

As stated above in response to Question 4, without the provision of a 'fringe benefit', no amount will be subject to FBT. The benefits provided to the Trustee by way of irretrievable cash contributions to the Trust are excluded from the definition of a fringe benefit for the reasons provided in response to Question 4 above. As these benefits have been excluded from the definition of a fringe benefit, the FBT liability is not any less than it would have been but for the arrangement.

The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Sub Co by the amount of tax benefit gained from the irretrievable cash contributions made by the Company to the Trustee to fund the acquisition of Company shares.