Edited version of private advice

Authorisation Number: 1052078371903

Date of advice: 20 January 2023

Ruling

Subject: Employee share scheme

Question 1

Will the Company be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 for irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition on-market of, ordinary shares in the Company to satisfy the issue of shares to Australian resident participants pursuant to the Plan?

Answer

Yes

Question 2

Can the Company obtain a deduction, under section 40-880 of the Income Tax Assessment Act 1997, for costs incurred in relation to the establishment of the Trust and Plan?

Answer

Yes

Question 3

Can the Company obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 for costs incurred in relation to the ongoing administration of the Trust to the extent the costs relate to the Australian resident participants of the Plan?

Answer

Yes

Question 4

Will the irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for, or acquisition on-market of, shares by the Trustee to satisfy the Company's obligations with respect to the issue of shares to the Australian resident participants pursuant to the Plan, be deductible under section 8-1 of the Income Tax Assessment Act 1997 at the time determined by section 83A-210 of the Income Tax Assessment Act 1997, if those contributions are made before the acquisition of the relevant shares by those participants in the Plan?

Answer

Yes

Question 5

If the Trust satisfies its obligations under the Plan by subscribing for new shares, will the subscription proceeds be included in the assessable income of the Company under section 6-5 or section 20-20 of the Income Tax Assessment Act 1997, or trigger a capital gains tax event under Division 104 of the Income Tax Assessment Act 1997?

Answer

No

Question 6

Will the provision of Shares by the Company to its Australian resident employees under the Plan constitute a 'fringe benefit' within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No

Question 7A

Will the irretrievable cash contributions made by the Company to the Trustee under the Trust Deed, to fund the subscription for, or acquisition on-market of, shares by the Trustee to satisfy the issue of shares to Australian resident participants pursuant to the Plan constitute a 'fringe benefit' within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No

Question 7B

Will the irretrievable cash contributions made by the Company to the Trustee under the amended Trust Deed, to fund the subscription for, or acquisition on-market of, shares by the Trustee to satisfy the issue of shares to Australian resident participants pursuant to the Plan constitute a 'fringe benefit' within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No

Question 8

Will the Commissioner seek to make a determination that section 67 of the Fringe Benefits Tax Assessment Act 1986 applies to include an amount in the aggregate fringe benefits amount of the Company by the amount of tax benefit gained from irretrievable cash contributions made to the Trustee, to fund the subscription for, or acquisition on-market of, shares by the Trustee to satisfy the issue of shares to Australian resident participants pursuant to the Plan?

Answer

No

Question 9

Will the Commissioner seek to make a determination under section 177F of the Income Tax Assessment Act 1936 that Part IVA of that Act applies to deny, in part or in full, any deduction claimed by the Company for the irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition on-market of, shares by the Trustee to satisfy the issue of shares to Australian resident participants pursuant to the Plan?

Answer

No

This ruling applies for the following periods:

For Questions 1, 2, 3, 4, 5 and 9:

Income year ended 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

For Questions 6 and 8:

Year ended 31 March 20XX

Year ending 31 March 20XX

Year ending 31 March 20XX

Year ending 31 March 20XX

Year ending 31 March 20XX

For Question 7A:

DD Month YYYY to DD Month YYYY

For Question 7B:

DD Month YYYY to DD Month YYYY

Relevant facts and circumstances

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

The Company is the head company of a tax consolidated group.

The Company established an employee share plan (the Plan) that is governed by the Plan Rules as part of its remuneration and reward program for its employees. Under the Plan, participants are provided Company shares that are allocated and held in the Trust on behalf of the participant until the relevant vesting date.

The employees of the Company are Australian residents and are engaged only in activities that generate assessable income for the Company.

The Trust was established to facilitate the provision of shares to participants under the Plan. The Trust is governed by the Trust Deed.

The Trustee of the Trust is an independent third party.

The Company will make cash contributions to the Trustee to fund the acquisition of Company shares. These contributions are irretrievable and non-refundable because the Company is not a beneficiary of the Trust and is not entitled to any part of the Trust fund (including shares held by the Trustee).

The Company incurred costs to establish the Trust and Plan. The Company also incurred costs (and will continue to incur costs) for the ongoing administration of the Trust.

On DD Month YYYY, the Trust Deed was amended and the amended Trust Deed took effect from that date onwards.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 Division 104

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 section 136

Reasons for decision

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

Question 1

Detailed reasoning

Subsection 8-1(1) will allow you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, pursuant to subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature.

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

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

Incurred in carrying on a business

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

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

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

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

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

The Company has granted (and will in the future grant) awards under the Plan as part of its remuneration and reward program for participants. The contributions to the Trustee are part of an on-going series of payments in the nature of remuneration of its employees and incurred to satisfy the awards as part of the remuneration arrangement.

Not capital or of a capital nature

The Company has made (and will continue to make) irretrievable contributions to the Trustee to satisfy its obligations under the Plan. This indicates that the irretrievable contributions are a periodic outlay (rather than a one-off).

While the contributions may secure an enduring or lasting benefit for the employer that is independent of the year to year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be sufficiently small. Therefore, the payments are not capital, or of a capital nature.

Accordingly, the Company 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 to its employees pursuant to the Plan.

Question 2

Detailed reasoning

Establishment expenses are outgoings associated with the creation of an ESS and include fees and start-up costs incurred in establishing the employee share trust (EST) and ESS plan rules.

Section 40-880 allows deductions for certain business capital expenditure that fall outside the scope of the deduction provisions of the income tax law. It requires the expenditure to be capital and in relation to the business. As this expenditure relates to remuneration of employees of the employer company who work within that business, the expenditure must be incurred in relation to that business.

Section 40-880 contains limitations and exceptions in subsections 40-880(3) to (9) which may prevent a deduction being allowed. Subsection 40-880(3) indicates that the expenditure is only deductible to the extent that the business is carried on for a taxable purpose. The other limitations and exceptions in subsections 40-880(4) to (9) do not prevent the expenses from being deductible under section 40-880.

Therefore, establishment expenses of the Plan or the Trust are deductible in equal proportions over 5 years under section 40-880 to the extent that the business carried on is for a taxable purpose (Taxation Determination TD 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an employee share scheme).

Question 3

Detailed reasoning

In addition to the reasoning provided in question 1, the Company incurs ongoing administration costs for operating the Trust and has appointed the Trustee to administer the Trust. The Company must pay all Trust Expenses which include brokerage fees, audit fees, tax return fees, bank charges and other ongoing administrative expenses.

These costs are regular and recurrent which are deductible under section 8-1 as they are costs necessarily incurred by the Company in running the ESS while carrying on its business for the purpose of gaining or producing its assessable income. These costs are not capital or of a capital nature as the loss or outgoings are regular, recurrent and part of the ordinary employee remuneration costs of the Company (Taxation Determination TD 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an employee share scheme).

Question 4

Detailed reasoning

Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to the Trust to purchase ESS interests under an ESS that occurs before the ultimate beneficiary acquires the ESS interest. Further information is available in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

The Plan is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which beneficial interests in the Company shares (and are ESS interests under subsection 83A-10(1)) are granted to the Company's employees as a result of their employment.

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

The deduction for the irretrievable cash contribution can only be deducted from the assessable income of the Company in the income year when the relevant beneficial interest in a share in the Company is acquired by a participant under the Plan.

Question 5

Detailed reasoning

Subscription proceeds not ordinary Income

Section 6-5 provides that your assessable income includes income according to ordinary concepts which is called ordinary income.

As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In GP International Pipecoaters v Federal Commissioner of Taxation [1990] HCA 25, the High Court of Australia found that:

To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

The character of the contribution of share capital received by the Company from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, the Company is issuing the Trustee with new shares in itself. The character of the newly issued share is one of capital. Therefore, the receipt of the subscription proceeds takes the character of share capital, and accordingly, is of a capital nature. This view is supported by the reasoning in ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee.

In conclusion, when the Company receives subscription proceeds from the Trustee where the Trustee has subscribed for new Shares to satisfy obligations to Participants, those subscription proceeds received by the Company is a capital receipt, and will not be ordinary income in the hands of the Company under section 6-5.

Subscription proceeds not assessable recoupment

Subsection 20-20(2) provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year.

The Company will receive an amount for the subscription of Shares by the Trustee. There is no insurance contract in this case, so the amount is not received by way of insurance.

Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation.

Subsection 20-20(3) establishes that an amount received by you as 'recoupment' of a loss or outgoing is an 'assessable recoupment' if you can deduct the loss or outgoing for an earlier income year under a provision listed in section 20-30. None of the provisions listed in section 20-30 are relevant to the current circumstances.

Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20.

Subscription proceeds will not trigger a CGT event

Section 102-20 states that you make a capital gain or loss if and only if a CGT event happens.

The relevant CGT events that may be applicable when the subscription proceeds are received by the Company are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset).

However, paragraphs 104-35(5)(c) and 104-155(5)(c) respectively state that CGT event D1 and CGT event H2 do not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, the Company is issuing shares, being equity interests as defined in section 974-75, to the Trustee. Therefore, neither CGT event D1 nor CGT event H2 will occur.

Since no CGT event occurs, there is no amount that will be assessable as a capital gain to the Company under Division 104.

Question 6

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 136(1)(f) to (s) of the FBTAA.

In particular, paragraph 136(1)(h) 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 and the shares provided under the Plan are ESS interests to which Subdivision 83A-B or 83A-C applies.

Accordingly, the provision of ESS interests under the Plan will not be subject of 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 136(1)(h) of the FBTAA.

Question 7A

Detailed reasoning

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

In examining whether the requirements of subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that is relevant. To qualify as an employee share trust, a trustee's activities must be limited to those described in paragraphs 130-85(4)(a), (b) and (c).

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

•         the Trustee acquires shares in the Company on behalf of the Trust, and

•         the Trustee ensures that ESS interests (as defined in subsection 83A-10(1)) are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust Deed and the Plan Rules.

Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'?

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental.

In the present case, the objects of the Trust, as set out in the original Trust Deed, are for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under section 130-85(4) including paragraph 130-85(4)(c) as the other activities undertaken by the Trustee are merely incidental to managing the ESS.

Therefore, the irretrievable cash contributions made by the Company to the Trustee, prior to the Trust Deed being amended, to fund the acquisition of Company shares to satisfy grants of ESS interests will not be a fringe benefit.

Question 7B

Detailed reasoning

As set out in question 7A above, paragraph subsection 136(1)(ha) of the FBTAA excludes a benefit constituted by the acquisition of money or property by an employee share trust from being a 'fringe benefit'.

In the present case, the objects of the Trust, as set out in the amended Trust Deed, are for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under section 130-85(4) including paragraph 130-85(4)(c) as the other activities that will be undertaken by the Trustee are merely incidental to managing the ESS.

Therefore, the irretrievable cash contributions the Company makes to the Trustee, after the Trust Deed was amended, to fund the acquisition of Company shares to satisfy grants of ESS interests will not be a fringe benefit.

Question 8

Detailed reasoning

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

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

As stated above in the detailed reasoning for question 6, without the provision of a 'fringe benefit', no amount will be subject to FBT. The irretrievable cash contributions paid by the Company to the Trustee are excluded from the definition of a fringe benefit for the reasons provided in the detailed reasoning for questions 7A and 7B. 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 to include an amount in the aggregate fringe benefits amount of the Company by the amount of tax benefit gained from irretrievable cash contributions made to the Trustee, to fund the subscription for, or acquisition on-market of, shares by the Trustee to satisfy the issue of shares to Australian resident participants pursuant to the Plan.

Question 9

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 general 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 scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the employee share trust arrangement.

Therefore, having regard to the 8 factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling the Company to obtain a tax benefit.