Edited version of private advice

Authorisation Number: 1052080931342

Date of advice: 3 July 2023

Ruling

Subject: Employee share scheme

Question 1

Will Company P be entitled to deduct an amount under section 8-1 of the ITAA 1997 in respect of irretrievable cash contributions made by it to the Trustee of the Trust to fund the subscription or acquisition of ordinary shares in the Company pursuant to the Plan (Shares), to satisfy the issue of Shares to an eligible employee whose Performance Rights have vested, or options exercised, upon satisfying the relevant vesting conditions?

Answer

Yes.

Question 2

Can Company P obtain an income tax deduction, under section 8-1 of the ITAA 1997, for costs incurred in relation to the on-going administration of the Trust?

Answer

Yes.

Question 3

Will irretrievable cash contributions made by Company P to the Trustee to fund the subscription for, or acquisition on market of, Shares by the Trust be deductible to Company P under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997?

Answer

Yes.

Question 4

If the Trust satisfies its obligation under the Plan by subscribing for new Shares, will the subscription proceeds be included in the assessable income of Company P under section 6-5 or 20-20 of the ITAA 1997, or trigger a capital gain tax (CGT) event under Division 104 of the ITAA 1997?

Answer

No.

Question 5

Will the provision of Shares by Company P to its employees under the Plan constitute a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

Question 6

Will the irretrievable cash contributions made by Company P to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of Shares, constitute a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

Question 7

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company P by the amount of tax benefit gained from irretrievable cash contributions made by Company P to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plan?

Answer

No.

Question 8

Will the Commissioner seek to make a determination under section 177F that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by Company P in respect of the irretrievable cash contributions made by Company P to the Trustee of the Trust to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plan?

Answer

No.

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

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

While the facts and circumstances identify participants broadly, this private ruling is confined to expenses paid and rights/options/shares provided for the benefit of participants directly employed by Company P who engage in activities that derive income assessable in Australia.

Background

Company P is an Australian listed company.

Company P aims to maintain a remuneration policy where employee reward is aligned with the achievement of the company's overall strategic objectives, outcomes and creation of value for shareholders. Company P rewards key employees with a mix of remuneration commensurate with their position and responsibilities. Remuneration structures are reviewed regularly to ensure that:

•         remuneration is competitive by market standards

•         rewards are linked to strategic goals and performance, and

•         accountabilities and deliverables are clearly defined to minimise potential conflicts of interest and promote effective decision-making.

Remuneration of employees is evaluated against comparative positions in similar companies and

industries. The remuneration of key employees comprises the following elements:

•         Fixed remuneration, which includes base pay and other benefits

•         Performance linked remuneration, which consists of performance rights or options, and

•         Employee share ownership, through the grant of ordinary shares subject to dealing restrictions granted under a salary sacrifice, tax exempt or tax deferred arrangement.

Company P Employee Incentive Plan (Plan)

The Plan is an employee incentive plan operated by Company P for employees. The objective of the Plan is to:

•         align the interest of Eligible Employees with those of shareholders;

•         provide incentives to attract, retain and motivate Eligible Employees for the long term benefit of Company P; and

•         provide Eligible Employees with the opportunity to acquire Options, Share Rights, and ultimately Shares, in accordance with the Plan rules.

The purpose of the Plan is to provide Key Employees with Options in Company P (Options), and general Employees with Performance Rights in Company P (Performance Rights) which will convert into shares in Company P upon satisfying various vesting conditions (Shares).

An Eligible Employee becomes a participant of the Plan (Participant) on issue of an Option or Performances Right and is taken to have accepted the offer to acquire and hold the Options and Performance Rights by completing an acceptance form.

Option Plan

The Board may invite a Key Employee the Board determines to be eligible to participate in the Plan (Key Employee) by making an Offer (Invitation). The Eligible Employee will need to complete an application form and return it to Company P if they would like to participate in the Plan.

Company P will grant Options to the Key Employee with a pre-determined exercise price per Option. No amount is payable in respect of the grant of the Options.

The options will typically vest in three tranches over a period of at least three years.

The Plan Rules specify that Subdivision 83A-C applies to the Options.

Performance Rights Plan

The general Employee will be provided with an Offer Letter, and will need to complete an application form and return it to the Company if they would like to participate in the Plan. The general Employee's participation in the Plan is subject to approval by the Board.

Each Performance Right entitles the Employee to receive one fully paid ordinary share in the Company.

No amount is payable in respect of the grant of the Performance Rights. No amount is payable on the vesting of the Performance Rights, nor the subsequent issue of the Shares.

Performance Rights will automatically be exercised and vest if both the Performance Condition and Service Condition are satisfied.

The Plan Rules specify that Subdivision 83A applies to the Performance Rights.

Company P Employee Share Trust (Trust)

The Trust was established to facilitate the acquisition, holding of and allocation of Shares to Participants in accordance with employee equity plans, including the Plan. The Trustee of the Trust is not a related entity of Company P.

Company P's reasons for using an employee share trust arrangement for the existing and any future equity based incentive plans include:

•         a company is unable to hold its own shares. The Trust is a vehicle which will enable Company P to effectively acquire and hold its own Shares for the purpose of fulfilling its obligations resulting from new and existing grants under the Plan;

•         the Trust will facilitate the acquisition of Shares either on-market or by new issue of Shares by Company P;

•         the Trust provides an arm's length vehicle for acquiring and holding Shares in Company P, either by way of new issue or acquiring on-market, i.e. providing flexibility relating to capital management;

•         the Trust will be an efficient structure for giving effect to vesting conditions. As the Trustee is the legal owner; employees have no ability to deal in the Shares;

Company P states the Trust broadly operates as follows:

•         The sole activities of the Trustee will be acquiring Shares for the purpose of providing them to Participants on vesting of their Option or Performance Rights under the Plan and the administration of the Trust. The Trustee will acquire Shares at market value and will either acquire them on-market, by way of off-market transaction or subscribe for new.

•         The Trustee acknowledges and agrees that each Participant is absolutely entitled to any and all of the allocated Plan Shares held by the Trustee on his or her behalf, and all other benefits and privileges attached to the Plan Shares. The Participant have substantially the same rights in respect of allocated Plan Shares as if the allocated Plan Shares were registered in the name of the relevant Participant.

•         The Trustee's activity in its capacity as a trustee of the Trust will be limited to the Plan.

•         The Trustee authorises the Company to register the Trustee as the legal owner of the Shares when the Company receives a completed application form from the Participant.

•         The Trustee will be managed and administered so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997.

Contributions to the Trust

Company P may contribute money to the Trustee to fund the acquisition of Shares for the purpose of the Plan.

Company P will instruct the Trustee to acquire Shares on the market, by way of an off-market transaction or new shares issued by the Company, for the purpose of enabling Company P to satisfy its obligation to allocate Shares under the Plan, provided that the Trustee receives sufficient payment from Company P to subscribe for or purchase Shares.

All funds received by the Trustee from Company P in the form of irretrievable contributions will constitute accretions to the corpus of the Trust and will not be repaid to Company P, and no Participant shall be entitled to receive such fund.

Company P is not a beneficiary under the Trust Deed and any funds it contributes to the Trust other than specifically in the form of a loan, cannot be refunded, repaid or returned to Company P other than by way of the Trustee paying the issue price where it subscribes for new Shares.

Allocation of Shares

Unless and until Shares are allocated to a Participant, the Plan Trustee will hold those Plan Shares on trust for the benefit of Participants. The Trustee may apply any capital receipts, dividends or other distribution received in respect of the unallocated Shares to purchase further Shares to be held on trust.

On receipt of a direction by the Board to do so, the Trustee must allocate or transfer to any Participant nominated by the Board the number of Plan Shares specified by the Board. If the Shares are transferred, the Company will register the participant as the holder of those Shares, and the Participant will be absolutely legally and beneficially entitled to them.

If the Trustee holds allocated Shares on a Participant's behalf, the Participant is entitled to receive all dividends paid in respect of their allocated plan Shares.

The balance of net income of the trust to which no Participant is presently entitled to may be accumulated by the Trustee as accretion to the Trust.

Ongoing costs

The costs incurred in relation to the ongoing administration of the Trust are brokerage fees and bank charges.

Reasons for decision

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

Question 1

Will Company P be entitled to deduct an amount under section 8-1 of the ITAA 1997 in respect of irretrievable cash contributions made by it to the Trustee of the Trust to fund the subscription or acquisition of ordinary shares in the Company pursuant to the Plan (Shares), to satisfy the issue of Shares to an eligible employee whose Performance Rights have vested, or options exercised, upon satisfying the relevant vesting conditions?

Summary

Company P will be entitled to deduct an amount pursuant to section 8-1 in respect of the cash irretrievable contributions to the Trustee to fund the acquisition by the Trust of Company P shares either on-market or via a new subscription of Shares pursuant to the Plan.

Detailed reasoning

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

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

In accordance with the Plan Rules and the Trust Deed, Company P grants rights or shares to employees and will make irretrievable cash contributions to the Trustee to enable the Trustee to purchase Shares in Company P to benefit its employees (Eligible Participants).

Incurred in carrying on a business

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

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

Not capital, or of a capital nature

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

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.

While the deduction under section 8-1 would generally be allowable in the income year in which the employer provided the contributions to the trustee, in certain circumstances, the timing of the deduction is specifically determined under section 83A-210 (see question 3 of the Reasons for Decision).

Question 2

Can Company P obtain an income tax deduction, under section 8-1 of the ITAA 1997, for costs incurred in relation to the on-going administration of the Trust?

Summary

Company P is entitled to an income tax deduction pursuant to section 8-1 in respect of costs it incurs in relation to the on-going administration of the Trust.

Detailed Reasoning

The on-going costs are set out in the Relevant facts and circumstances under the heading On-going costs.

The Commissioner accepts that the on-going costs incurred by Company P towards the on-going administration of the Trust are deductible to Company P under section 8-1. The on-going costs are considered to be regular and recurring expenses in connection with employees. The Commissioner also accepts these costs are deductible in accordance with the Commissioner's view set out in ATO Interpretative Decision ATO ID 2014/42.

Question 3

Will irretrievable cash contributions made by Company P to the Trustee to fund the subscription for, or acquisition on market of, Shares by the Trust be deductible to Company P under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997?

Summary

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

Detailed Reasoning

Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to the trust to acquire ESS interests in excess of the number required to grant the relevant ESS interests to the employees arising in the year of income under an employee share scheme. Further information is available in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

The Plan is an employee share scheme 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 P.

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

Question 4

If the Trust satisfies its obligation under the Plan by subscribing for new Shares, will the subscription proceeds be included in the assessable income of Company P under section 6-5 or 20-20 of the ITAA 1997, or trigger a capital gain tax (CGT) event under Division 104 of the ITAA 1997?

Summary

No. Company P will not be required to include the subscription proceeds in its assessable income, as those proceeds are not assessable income pursuant section 6-5 or section 20-20 of the ITAA 1997, nor does the receipt trigger a CGT event under Division 104.

Detailed Reasoning

Income Tax

Pursuant to subsection 6-5(1), assessable income includes income according to ordinary concepts, and excludes items and the receipt of items that are capital in nature. Company P will issue Shares to the Trustee of the Trust in exchange for subscription proceeds. As the character of the Shares is capital, the subscription proceeds take the character of the Share and are also capital in nature. Subsequently resulting in the subscription proceeds not being ordinary income under section 6-5.

Pursuant to subsection 20-20(2), assessable income includes an amount a taxpayer receives as *recoupment of a loss or outgoing if:

(a)         You received the amount by way of insurance or indemnity; and

(b)         You can deduct an amount for the loss or outgoing for the *current year or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act.

There are no insurance contracts involved, therefore the receipt cannot be considered an insurance receipt. There is also no indemnity because the subscription proceeds do not arise due to a statutory right or contract of indemnity and, the receipt is not in the nature of a compensation contract of indemnity.

Additionally, the subscription proceeds are not a recoupment of previously deducted expenditure in respect of a provision listed in section 20-30 (for example, bad debts, tax related expenses, capital allowances). The only deduction that arises to Company P is the section 8-1 deduction relating to the irretrievable cash contributions to the Trust to acquire Shares for Participants and for costs associated with the administration of the trust arrangement. Section 8-1 deductions of this nature do not fall within the scope of the provisions listed on the table to section 20-30.

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

Capital Gains Tax

Pursuant to section 102-20, an entity can make a capital gain or loss if, and only if, a CGT event happens.

The key CGT events that may be of relevance to the receipt of subscription proceeds by Company P in exchange for the issue of Shares under the Plan are CGT event D1 (section 104-35), CGT event D2 (section 104-40) and CGT event H2 (section 104-155).

Under subsection 104-35(1), CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity.

Under subsection 104-40(1), CGT event D2 happens if you grant an option to an entity, or renew or extend an option you had granted.

Under subsection 104-155(1), CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset that you own; and (...) does not result in an adjustment being made to the asset's cost base or reduced cost base.

However, CGT event D1 and H2 does not occur when a company issues or allots equity interests or non-equity shares. CGT event D2 does not apply where the option granted is to *acquire a CGT asset that is *shares in the company or units in the unit trust.[1]

Therefore, no CGT event is triggered under Division 104.

Question 5

Will the provision of Shares by Company P to its employees under the Plan constitute a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA?

Summary

No. The provision of Shares by Company P to employees of Company P under the Plan rules will not be a 'fringe benefit' within the meaning of the term in subsection 136(1) of the FBTAA.

Detailed Reasoning

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA, which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax.

In general terms, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

In particular, paragraph (h) of subsection 136(1) of the FBTAA 1986 excludes the following from being a 'fringe benefit':

(h)  a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83A-B or 83A-C of that Act applies;

The Commissioner accepts that the Plan is an employee share scheme, the Shares provided under the Plan are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of Shares under the Plan will not be subject to FBT on the basis that they are acquired by Participants under an employee share scheme (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

Question 6

Will the irretrievable cash contributions made by Company P to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of Shares, constitute a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA?

Summary

No. The irretrievable payments made by Company P to the Trustee, to fund the acquisition by the Trust of Company P shares either on market or via a new subscription of Shares, will not be treated as a fringe benefit within the meaning of the term in subsection 136(1) of the FBTAA.

Detailed Reasoning

One benefit excluded from being a 'fringe benefit', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an employee share trust within the meaning in subsection 130-85(4).

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

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

•         The Trust acquires shares in a company, namely Company P; and

•         The Trust ensures that ESS interests as defined in subsection 83A-10(1) (being rights in Company P) are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating them to the employees in accordance with 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 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 Plan.

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

Question 7

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company P by the amount of tax benefit gained from irretrievable cash contributions made by Company P to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plan?

Summary

No. The Commissioner will not seek to apply Section 67 of the FBTAA to increase the aggregate fringe benefits amount by the amount of tax benefit obtained from irretrievable cash contributions made to the Trustee of the EST to fund the acquisition of Shares pursuant to the Plan.

Detailed Reasoning

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

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

(i)            a benefit is provided to a person;

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

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

The provision of benefits in the form of irretrievable contributions to the Trustee of the Trust and to participating employees as Shares under the Plan are excluded from the definition of 'fringe benefit' in subsection 136(1) of the FBTAA. In addition, Shares allocated to the participating employees on the vesting and exercise of rights are not 'fringe benefits' because these are received for the exercise of the relevant ESS interest, rather than 'in respect of' employment: ATO Interpretative Decision ATO ID 2010/219: Fringe Benefits Tax: Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme.

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

Question 8

Will the Commissioner seek to make a determination under section 177F that Part IVA of the ITAA36 applies to deny, in part or in full, any deduction claimed by Company P in respect of the irretrievable cash contributions made

by Company P to the Trustee of the Trust to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plan?

Summary

No. The Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by Company P in respect of the irretrievable cash contributions made by Company P to the Trustee of the Trust to fund the subscription for or on-market acquisition of Company P's shares by the Trust.

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 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 EST arrangement.

Therefore, having regard to the eight factors set out in paragraph 177D(b) 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 Company P to obtain a tax benefit.

[1] Section 104-35(5)(c), section 104-155(5)(c) and section 104-40(6)(a).