Edited version of private advice

Authorisation Number: 1052048729400

Date of advice: 3 November 2022

Ruling

Subject: Employee share scheme

Question 1

Will Company A 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 (Trust) to fund the subscription for, or acquisition of, ordinary shares in the Company A (Shares) to satisfy employee share scheme (ESS) interests issued pursuant to the Plan in respect of Participants whose activities are related to generating assessable income for Company A?

Answer

Yes.

Question 2

Will the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for, or acquisition of, Shares by the Trustee to satisfy ESS interests issued 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?

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 of Shares by the Trustee, pursuant to the Plan?

Answer

No.

Question 4

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

Answer

No.

Question 5

Will the Commissioner make a determination under section 67 of the FBTAA to include an amount in the aggregate fringe benefits amount of the Company A, by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee, to fund the acquisition of Company A Shares?

Answer

No.

Relevant facts and circumstances

Background

Company A carries on a business in the retail and wholesale of X in Australia and Country B.

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

Description of the Plan

Company A has established the Plan to encourage Eligible Participants to share in the ownership of Company A and to promote the long-term success of Company A as a goal shared by all.

The Board (Company A's board of directors) will administer the Plan. The Plan states that the Board may designate some or all executive Directors or Employees as an Eligible Participant for the purposes of the Plan.

Offer

The Board at its discretion, may from time to time offer Shares to one or more Eligible Participants on the terms the Board decides by giving the Eligible Participants an Offer, subject to the Plan and any applicable law. An Offer must state the following:

•         the name and address of an Eligible Participant to whom an Offer is made

•         the maximum number or value of Shares that an Eligible Participant may accept

•         the date of the Offer and the anticipated closing date of the Offer

•         the Issue Price (which will be nil or a discount to the market price of Shares, as set by the Board)

•         that the Offer is subject to the Eligible Participant directing the Shares be held by the Trustee on the terms of the Employee Share Trust Deed

•         any other terms of the Shares or the offer of Shares, and

•         any matters required to be specified by the Corporations Act.

To accept an Offer an Eligible Participant must complete, sign and return the Acceptance Form and any other document required by the Board in accordance with the Offer.

If Company A determines to cause the transfer or allocation of Shares to a Participant, the Shares may be acquired in such manner as Company A considers appropriate, including through allocation by the Trustee.

Upon issue or transfer of Shares under the Plan Rules and/or the Trust Deed, each Participant agrees to become a member of the Company A and to be bound by its' Constitution.

Share Rights

Shares issued in accordance with the Plan carry the rights set out in the Constitution.

Shares will be issued to the Trustee to be held for the benefit of the Participant in accordance with the terms of the Trust Deed.

Company A may, at its discretion, require that the Shares be transferred out of the Trust to a Bare Trustee nominated by Company A. If it does so, the Plan Rules continue to apply to those Shares.

Participants who have acquired Shares will be entitled to dividends declared or determined by Company A where the record date for the dividend is after the date the Shares are acquired. Company A intends to declare and pay annual dividends, if it has sufficient funds for the anticipated capital expenditure and working capital required by Company A and can lawfully do so in compliance with the Corporations Act, its Constitution and applicable law.

Restrictions on disposal of Shares

An Offer may specify disposal restrictions that will apply to Shares issued pursuant to that Offer and other Plan Shares. A Participant must not instruct the Trustee or any Bare Trustee to Transfer their Shares to anyone, including the Participant, or agree to Transfer their Shares until any disposal restrictions specified in the Offer cease to apply, except with the written consent of the Board, which may be withheld at its absolute discretion.

If no disposal restrictions are specified in the Offer, a Participant must not instruct the Trustee or any Bare Trustee to Transfer their Shares to anyone, including the Participant, or agree to Transfer their Shares until the later of a Listing or a date that is 5 years after the date on which the Shares were issued, except with the written consent of the Board, which may be withheld at its absolute discretion.

Where Shares are issued for nil value, the Participant must not direct the Trustee to transfer the Shares for until the earlier of 3 years after they are issued, or the date the Participant ceases to be employed by Company A TCG.

Terms of the Trust Deed

Company A established the Trust under a deed entered into between Company A and the Trustee.

The recitals of the Trust Deed state that the sole activities of the Trust will be acquiring, holding and transferring Shares for the benefit of Participants in accordance with an Employee Share Plan on the terms of the Trust Deed. The Trust has been established to be an 'employee share trust' as defined in subsection 130-85(4) of the ITAA 1997.

The Trustee's powers include the ability to:

•         enter into and execute all agreements, deeds and documents

•         subscribe for, purchase or otherwise acquire and to sell or otherwise dispose of Shares

•         open bank accounts and retain on current or deposit account at any bank any money which it considers proper

•         take and act upon the advice or opinion of any legal practitioner or other professional

•         do all acts, matters or things which it may deem necessary or expedient for the purpose of giving effect to, and carrying out, the trusts, powers and discretions conferred on the Trustee by the Trust Deed or the law.

The Trustee's powers are limited to those that would not result in the Trust ceasing to satisfy the definition of 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997.

The Trustee and Company A must not grant a Security Interest over any Shares or Plan Shares held by the Trustee, or otherwise use any Shares or Plan shares as security.

Nothing in the Trust Deed confers or is intended to confer that Company A has proprietary right or interest, charge or lien in the Shares acquired by the Trustee under the Trust Deed. Company A nor any of its subsidiaries has, or is able to acquire, a beneficial interest in the Shares held by the Trust.

Acquisition and transfer of Shares

The Board may, by notice in writing to the Trustee, instruct the Trustee to subscribe for, acquire and/or allocate a number of Shares specified in the notice, to be held by the Trustee as Plan Shares in respect of an identified Participant or Participants.

The Trustee will not acquire Shares already on issue from existing shareholders.

The Board may also by notice in writing instruct the Trustee to subscribe for or acquire a number of Shares as specified in a notice, to be held by the Trustee on an unallocated basis on trust for Participants generally.

Shares subscribed for or acquired are to be registered in the name of the Trustee on subscription or acquisition and are general Trust property to be held subject to the terms of the Trust Deed.

The Trustee must transfer or dispose of Plan Shares in accordance with the Plan Rules and any Offer.

For the duration of any Restriction Period, the Trustee and the Participant must not assign, transfer, sell, or grant a Security Interest in or over, or otherwise deal with, a Plan Share, except with the express consent of the Board in accordance with the relevant Plan Rules.

Where a Restriction Period applies, and the Trustee receives notice from the Company that it has ceased, the Trust must notify the Participant and transfer the legal title in those Plan Shares to the Participant if directed.

Where no Restriction Period applies, the Trustee must notify the Participant and transfer the legal title in those Plan Shares to the Participant if directed; and may, at its discretion or if directed by Company A, transfer the legal title in those Plan Shares to a third party trustee to hold on bare trust for the Participant. If it does so, it must promptly notify the Company A and the Participant of the transfer and provide the name and contact details of the new trustee.

Funding

Company A may, from time to time, provide to the Trustee amounts for the purposes of funding the acquisition of Shares by the Trustee according to Trust Deed for the benefit of the Participants.

The Company A does not have any right to the income or capital of the Trust.

Company A must pay to the Trustee such fees and reimburse such expenses incurred by the Trustee as Company A and the Trustee agree.

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

Additional funds that are derived through unallocated Shares may be applied to acquire Shares and allocate them to Participants or to pay administration costs of the Trust.

Unallocated Shares

The balance of the Net Income of the Trust for a Financial Year to which no Participant is presently entitled must be accumulated by the Trustee as part of the capital of the Trust.

Rights in respect of Allocated Plan Shares

Subject to the Plan Rules, a Participant is presently entitled to so much of the Net Income of the Trust for a Financial Year which is attributable to:

•         the Plan Shares held by the Trustee on behalf of the Participant

•         the proceeds of sale arising from the sale of Plan Shares by the Trustee on behalf of the Participant

•         transactions or events related to the Plan Shares or property related to or arising from Plan 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

Will Company A be entitled to deduct an amount under section 8-1 for irretrievable cash contributions made by the Company A to Trustee of the Trust to fund the subscription for, or acquisition of, Shares to ESS interests issued pursuant to the Plan in respect of Participants whose activities are related to generating assessable income for Company A?

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, under 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 in retail and wholesale of X in Australia and Country B, which provides assessable income. Company A operates an ESS as part of its remuneration strategy.

Under the Plan, Participants have the opportunity to receive an award subject to meeting certain eligibility criteria in the relevant financial year. The award includes Shares that are allocated and held in the Trust on behalf of the Participant until the relevant dates under the Plan.

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:

•         all funds received by the Trustee from the Company A in the form of contributions will constitute accretions to the capital of the Trust and will not be repaid to Company A, unless funds received by the Trustee from Company A are paid to Company A where the Trustee subscribes for Shares in accordance with the Trust Deed and the Plan

•         nothing in the Trust Deed confers, or is intended to confer, on Company A any proprietary right or proprietary interest in the Shares acquired by the Trustee.

Company A will grant in the future ESS interests as part of its 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 Shares, and Company A intends to continue making contributions on a regular basis as part of the ongoing process of remunerating Participants and the Trust is expected to acquire shares regularly. 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 under the Plan.

Question 2

Will the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for, or acquisition of, Shares by the Trustee to satisfy ESS interests issued pursuant to the Plan, be deductible to Company A under section 8-1 at the time determined by 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 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 a member of the Company A TCG).

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

Will the Commissioner seek to make a determination that Part IVA 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 of Shares by the Trustee, pursuant to the Plan?

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 dominant purpose of enabling Company A to obtain a tax benefit.

Question 4

Will the irretrievable cash contributions made by Company A to the Trustee of the Trust, to fund the subscription for, or acquisition of, Shares pursuant to the Plan, constitute a 'fringe benefit' within the meaning of subsection 136(1) of 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 (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 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. Shares are 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 (or a subsidiary member of the Company A income tax consolidated group) to the Trustee of the Trust, to fund the subscription for, or acquisition of, shares pursuant to the Plans, will not be a fringe benefit.

Question 5

Will the Commissioner make a determination under section 67 of the FBTAA to include an amount in 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 acquisition of Company A Shares?

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 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 under the Plan are excluded from the definition of a fringe benefit for the reasons provided in response to Question 4. 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.

Therefore, 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.