Edited version of private advice

Authorisation Number: 1051914193862

Date of advice: 17 December 2021

Ruling

Subject: Employee share scheme

Question 1

Will Company A (as the 'head entity' of a group of wholly owned Australian companies consolidated for Australian tax purposes) be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by Company A to the Trustee of the Company A Employee Share Trust (the Trust) to fund the subscription for, or acquisition on-market of, ordinary shares in Company A (Shares) to satisfy the issue of Shares by the Trustee to Participants pursuant to the Equity Incentive Plan?

Answer

Yes.

Question 2a

Will the irretrievable cash contributions made by Company A (as the 'head entity' of a group of wholly owned Australian companies consolidated for Australian tax purposes) to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares by the Trustee pursuant to the Plan, 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 employee share scheme (ESS) interests by the Participants?

Answer

Yes.

Question 2b

Will the irretrievable cash contributions made by Company A (as the 'head entity' of a group of wholly owned Australian companies consolidated for Australian tax purposes) to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares by the Trustee pursuant to the Plan, be deductible to Company A 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 Participants?

Answer

Yes.

Question 3

Will the Commissioner seek to 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 Company A 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

No.

Question 4

Will the provision of ESS interests by Company A to Participants under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

Will the irretrievable cash contributions made by Company A, 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?

Answer

No.

Question 6

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition of, Shares by the Trustee to satisfy its obligations under the Plan?

Answer

No.

Relevant facts and circumstances

Company A is a public company listed on the Australian Securities Exchange and is the head company of the Company A tax consolidated group (TCG).

Company A established the Plan as part of its strategy to incentivise key talent and promote the long-term success of the Company A TCG.

The Board proposes to establish an employee share trust (EST) under the terms of the Trust Deed.

The Trustee has agreed that its activities will comply with section 130-85(4) of the ITAA 1997.

The Plan

The Board may, in its absolute discretion make an offer (Offer) to Eligible Employees to participate in a grant of Awards, which may comprise any one or more of:

•         Rights

•         Options

•         Restricted Shares

The Offer will be made on the terms set out in the Plan as specified in the terms of an Offer.

Where Awards are to be satisfied by a cash payment in lieu of an allocation of Shares, these payments will not flow through the Trust.

Offer

Each Eligible Employee should be advised of the following information in connections with an Offer:

•         the type and number of Awards being offered, or the method by which the number will be calculated

•         the amount (if any) that will be payable for the grant of Awards

•         any Vesting Conditions or other conditions that apply, including any Vesting Period

•         the procedure for exercising an Option (including any Exercise Price that will be payable) following Vesting and the period(s) during which it may be exercised

•         where the Board has made a determination, that the Vesting of Rights and/or exercise of Options (as applicable) will only be satisfied through an allocation of Shares

•         the circumstances in which Rights and/or Options will lapse, Shares allocated under the Plan may be forfeited or a Participant's entitlement to Awards may be reduced

•         how Awards may be treated in the event that the Eligible Employee ceases employment with a member of the Group (Group company), and any discretions retained by the Board, and

•         any restrictions (including the period of restriction) on Dealing in relation to a Restricted Share or Share allocated to the Eligible Employee under the Plan.

Acceptance of an Offer must be made by the Eligible Employee in accordance with the instructions that accompany the Offer, or in any other way the Board determines.

The Board may, at its discretion, refuse to allow the participation of an Eligible Employee where that Eligible Employee ceases to be an Eligible Employee, or ceases to satisfy any other conditions imposed by the Board, before the grant is made.

To the extent of any inconsistency, the terms and conditions advised to an Eligible Employee by the Board in an Offer will prevail over any other provision of the Plan.

Unless the Board determines otherwise, no payment is required for the grant of an Award and Awards may not be registered in any name other than that of the Eligible Employee.

General Conditions for Awards

Awards may not be transferred by a Participant unless the Board determines otherwise or if the dealing is required by law and the Participant has provided satisfactory evidence to Company A of the fact.

Subject to any express rule to the contrary, Awards will only Vest where each Vesting Condition, and all other relevant conditions advised to the Participant by the Board, have been satisfied or otherwise waived by the Board.

If the Vesting of Awards would arise in a period where Dealings by a Participant would be prohibited, the Board may determine that Vesting will be delayed until such time as Dealings are permitted. For the avoidance of doubt, the Board may determine that Vesting will be delayed only in relation to the affected Participant or in relation to some or all of Participants who hold Awards under the Plan (irrespective of whether they are subject to the Dealing restriction).

Unless otherwise determined by the Board, and subject to the terms of the Offer, a Participant is not entitled to receive dividends or exercise voting rights until their Rights have vested or Options are exercised, and Shares are allocated.

Rights

A Right constitutes a right to acquire a fully paid ordinary share in Company A subject to the satisfaction of vesting conditions and all other relevant conditions advised to the Participant in connection with the Offer.

As soon as practicable following the vesting of Rights, the Board must issue or procure the transfer to the Participant the number of Shares in respect of which Rights have vested.

The Board may determine that some or all of the Participant's vested Rights will be satisfied by Company A making a cash payment to a Participant in lieu of an allocation of Shares.

The Board may determine, prior to making a grant of Rights, that the Vesting of those Rights will only be satisfied through an allocation of Shares to the Participant and not by making a cash payment.

Vesting occurs upon notification from Company A to the Participant that a Right has Vested.

In the case of Rights held by or on behalf of a Participant who is a Director, Vested Rights must be satisfied by Shares that have been purchased on market, unless:

•         no shareholder approval is required under the Listing Rules in respect of the Director's participation in the Plan, or

•         shareholders have approved the Director's participation in the Plan to the extent required under the Listing Rules.

Options

The exercise of any Option granted under the Plan will be effected in the form and manner determined by the Board and must be accompanied by payment of the relevant Exercise Price (if any) unless a cash payment in lieu of an allocation of Shares occurs.

Subject to the Plan, as soon as practicable following the exercise of an Option, the Board must issue to, procure the transfer to, or procure the setting aside for, the Participant the number of Shares in respect of which Options have been exercised.

The Board may determine that some or all of a Participant's exercised Options be satisfied by a cash payment to a Participant in lieu of an allocation of Shares.

The Board may determine, prior to making a grant of Options, that the exercise of those Options will only be satisfied through an allocation of Shares to the Participant and not by making a cash payment.

Vesting occurs upon notification from Company A to the Participant that an Option has Vested.

In the case of Options held by or on behalf of a Participant who is a Director, Vested Options must be satisfied by Shares that have been purchased on market, unless

•         no shareholder approval is required under the Listing Rules in respect of the Director's participation in the Plan, or

•         shareholders have approved the Director's participation in the Plan to the extent required under the Listing Rules.

Restricted Shares

As soon as practicable after an Eligible Employee has accepted an Offer to participate in a grant of Restricted Shares, the Board must allocate the Restricted Shares to the Eligible Employee by either:

•         issuing Restricted Shares

•         procuring the transfer of Restricted Shares, or

•         procuring the setting aside of Restricted Shares.

Subject to the terms of an Offer and the Securities Dealing Policy, when a Share ceases to be a Restricted Share, all restrictions on disposing of, or otherwise Dealing with, that Share, as set out in these Rules, will cease.

Lapse of Awards

Options and Rights will lapse upon the earliest to occur of:

•         15 years after the date on which the Options/Rights were granted to the Participant, or any other date nominated as the expiry date in the Offer

•         the Option/Right lapsing in accordance with a provision of these Rules (including in accordance with a term of an Offer)

•         failure to meet a Vesting Condition or any other condition applicable to the Option/Right within the Vesting Period, or

•         the receipt by Company A of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Option/Right.

Restricted Shares will be forfeited upon the earliest to occur of:

•         the Restricted Share being forfeited in accordance with a provision of these Rules (including in accordance with a term of an Offer)

•         the failure to meet a Vesting Condition or any other condition applicable to the Restricted Share within the Vesting Period, or

•         the receipt by Company A of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Restricted Share.

Cessation of Employment

As a result of the Participant ceasing to be an employee of the Group, the Board, in its discretion, may determine that some or all of a Participant's unvested Awards, as applicable:

•         lapse

•         are forfeited

•         Vest (immediately or subject to conditions)

•         are only exercisable for a prescribed period and will otherwise lapse, and/or

•         are no longer subject to some of the restrictions (including any Vesting Condition) that previously applied.

Trust

Company A will establish the Trust to facilitate the acquisition, holding of, and allocation of Shares to Participants in accordance with employee equity plans that Company A operates from time to time (including the Plan).

The Trust is an independent legal entity.

Company A (or any other Group company) cannot be a beneficiary of the Trust.

Company A intends to only make contributions to the Trust to fund the acquisition of Shares by the Trustee once Awards have been granted.

The Trust will facilitate the acquisition of Shares either on market or by the new issue of Shares by Company A.

The Trust will be an efficient structure for giving effect to vesting conditions and administer trading dealing restrictions on Shares imposed by the Plan. As the trustee of the Trust is the legal owner, employees have no ability to deal in the Shares until able to do under the terms of the Plan.

The Trust provides the flexibility to acquire and hold Shares that will be allocated to employees under the Plan. When vesting conditions are not met, Awards are forfeited, and the Trust enables Shares held for such forfeited Awards to be 'recycled' to satisfy other grants of Awards.

Where the Trustee receives a request or direction from the Board which specifies whether to subscribe for Shares or purchase Shares on market or pursuant to an off-market transfer, the Trustee must, so far as is reasonable and subject to clause 3.1(g), comply with any such request or direction.

Subject to the relevant Rules, if Shares that form part of the Allocated Trust Property are held on trust for an Allocated Trust Property Beneficiary and rights arise on a rights issue in respect of those Shares:

•         the Trustee holds an Allocated Trust Property Beneficiary's rights on separate trust for that beneficiary so that

­   the Allocated Trust Property Beneficiary's rights and any new Shares acquired by the Trustee on exercise of the rights and any proceeds of sale of the rights (net of any applicable brokerage, commission, stamp duty or other transaction costs) are held by the Trustee on a separate trust as bare trustee for the benefit of that beneficiary (Participant's Bare Trust); and

­   the Allocated Trust Property Beneficiary is the sole beneficiary of the Participant's Bare Trust in relation to the beneficiary and any such new Shares and is absolutely entitled to the rights and any new Shares acquired as against the Trustee.

Funding

Company A's covenants with the Trustee includes that Company A will keep the Trustee in funds necessary to do any act request by the Board.

All funds received by the Trustee from Company A in the form of irretrievable cash contributions will constitute accretions to the corpus of the Trust and no Participant will be entitled to receive a distribution of or from such funds. The funds will not be returned or repayable to Company A except where they are used for subscribing for Shares in Company A.

Company A cannot be a beneficiary under the Trust Deed and any funds it contributes to the Trust, cannot be refunded, repaid or returned to Company A.

Reasons for decision

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

Question 1

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 A carries on a business which produces assessable income, it operates an ESS as part of its remuneration strategy.

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

Incurred in carrying on a business

Company A must provide the Trustee with the funds required to enable the Trustee to subscribe for, or acquire Shares.

The contributions made by Company A are irretrievable and non-refundable to Company A in accordance with the Trust Deed as Company A and each Group company are not Beneficiaries of the Trust and have no entitlement to any of the Shares or other trust property forming part of the Trust Fund or entitlement to any return of contributions made to the Trust.

Company A has granted (and will grant in the future) ESS interests as part of its remuneration and reward program for Participants. The costs incurred by Company A for the acquisition of shares to satisfy grants of ESS interests 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. Therefore, subsection 8-1(1) is satisfied.

Not capital or of a capital nature

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

While the irretrievable 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 and paragraph 8-1(2)(a) is not satisfied.

Accordingly, Company A will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee to acquire Shares to satisfy ESS interests issued pursuant to the Plan.

Question 2a

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 ESS interests 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 in relation to their employment with Company A (or the Group).

The ESS 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 Plan, to acquire ESS interests.

The deduction for the irretrievable cash contribution is allowable 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 a Participant under the Plan.

Indeterminate rights under the Plan

An Option or Right provided under the Plan is an indeterminate right because that right entitles the employee to acquire either a Share or cash, to be determined at a future time at the discretion of the employer. Although the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate right will, pursuant to section 83A-340, be treated as if it had always been an ESS interest.

Section 83A-210 applies equally to contributions made in respect of ESS interests and indeterminate rights. Therefore, an irretrievable cash contribution in respect of an indeterminate right is taken to have been paid at the acquisition time of the ESS interest. If an indeterminate right becomes an ESS interest, deductible contributions made in respect of those rights can be claimed in the income year when the ESS interest is deemed to have been acquired under section 83A-340 (this will be the year in which the indeterminate right was granted to the employee). Once this has been established, such contributions can be matched to ESS interests issued to the employee and where necessary the relevant earlier income year assessments may be amended to allow the deduction (Item 28 of subsection 170(10AA)).

It is important to note that an indeterminate right which is satisfied by the provision of cash never becomes an ESS interest and the contribution to the Trust in respect of the provision of that right is permanently deferred. However, where that ESS interest is subsequently issued to another participating employee, this employee becomes the "ultimate beneficiary" and the deduction is available in the income year that this participating employee acquired this ESS interest.

Question 2b

Detailed reasoning

Consistent with the analysis in question 2a, where the contribution is made after the acquisition of the relevant ESS interests, irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of, Shares by the Trust 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 3

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 be obtained 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 EST where the conditions of Division 83A are met.

In this case, the ESS 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), 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 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 (h) of subsection 136(1) of the FBTAA excludes a benefit constituted by the acquisition of an ESS interest under an ESS (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C applies.

The Commissioner accepts that the Plan is an ESS as the Awards granted under the Plan are ESS interests under section 83A-10(1), being a share in a company, or a right to acquire a beneficial interest in a share in a company. These Awards are also ESS interests to which Subdivision 83A-B or 83A-C applies because a Participant acquires the ESS interest under an ESS for nil consideration, which is at a discount.

Accordingly, the provision of Awards for 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 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 5

Detailed reasoning

As stated above in response to Question 4, an employer's liability to 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.

One benefit excluded from being a fringe benefit, pursuant to paragraph (ha) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an ESS within the meaning of the ITAA 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:

•         obtaining shares or rights in a company (paragraph 130-85(4)(a))

•         ensuring that ESS interests in the company that are beneficial interest in those shares or rights are provided under the ESS to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph130-85(4)(b))

•         other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b) (paragraph 130-85(4)(c)).

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

•         The Trust acquires shares in a company, namely Company A

•         The Trust ensures that ESS interests as defined in subsection 83A-10(1) (being Awards in Company A) are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust Deed 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) 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 Company A to fund the subscription for, or acquisition on-market of Shares by the Trust will not be a fringe benefit.

Question 6

Detailed reasoning

Section 67 of the FBTAA is a general anti-avoidance provision of 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 5, 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 and to Participants by way of the provision of Awards under the Plan are excluded from the definition of a fringe benefit for the reasons provided in response to Questions 5 and 6 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 Company A by the amount of tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition of, Shares.