Edited version of private advice

Authorisation Number: 1051971648582

Date of advice: 7 July 2022

Ruling

Subject: Employee share scheme

Question 1

Is Company A entitled to obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of irretrievable cash contributions made by Company A to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Shares to satisfy the issue of Shares by the Trustee to executives pursuant to the Plan?

Answer

Yes.

Question 2

Will Company A's irretrievable cash contributions to the Trustee, to fund the subscription for, or acquisition on-market of, Shares to satisfy Company A's obligations with respect to the issue of Shares to executives pursuant to the Plan, be deductible to Company A at a time determined by section 83A-210 of the ITAA 1997, if those contributions are made before allocation of the Shares to the executives?

Answer

Yes.

Question 3

To the extent the answer to Questions 1 or 2 is yes, 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, a deduction claimed by Company A for irretrievable cash contributions made by Company A to the Trustee to fund the subscription, or acquisition on-market of, Shares?

Answer

No.

Question 4

Is any amount required to be withheld from the irretrievable cash contributions made by Company A to the Trustee in accordance with the Plan to fund the subscription for, or acquisition on-market of, Shares in respect of Company A executives under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

No.

Question 5

Will the irretrievable cash contributions made by Company A to the Trustee, pursuant to the Plan, to fund the subscription for, or acquisition on-market of, Shares constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 6

Will the provision of Shares to executives on vesting under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

Relevant facts and circumstances

Company A is a public company listed on the Australian Securities Exchange.

Company A is the head company of the Company A tax consolidated group (Company A TCG).

The Plan

Company A has established the Plan which allows Company A to grant Share Rights to selected Company A executives and is part of Company A's retention and reward program. Each Share Right granted represents the right to achieve one Share for nil consideration upon the achievement of Performance Conditions.

The Plan will be administered by the Board, or a committee of the Board.

Offer

Company A may make an Offer to an Employee to participate in the Plan. Each Offer must be in writing (which includes email), include an Application if acceptance is required, and specify the information required under the Plan Rules.

If acceptance of an Offer is required, it may be accepted by an Employee completing and submitting the Application, as required by the Offer, by not later than the date specified in the Offer.

Share Rights

Each Share Right will convert into one Share on the vesting date upon satisfying all of the Performance Conditions (Vesting Date). The Trustee must then transfer the Shares to the Employee and the Employee will be registered as the legal holder of those Shares. The Vesting Date will occur after the release of the 20XX financial year annual audited results.

Any unpaid leave taken during the term of the Performance Conditions may be added to the vesting term at the Board's discretion.

Once the Vesting Conditions are met, an Employee may transfer, sell or use the Shares as a security for a loan.

Generally, an Employee forfeits all rights to any Share Rights on resignation before the release of the 20XX financial year annual audited results unless the Board, in its absolute discretion, determines otherwise.

The number of Share Rights granted to an Employee is based on satisfying the Performance Conditions, and may be increased under a tiered multiplier system. The allocation price for the Share Right is determined and approved by the Board and is set out in the Offer, equalling the average purchase price on market.

The Trust

Company A established the Trust under a deed entered into between Company A and the Trustee. Under the Trust Deed, the Trustee acquires and holds Shares in accordance with the Trust Deed and the Plan Rules for the benefit of Eligible Participants.

Under the Trust Deed, the Trustee has agreed to acquire Shares at the direction of Company A, and hold Shares in relation to the Plan on the terms and conditions set out in the Plan Rules and in accordance with the Trust Deed. The Trustee must act in accordance with the Plan Rules.

In addition, the Trustee will undertake activities associated with the administration of the Trust including:

• entering into and executing contracts
• opening and operating bank accounts to retain, on current or deposit account at any bank, any money it considers proper
• taking and acting on the advice or opinion of any legal practitioner or other professional person
• buying, transferring or selling Shares and applying the proceeds of sale in accordance with the Trust Deed
• receiving dividends or distributions in relation to Shares and applying those amounts in accordance with the Trust Deed
• generally doing all acts and things the Trustee considers necessary for the administration, maintenance and preservation of the Trust in performance of its obligations under the Trust Deed.

The Trustee may not, at its own discretion, exercise any voting rights attaching to any of the Plan Shares or Shares it holds on trust.

Neither the Trustee nor the Company may use as security Shares or Plan Shares held by the Trustee.

The Trustee agrees to administer the Trust, at all times, in accordance with the Trustee Sole Activities Test.

Company A does not have any beneficial interest in any Shares acquired under the Trust Deed, and nothing in the Trust Deed confers on Company A any proprietary right or interest in the Shares acquired by the Trustee.

Acquisition and transfer of Shares

The Trustee may, upon direction by Company A, acquire Shares from time to time.

The Trustee must allocate Shares to the Account established for a Participant in accordance with the Plan Rules, provided the Trustee either or both:

• receives sufficient payment from Company A to buy the relevant Shares
• holds sufficient Shares in the Fund.

The Trustee must transfer or dispose of Shares in accordance with the Plan Rules stated above.

Funding

The Trustee is to receive sufficient payment by Company A to enable the Trustee to buy the relevant Shares and allocate the Shares to Participants.

Company A will pay to the Trustee fees and reimburse reasonable expenses incurred by the Trustee which Company A and the Trustee agree from time to time.

Unallocated Shares

The balance of Net Income of the Trust for a Year of Income to which no Participant is presently entitled may be applied to meet any reasonable costs and expenses properly incurred by Company A in relation to the establishment, administration or termination of the Trust.

Rights in respect of allocated Shares

A Participant is presently entitled to so much of the Net Income of the Trust for a Year of Income which is attributable to:

• the Shares held by the Trustee on behalf of the Participant
• the proceeds of sales arising from any sale of Shares by the Trustee on behalf of the Participant
• transactions or events related to the Shares or property related to arising from Shares held by the Trustee on behalf of the Participant.

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 provides assessable income, and operates an ESS as part of its remuneration strategy.

Under the Plan, Company A grants Share Rights to Participants and makes irretrievable cash contributions to the Trustee (in accordance with the Plan and the Trust Deed) which the Trustee will use to acquire Shares for allocation to Participants.

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 to the Trustee are irretrievable as:

• Company A does not have any beneficial interest in any Shares acquired under the Trust Deed
• nothing in the Trust Deed confers on Company A any proprietary right or interest in the Shares acquired by the Trustee.

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 interest arise as part of these remuneration arrangements, and contributions to the Trust are part of an ongoing 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 Share Rights, and Company A intends to continue satisfying the outstanding Share Rights using Shares acquired by the Trust. This indicates that the irretrievable cash contributions to the Trust are 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 comparatively 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 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 Shares in excess of the number required to grant the relevant ESS interests to the employees arising in the year of income under an ESS. 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 (that is 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).

Company A's ESS contains a number of interrelated components which include the provision of irretrievable cash contributions by Company A to the Trustee. These irretrievable cash 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 can only be deducted from the assessable income of Company A 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.

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 employee share trust (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 ESS is not being entered into or carried out for the dominate purpose of enabling Company A to obtain a tax benefit.

Question 4

Detailed reasoning

Section 12-35 of Schedule 1 to the TAA 1953 provides that an entity making a payment of salary, wages, commission, bonuses or allowances to an individual as an employee (that is not exempt income or non-assessable non-exempt income of that employee) is required to withhold an amount from that payment.

Section 11-5 of Schedule 1 to the TAA 1953 states that in working out whether an entity (first entity) has paid an amount to another entity (other entity), and when the amount is paid, the amount is taken to have been paid to the other entity when the first entity applies or deals with the amount in any way on behalf of or as directed by the other entity.

As no payment is made directly to an executive of Company A, the irretrievable cash contributions will only be taken to have been paid to an executive if the amount is paid to the Trustee for or on behalf of an executive or at the direction of an executive. The executive has no interest in the contributions paid to the Trustee by Company A, nor is the executive able to direct Company A to make the contributions to the Trustee. As such, the contributions do not constitute a payment of salary, wages, commission, bonuses or allowances and the contributions do not satisfy the constructive payment provision in section 11-5 of Schedule 1 to the TAA 1953.

Therefore, no amount will be required to be withheld from the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of, Shares in respect of Company A's executives under section 12-35 of Schedule 1 to the TAA 1953.

Question 5

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 the 'fringe benefit' definition excludes a benefit constituted by the acquisition of money or property by an EST within the meaning of 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 are relevant. To qualify as an EST, a trustee's activities must be limited to:

• obtaining share or rights in a company (paragraph 130-85(4)(a))
• ensuring that ESS interests in the company that are beneficial interests 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 (paragraph 130-85(4)(b)
• other activities that are merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and (b) (paragraph 130-85(c)).

The Commissioner accepts that the Plan is an ESS as a Share Right granted under the Plan is an ESS interest under paragraph 83A-10(1), being a beneficial interest in either a share in a company or a right to acquire a share in a company. A Share Right is also an ESS interest 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, paragraphs 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)) 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 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). The other activities undertaken by the Trustee are merely incidental to managing the Plan.

Therefore, the irretrievable cash contributions made by Company A to fund the subscription for, or acquisition on-market of, Shares by the Trust pursuant to the Plan will not be a fringe benefit.

Question 6

Detailed reasoning

As stated above in response to Question 5, 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 (h) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA, is 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.

As stated above in the response to Question 5, the Commissioner accepts that the Plan is an ESS and a Share Right granted under the Plan is an ESS interest under paragraph 83A-10(1)(b), as well as an ESS interest to which Subdivision 83A-B or 83A-C applies.

Accordingly, the provision of ESS interests under the Plan will not be subject to FBT on the basis that they are acquired 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 'fringe benefit' definition 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 Share 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 shares scheme).