Edited version of private advice

Authorisation Number: 1051912213030

Date of advice: 30 September 2022

Ruling

Subject: Employee share schemes

Question 1

Are Class Z shares ordinary shares for the purposes of Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will Company P obtain a deduction under section 8-1 of the ITAA 1997 for irretrievable cash contributions made by Company P (or a subsidiary member of the tax consolidated group (TCG) to the Trustee of the Company P Employee Share Plan Trust (EST) to fund the subscription for, or acquisition on-market of, Class Z shares?

Answer

Yes.

Question 3

If the answer to Question 2 is 'Yes', will the deduction under section 8-1 of the ITAA 1997 be at the time determined by section 83A-210 of the ITAA 1997?

Answer

Yes.

Question 4

Will Company P obtain a deduction under section 8-1 of the ITAA 1997 for costs incurred in relation to the on-going administration of the ESP?

Answer

Yes.

Question 5

Will the Commissioner make a determination that section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, a deduction claimed by Company P for the irretrievable cash contributions made to the Trustee of the EST to fund the subscription for, or acquisition on-market of, Class Z shares?

Answer

No.

Question 6

Will the irretrievable cash contributions Company P, or a subsidiary member of the TCG, make to the EST to fund the subscription for, or acquisition on-market of, Class Z shares constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 7

Will the provision of rights to acquire Class Z shares (Share Rights) to employees of Company P and the Employer entities under the ESP constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

Question 8

Will the Commissioner make a determination under section 67 of the FBTAA to increase the aggregate fringe benefits amount by the amount of tax benefit obtained from irretrievable cash contributions made to the Trustee of the EST to fund the acquisition of Class Z Shares?

Answer

No.

This ruling applies for the following periods:

Questions 1-5

Year ended 30 April 2020

Year ended 30 April 2021

Year ended 30 April 2022

Year ended 30 April 2023

Year ended 30 April 2024

Year ended 30 April 2025

Questions 6-8

Year ended 31 March 2020

Year ended 31 March 2021

Year ended 31 March 2022

Year ended 31 March 2023

Year ended 31 March 2024

Year ended 31 March 2025

The scheme commences on:

1 May 2019

Relevant facts and circumstances

This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

This private ruling is based on the facts stated in the description of the scheme that is set out below including the following documents, or relevant parts of them, which are to be read with the description:

•                    Company P Employee Share Plan rules, and

•                    Company P Employee Share Trust Deed (Trust Deed).

If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

All legislative references are to provisions of the ITAA 1997 unless otherwise indicated.

Background

Company P is the head company of an Australian tax consolidated group and the principal employer of the TCG.

Company A and Company B are subsidiary members of the Company P TCG and are associated employers.

The share capital of Company P comprises Class S Shares and fully paid Class Z Shares.

Class Z shares are listed on the ASX and confer on their holders the right to receive dividends, as determined by the directors from time to time. Holders of Class Z Shares do not have the right to vote at general meetings of Company P and may only vote on proposals involving a variation to their class rights or if required for the purposes of the ASX Listing Rules. This means Class Z shareholders have no right to vote on the election of directors of Company P. No person may hold more than 10% of the total number of Class Z Shares on issue.

Company P Employee Share Plan

Company P established the ESP in 2018.

The ESP provides a means by which the Board can from time to time offer employees of Company P an opportunity to acquire shares in Company P.

New shares issued to employees (Employee Holders) have the same rights as all other classes of Company P shares. The rights and liabilities attaching to Class Z shares arise from a combination of:

•                    the Constitution of Company P and

•                    in certain circumstances, the Corporations Act, the ASX Listing Rules and the general law.

To attract, retain and incentivise employees Company P makes offers under the ESP by way of Company P shares employees under the ESP.

Company P has made changes to the ESP with shareholder approval.

Company P Employee Share Plan Trust

Company P established the EST which is partially funded by Employee Holders and Company P (i.e. the balance) by way of irretrievable cash contributions into the EST.

Company P funds the EST by way of a cash amount, which can be used by the Trustee to purchase Company P shares. Cash is used by the Trustee to purchase Company P shares.

The EST holds shares in trust to the account of the Employee Holder (who will be the beneficial owners of the Company P shares) subject to the terms of the ESP, as applicable.

Class Z shares are delivered in accordance with the terms of the ESP.

Other Matters

Shares and Share Rights are only provided at a discount.

Reasons for decision

Question 1

Are Class Z Shares ordinary shares for the purposes of Division 83A of the ITAA 1997?

Summary

Yes. Class Z shares are ordinary shares for the purposes of Division 83A.

Detailed reasoning

Summary of the law

Division 83A provides for the taxation of ESS interests acquired under employee share schemes at a discount.

An ESS interest in a company is defined in subsection 83A-10(1) as a beneficial interest in either a share in the company, or a right to acquire a beneficial interest in a share in the company.

Subsection 83A-45(2) requires an ESS interest acquired under an employee share scheme relate to ordinary shares.

The term 'ordinary share' is not defined in the ITAA 1997. Therefore, in the context of Division 83A, an ordinary share takes its ordinary meaning.

ATO Interpretative Decision ATO ID 2010/62 Income Tax - Employee share scheme: whether interest in a corporate limited partnership are ordinary shares sets out the ATO view that the relevant inquiry in determining whether (or not) a share is an ordinary share in context, is determined by the rights attached to the share in relation to distributions of profits and capital and on winding up the company, as compared to other shares. The relevant inquiry is whether (or not) preferential rights exist. If preferential rights exist, then the share is not an ordinary share for the purposes of Division 83A.

The ASX Glossary defines ordinary share as:

The most commonly traded security in Australia. Holders of ordinary shares are part-owners of a company and may receive payments in cash, called dividends, if the company trades profitably. They have no preferential rights as to either dividends out of profits or capital on a winding up

ASX listing rule 6.8 requires the holders of ordinary shares to be entitled to one vote per person at resolution by show of hands, and rule 6.9 requires one vote per share in resolution by poll. However, the ASX may waive a

listing rule on application by an entity.

Classification of shares in accordance with constitution

In the case of Company P there are several classes of shares on issue which differ in regard to voting, dividends and distribution of surplus on windup.

Same as offered to the public

The Class Z shares offered under the ESP are the same shares issued to members of the public.

Impact of the ASX listing rules

Whilst in general to be classified as ordinary securities the ASX listing rules require ordinary shares to be entitled to voting rights at general meetings of shareholders, the ASX has provided Company P with a waiver from listing rules 6.8 and 6.9 thereby classifying the Class Z shares as ordinary shares with limited voting rights.

Aligning interests

Class Z shares offered under the ESP receive dividends and are entitled to participate in distributions from the company on windup, in the same way as any other investor in the company. Class Z shareholders as investors have an economic interest in the profitability of the company. It can be accepted that the economic interests of employees participating in the ESP represented by their holding of Class Z shares align with the economic interests of the company and other investors.

Conclusion

Taking into account above factors, the Commissioner is satisfied that Class Z shareholders do not have preferential rights over Class S shareholders. As such, the rights attached to the Class Z shares do not take preference to the Class Z shares and it is reasonable to consider Class Z shares as ordinary shares.

Therefore, the Commissioner is satisfied that the Class Z shares provided under the ESP are 'ordinary' shares, and therefore ESS interests, for Division 83A purposes.

Question 2

Will Company P obtain a deduction under section 8-1 of the ITAA 1997 for irretrievable cash contributions made by Company P (or a subsidiary member of the TCG) to the Trustee of the EST to fund the subscription for, or acquisition on-market of, Class Z shares?

Summary

Yes. Company is entitled to a tax deduction under section 8-1 for irretrievable cash contributions which Company P or a subsidiary member of the TCG makes to the Trustee to fund the subscription for, or acquisition on-market of, Class Z shares on the basis that the amounts are in the nature of employee remuneration costs incurred in carrying on Company P's business for the purpose of deriving assessable income.

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.

Company P carries on a business in Australia and it operates an ESS as part of its remuneration strategy.

In accordance with the ESP rules and the Trust Deed, Company P, Company A and Company B grant rights or shares to employees and will make irretrievable cash contributions to the Trustee to enable the Trustee to purchase shares in Company P to benefit its employees Eligible Participants.

Incurred in carrying on a business

Company P and the Employer entities must provide the Trustee with all funds required to enable the Trustee to subscribe for, or acquire, Class Z shares. Further, pursuant to the Trust Deed, any contributions made by Company P and the Employer entities to the Trustee will constitute accretions to the capital of the EST and will be irretrievable to them and non-refundable by the Trustee. As the funds are not repayable by the Trustee, the contributions will represent a permanent loss or outgoing incurred by Company P.

Company P has granted rights or shares under the ESP as part of its remuneration and reward program for employees. The costs incurred for the acquisition of shares to satisfy rights arise as part of these remuneration arrangements, and contributions to the EST are part of an on-going series of payments in the nature of remuneration of its employees.

Not capital, or of a capital nature

Irretrievable cash contributions are outgoings incurred for periodic funding of an ESS for employees and part of the broader remuneration expenditure of Company P.

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 such that the payments are not considered to be an outgoing of capital, or an outgoing of a capital nature.

While the deduction under section 8-1 would generally be allowable in the income year in which the employer provided the contributions to the Trustee, in certain circumstances, the timing of the deduction is specifically determined under section 83A-210 (see question 4 of the Reasons for Decision).

Question 3

If the answer to Question 3 is 'Yes', will the deduction under section 8-1 of the ITAA 1997 be at the time determined by section 83A-210 of the ITAA 1997?

Summary

Yes. The deduction under section 8-1 would generally be allowable in the income year in which the employer provided the money to the Trustee but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210.

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 acquire ESS interests in excess of the number required to grant the relevant ESS interests to the employees arising in the year of income 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 ESP 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 in relation to their employment with an Employer entity.

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

The deduction under section 8-1 for the irretrievable cash contributions is allowable in the income year the relevant beneficial interest in a share, or beneficial interest in a right to a beneficial interest in a share, is acquired by a Participant under the ESP.

Question 4

Will Company P obtain a deduction under section 8-1 of the ITAA 1997 for costs incurred in relation to the on-going administration of the ESP?

Summary

Yes. Company P is entitled to an income tax deduction pursuant to section 8-1 in respect of costs which the Employer entities incur in relation to the on-going administration of the ESP.

Detailed reasoning

The on-going administration costs include the following:

•                    brokerage fees, audit fees, bank charges and costs in respect of making new offers to employees under the ESP

The Commissioner accepts that the above on-going administration costs which the Employer entities incur for the administration of the ESP are deductible to Company P under section 8-1. The on-going administration costs are considered to be regular and recurring expenses in connection with its employees. The Commissioner also accepts these costs are deductible in accordance with the Commissioner's view set out in ATO Interpretative Decision ATO ID 2014/42: Employer costs for the purpose of administering its employee share scheme are deductible.

Question 5

Will the Commissioner make a determination that section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, a deduction claimed by Company P for the irretrievable cash contributions made to the Trustee of the EST to fund the subscription for, or acquisition on-market of, Class Z shares?

Summary

No. The Commissioner of Taxation will not make a determination that section 177F of the ITAA 1936 applies to deny, in part or in full, a deduction claimed by Company P for the irretrievable cash contributions made by the Employer entities to fund the subscription for, or acquisition on-market of, Company P Class Z shares by the EST.

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 irretrievable cash contributions made by the Employer entities for the subscription or acquisition of Class Z shares by the EST do not contain the elements of artificiality or unnecessary complexity. In addition, the commercial drivers sufficiently explain the reasons for implementing and operating the ESP through an employee share trust structure.

Therefore, having regard to the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner has concluded that there is no scheme entered into or carried out for the dominant purpose of enabling Company P to obtain a tax benefit.

Question 6

Will the irretrievable cash contributions Company P and the Employer entities make to the EST to fund the subscription for, or acquisition on-market of, Class Z shares constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Summary

No. The irretrievable payments made by Company Pand the Employer entities to the Trustee to fund the acquisition by the EST of Class Z shares, either on market or via a new subscription of shares, will not be treated as a fringe benefit within the meaning of 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 employee share trust within the meaning in subsection 130-85(4).

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).

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'?.

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

•                    The EST acquires shares in a company, namely Company P Class Z shares; and

•                    The EST ensures that ESS interests as defined in subsection 83A-10(1) (being beneficial interests in Company P Class Z shares) 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 ESP.

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'.

Based on the terms of the Trust Deed, and provided the Trustee exercises its powers and obligations as set out in the Trust Deed, the Trust will be considered an employee share trust for the purposes of section 130-85(4).

Therefore, the irretrievable cash contributions to the EST to fund the subscription for or acquisition on-market of Class Z shares will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Question 7

Will the provision of rights to acquire Class Z shares (Share Rights) to employees of Company P and the Employer entities under the ESP constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Summary

No. The provision of Share Rights and Class Z shares by Company P and the Employer entities to employees of Company P and the Employer entities under the ESP will not constitute a 'fringe benefit' within the meaning of the term in 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 1986 excludes the following from being a 'fringe benefit':

(a) 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 ESP is an employee share scheme, the rights for the shares provided under the ESP are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of rights for shares under the ESP 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.

In addition, when a Share 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 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 8

Will the Commissioner of Taxation seek to apply Section 67 of the FBTAA to the arrangement where Rights or Class Z shares are provided to employees at a discount?

Summary

No. The Commissioner will not seek to apply Section 67 of the FBTAA to the arrangement where Rights or Class Z shares are provided to employees.

Detailed reasoning

Section 67 of the FBTAA is a general anti-avoidance provision. 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.

Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i)            a benefit is provided to a person;

(ii)           an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii)          that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

The provision of benefits in the form of irretrievable contributions to the Trustee of the EST and to participating employees as Share Rights or Class Z shares under the ESP are excluded from the definition of 'fringe benefit' in subsection 136(1) of the FBTAA. In addition, Class Z shares allocated to the participating employees on the vesting and exercise of Share Rights are not 'fringe benefits' because these are received for the exercise of the relevant ESS interest, rather than 'in respect of' employment: 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.

As these benefits are excluded from the definition of 'fringe benefit', no fringe benefit will arise and consequently no FBT will be payable in respect of benefits provided to employees under the ESP. Accordingly, there is no tax benefit for the purposes of subsection 67(2) of the FBTAA as no amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount of Company P had the Share Rights or Class Z shares not been provided to employees at a discount. Therefore, the Commissioner will not seek to make a determination under section 67 of the FBTAA.