Edited version of private advice

Authorisation Number: 1052108131848

Date of advice: 26 September 2023

Ruling

Subject: Employee share scheme

Question 1

Will Company as head company of the tax consolidated group obtain an income tax deduction, under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by Company to the Trustee to fund the subscription for or acquisition on-market of ordinary shares in Company (Shares) by the Trust to satisfy the issue of shares by the Trustee to participants under Plan A and Plan B (Plans)?

Answer

Yes

Question 2a

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

Answer

Yes

Question 2b

Will Company obtain a deduction, under section 40-880 of the ITAA 1997, for expenditure it incurs in relation to the implementation and establishment of the Trust?

Answer

Yes

Question 3

Will irretrievable cash contributions made by Company to the Trustee to fund the subscription for, or acquisition on-market of, shares by the Trust be deductible to Company at a time determined by section 83A-210 of the ITAA 1997 where contributions are made before the acquisition of the relevant 'ESS interests' (as defined in subsection 83A-10(1) of the ITAA 1997)?

Answer

Yes

Question 4

If the Trust satisfies its obligation under the Plans by subscribing for new shares, will the subscription proceeds be included in the assessable income of Company under section 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997?

Answer

No

Question 5

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 full, any deduction claimed by Company in respect of the irretrievable cash contributions made by Company to the Trustee to fund the subscription for or acquisition on market of shares by the Trust?

Answer

No

Question 6

Will the provision of rights or shares by Company to employees of Company or employees of other employer entities within the Company group under the Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No

Question 7

Will the irretrievable cash contributions made by Company or other employer entities within the Company group to the Trustee, to fund the subscription for or acquisition on market of shares by the Trust, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer

No

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to Company or any employer entity within the Company group, by the amount of tax benefit gained from the irretrievable cash contributions made by Company to the Trustee, to fund the subscription for or acquisition of on-market of shares?

Answer

No

Relevant facts and circumstances

Company is an Australian public company and is the head company of the Company tax consolidated group (TCG).

Plan A

The Plan A was approved by the Company board on DD MM YYYY.

The board will determine the procedure for granting options to participants, including the form and content of any invitation, offer or acceptance procedure, the issue price (if any), performance conditions (if any), exercise price (if any), exercise date, the expiry date of the options (if any) and any other terms or conditions the Board considers appropriate and which are not inconsistent with the Plan A Rules.

Subject to the Plan A Rules, each option entitles the holder to subscribe for and be allotted, credited as fully paid, one share at the exercise price (if any).

At the time an option is granted, the board may impose such performance conditions (if any) as it considers appropriate.

Subject to the Plan A Rules, an option may be exercised only if the performance conditions (if any) relating to it have been satisfied or waived by the board.

Unless the board otherwise determines and subject to the Plan A Rules, a participant may not exercise an option before the exercise date for the option.

Where a participant has ceased to be employed by the Company or a subsidiary by reason of total and permanent disability or death, or such other circumstances as determined by the board, then subject to the Plan A Rules, the participant may exercise the option within 90 days after cessation of the participant's employment.

An option is exercisable by the participant by providing to the Company, secretary of the Company or such other person as the board delegates, the following:

•                     a completed notice (in the form required by the Company) of exercise of options and application for shares

•                     the relevant option certificate, and

•                     payment of the exercise price (if any).

Upon the exercising of options by a participant, the board may, in its discretion, determine not to issue to a participant all or some of the shares and may instead make a cash payment to the participant equivalent to the fair market value of the shares (or any part thereof as determined by the board) as at the date of exercise of the option (less any unpaid exercise price per share applicable to the exercise of the options). Where options are settled in cash, this will be done outside of the Trust directly by the Company.

Subject to the Plan A Rules, options are not transferable and a participant must not encumber or otherwise deal with the options.

Expiry of options

An option not exercised will expire on the first to occur of the following:

•                     the 15th anniversary of the date of grant of the option unless the board in its discretion has determined at the time of any invitation or offer of options in accordance with the Plan A Rules that another expiry date is to apply to an option

•                     the expiration of the time within which the option must be exercised under the Plan A Rules, no later than the date which is 15 years from the date of grant for the option

•                     subject to the Plan A Rules, when before the exercise date the participant has ceased to be employed by the Company or a subsidiary, and

•                     such date as specified by the board if it determines that the participant has committed any act of fraud, defalcation, or gross misconduct, or otherwise in accordance with the Plan A Rules.

Where a participant enters, or is purported to enter, into any scheme, arrangement or agreement which has the effect of altering or limiting the economic risk or benefit to be derived from the options, all options will immediately lapse.

Forfeiture of options

Prior to the exercise date, if the board in its reasonable opinion determines that a participant is engaging in, or has engaged, in any of the following conduct, the board may declare that all, or some, of the participant's options are forfeited:

•                     cessation of employment, other than for special circumstances, redundancy or by mutual agreement between the board and the participant

•                     fraud, dishonesty, gross misconduct or criminal behaviour

•                     behaviour that may impact on the Company or a subsidiary's reputation or financial soundness

•                     misstatement of financial results or achievement of performance conditions

•                     material breach of the participant's obligations to the Company or a subsidiary

•                     behaviour that brings the Company, subsidiary, or any member of the Company or a subsidiary into disrepute.

The board will provide the participant with written notice of forfeiture of the options and the date on which the options will lapse.

Following the exercise date, if the board in its reasonable opinion determines that a participant is engaging in or has engaged in any conduct set out in the Plan A Rules, the board may declare that the participant shall forfeit any right or interest in the shares or other entitlements of the participants under Plan A.

Subject to the Trust, the board in its absolute discretion may determine that forfeited shares are to be sold, transferred or otherwise disposed of and how any proceeds therefrom are to be applied.

Plan B

Plan B was approved by the board on DD MM YYYY.

Plan B allows the Company to grant shares to participants.

The board may, in its absolute discretion, but in accordance with the terms of Plan B and on such additional terms and conditions as the board determines, operate Plan B and:

•                     invite an employee to contribute an agreed amount or percentage of the participant's pre-tax remuneration and apply for a grant of shares, or

•                     grant employee shares.

At the time of the invitation or grant, the board will provide each employee with an invitation letter which contains the following information:

•                     the type of shares being granted

•                     the number or value of shares being granted or the method for determining the number or value of shares

•                     the sacrifice amount (if any) that may be contributed and the period specified over which the participant agrees to make the sacrifice amount contributions

•                     the grant date

•                     details of any shares to be allocated to a participant free of charge

•                     details of any applicable conditions, including performance or service conditions

•                     details of any trading restrictions on shares, including the relevant restriction period

•                     treatment of shares in the event that a participant ceases to be an employee, and

•                     any other relevant terms and conditions to be attached to the shares allocated under the Plan B.

A grant of shares is personal to the participant and cannot be transferred to other persons or entities subject to the Plan B Rules.

Where an application to participate in the Plan B has been accepted by the board:

•                     each participant will be advised of the number of shares that have been allocated to them, as soon as reasonably practicable, and

•                     where relevant, each participant authorises the group (or any group company) to withhold the sacrifice amount over the participation period.

Unless otherwise stated in the invitation letter, shares allocated under the Plan B cannot be forfeited by a participant for any reason.

The Company is authorised, but not required, to bear all brokerage, commission, stamp duty and other transaction costs payable in relation to the acquisition of shares by a participant under the Plan B.

Unless the board determines otherwise, a participant shall be entitled to vote, receive distributions (such as dividends) and, subject to applicable trading restrictions, have all rights of a shareholder in respect of shares allocated to the participant under the Plan B Rules. Whilst shares are subject to trading restrictions, the rights and entitlements attaching to them must be exercised in accordance with the Plan B Rules.

Unless otherwise determined by the board, trading restrictions may be lifted on the earlier of the following:

•                     the date specified in the terms of the invitation letter, or

•                     the time when the participant ceases to be an employee (in accordance with the Plan B Rules).

A share subject to trading restrictions under Plan B is only transferable:

•                     with the consent of the board, which will only be provided in exceptional circumstances, and

•                     by force of law upon the death of the participant to the participant's legal personal representative or upon bankruptcy of the participant to the participant's trustee in bankruptcy.

The group may implement any procedure it considers appropriate to restrict a participant from dealing in shares that are subject to trading restrictions, including but not limited to imposing a holding lock on any shares subject to trading restrictions under Plan B, or requiring the applicable shares to be held by a Trustee on behalf of a participant for such time as the shares are subject to trading restrictions under the Plan B.

Ceasing employment

Subject to the terms of the invitation letter and unless the board determines otherwise, where a participant ceases to be an employee of the group, participation in Plan B ceases.

If a participant ceases to be an employee during the participation period but before the shares are allocated, the sacrifice amount will be reimbursed to the participant and subject to applicable taxes.

Unless otherwise set out in the terms of the invitation letter, if a participant ceases to be an employee while trading restrictions apply in respect of their shares under the plan, the trading restrictions will cease to apply immediately on cessation of employment.

Upon cessation of employment, a participant will be required to sell or have the shares transferred to a personal account within 60 days of ceasing employment.

If a participant remains an employee but is transferred to work in another country, or changes tax residence status, and as a result would:

•                     become subject to restrictions on his or her ability to hold or deal in shares or receive any proceeds of sale from the sale of shares due to the securities laws or exchange control laws of the country to which they are transferred, or

•                     suffer a tax disadvantage (or cause a member of the group to suffer a tax disadvantage),

the board, in its discretion and having regard to the requirements of the ITAA 1997, may determine any treatment in respect of shares and any trading restrictions or both, applicable to shares allocated under Plan B, before or after the employee's transfer takes effect.

Trust

On DD MM YYYY, Company established the Trust under a deed entered into between Company and the Trustee as amended on DD MM YYYY and on DD MM YYYY (Trust Deed).

The Trustee is an independent third party.

The recitals to Trust Deed states that Company wished to establish the Trust for the sole purpose of subscribing for, acquiring, holding and transferring shares in connection with equity incentive plans for the benefit of participants in those plans. Trust assets means the property, rights and income of the Trust and includes any ESS Interests, accretions, unallocated trust shares and cash.

The Trustee has the powers to:

•                     enter into and execute all contracts, deeds and other documents

•                     subscribe for, purchase or otherwise acquire trust assets or rights which the Trustee is authorised by the Trust Deed to acquire on such terms and conditions as it thinks fit, and do all things incidental to this activity

•                     sell or otherwise dispose of trust assets or rights which the Trustee is authorised by the Trust Deed to dispose of on such terms and conditions as directed by the relevant participant, and do all things incidental to this activity

•                     receive dividends or distributions on the trust shares and to apply those amounts in accordance with the Trust Deed

•                     sell or transfer the trust shares to the participants or their nominees and apply the proceeds of the sale in accordance with the Deed and Plan Rules and relevant terms of participation

•                     sell any rights relating to the trust shares and apply the proceeds of sale in accordance with the Trust Deed

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

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

•                     borrow money for the purpose of acquiring shares or rights in the Company, where no security is provided over the assets of the Trust and the interest payable on such a loan is not more than arm's length commercial rates

•                     receive dividends in respect of unallocated trust shares and any interest from bank accounts and using those funds to:

­        acquire additional shares for the purpose of a plan

­        subject to the Trust Deed, pay necessary and incidental costs of administered the Trust and undertaking the activities described in paragraphs 130-85(4)(a), (b) and (c) of the ITAA 1997, including without limitation paying costs relating to the audit of the Trust and fees for professional services provided to the Trustee in relation to the Trust, or

­        pay interest on loans provided for the acquisition of shares or rights in the Company, where the interest payable does not exceed arm's length commercial rates

•                     to do all acts, matters or things which the Trustee in its discretion considers necessary or expedient to administer and maintain the Trust and the trust assets or 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.

From 1 July 2021 to 6 February 2023:

•                     the Trustee did not borrow money for any purpose other than to acquire shares in Company under the Plans. No security was provided over the assets of the Trust in respect of the borrowing and interest was payable by the Trustee at arms-length commercial rates, and

•                     the Trustee's activities in its capacity as Trustee of the Trust, were limited to managing the Plans.

The Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4) of the ITAA 1997.

The Trustee's activities in its capacity as trustee will be limited to the relevant Plan Rules and relevant terms of participation.

Acquisition of trust shares

The Trustee will, in accordance with instructions received from the Company under the Plan Rules and as soon as reasonably practicable, acquire, allocate and deliver shares for the benefit of a participant provided that the Trustee:

•                     receives sufficient payment to subscribe for or purchase shares, or

•                     has sufficient unallocated trust shares available.

The trust assets, other than those referred to in clauses of the Trust Deed, and including unallocated trust shares, are to be held by the Trustee on trust for the participants to be nominated by the Company from time to time in accordance with the terms of the Trust Deed, the relevant Plan Rules, and the relevant terms of participation until the termination of the Trust under the Trust Deed or by operation of law. Nothing in the Trust Deed confers or is intended to confer on the Company any charge, lien or any other proprietary right or proprietary interest in the shares acquired by the Trustee.

If the Trustee has received a notice under the clauses of the Trust Deed, subject to the Trustee receiving sufficient payment or having sufficient capital as required by the notice, the Trustee must in accordance with the terms of that notice from the board:

•                     purchase the requisite number of (or proportion of that number determined by the board) shares on market or off market on behalf of the relevant participants or participants generally

•                     subscribe for, and the Company must issue to the Trustee, the requisite number (or proportion of that number determined by the board) of shares on behalf of the relevant participants or participants generally

•                     allocate shares that are trust assets (not being trust shares held on behalf of any other particular participant) to be held on behalf of the relevant participants or participants generally, or

•                     effect a combination of the acts above.

Funding

The Company must provide the Trustee, or cause its related body corporate to provide to the Trustee, any funds required by the Trustee in order to comply with is obligations under the clauses of the Trust Deed.

Subject to the clauses of the Trust Deed, all funds received by the Trustee from the Company or its related body corporate will constitute accretions to the corpus of the Trust and will not be repaid to the Company and no participant shall be entitled to receive such funds.

Funds received by the Trustee from the Company and its related body corporate may be paid to the Company where the Trustee subscribes for shares in accordance with the Trust Deed, the relevant Plan Rules or relevant terms of participation.

Where an amount paid by the Company or its related body corporate to the Trustee in respect of the acquisition of shares for the benefit of a participant is in excess of the amount required by the Trustee to subscribe for, acquire, allocate or deliver those shares, the board may require the Trustee to:

•                     apply such amounts to subscribe for, acquire or allocate and deliver shares in accordance with the Trust Deed, the relevant Plan Rules or the relevant terms of participation, or

•                     deposit the funds into any account opened and operated by the Trustee in accordance with the clauses of the Trust Deed to be used for the purposes set out in the clauses of the Trust Deed.

Subject to the clauses of the Trust Deed, the Company must pay all trust expenses. The Trustee may pay trust expenses from cash dividends received in relation to unallocated shares and interest earned on funds held in the Trust.

Trust expenses means all reasonable disbursements charged to the Trust, including expenses, outgoings, costs and charges incurred in establishing and operating a Company plan and includes any amount of income or other tax payable by the Trustee in relation to a Company plan and the costs of the audit of the Trust but excludes any costs directly related to selling and transferring trust shares or exercising rights (if any).

The Trustee is prevented from charging to, and is not entitled to seek or receive from, the Trust or any participant any fees, commission or remuneration in respect of its office. Reimbursement of the Trustee from the Trust for third party costs and expenses it has incurred in the execution or purported execution of the Trust or any of the powers, authorities or discretions vested in the Trustee will not constitute fees, commission or other remuneration of the Trustee.

The Company must pay to the Trustee from the Company's own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as the Company and the Trustee agree from time to time. The Trustee is entitled to retain for its own benefit any such fees, commissions or remuneration or reimbursement.

The Company incurs costs in relation to the on-going administration of the Trust including:

•                     employee plan recording keeping

•                     production and dispatch of holding statement to employees

•                     costs incurred in the acquisition of shares on market, such as brokerage costs and the allocations of such shares to participants

•                     other trustee expenses such as the annual audit of the financial statements and the annual income tax return of the Trust, and

The Company also incurs various establishment and implementation costs including initial costs to establish the Trust, and services provided by the Company's accounting, tax and legal advisors.

Allocation of trust shares

The Company may direct the Trustee to allocate unallocated trust shares to a participant from time to time. Following the allocation to a participant of Trust shares held by the Trustee in accordance with the Trust Deed, the Company may direct the Trustee to continue to hold those Trust shares on behalf of the participant and on the terms of the Trust Deed.

Subject to clauses in the Trust Deed, at any time after a restrictive period (if any) and subject to any administrative guidelines established by the board, a participant may give to the Trustee, or be deemed by the relevant Plan Rules or relevant terms of participation to give the Trustee, a withdrawal notice, and following any required approval by the board of the withdrawal notice, the Trustee must transfer legal title in those trust shares or sell those trust shares in accordance with the terms of the approved withdrawal notice and clauses of the Trust Deed.

Subject to clauses in the Trust Deed, if the relevant Plan Rules or relevant terms of participation permit, the Trustee may at the direction of the participant, sell any of the trust shares to which the participant is entitled. On sale of any such trust shares, subject to any Plan Rules or relevant terms of participation, the Trustee will apply the proceeds of sale (and pay to the participant any other monies held on the account for the participant):

•                     first, in payment of any brokerage and other costs and expenses of the sale incurred by the Trustee (including an amount sufficient to meet the tax liability (if any) incurred by the Trustee resulting from that sale), and

•                     second, the balance (if any) in payment to the relevant participant.

Subject to clauses of the Trust Deed, the Trustee must do all things required by it to transfer legal title in Trust shares to a participant on whose behalf the trust shares are held or to any third party as directed by the relevant participant (and pay to the participant any other monies held on the account for the participant):

•                     where required to do so, or permitted, by the relevant Plan Rules or relevant terms of participation as soon as reasonably practicable,

•                     if the Trust is terminated under clauses of the Trust Deed, or

•                     otherwise, where the board in its discretion determines.

Unallocated trust shares

Before the allocation to a participant of an unallocated trust share held by the Trustee in accordance with the Trust Deed, the Trustee:

•                     subject to the Trust Deed, must not, at its own discretion, exercise any voting rights in relation to the unallocated share, except to the extent consistent with the Trustee's fiduciary duties

•                     subject to the Trust Deed, may exercise at its own discretion any voting rights in relation to the unallocated share, but only where the Trustee determines that voting in those circumstances is 'merely incidental' to obtaining, holding and providing shares in the Company to participants

•                     may apply any capital receipts, dividends or other distributions received in respect of the unallocated Trust share to purchase further shares to be held on trust for the purposes of this Trust

•                     must not participate in any rights issues in respect of the unallocated trust share

•                     must hold any bonus shares issued in respect of the unallocated trust shares on trust for the purpose of the Trust Deed, and

•                     must keep an account of all unallocated trust shares acquired by the Trustee that are held as trust assets.

The board may from time to time specify that certain unallocated trust shares are to be held by the Trustee for a particular plan in which case:

•                     the board must identify the unallocated trust shares which are to be held for a particular plan and must direct the Trustee in writing to hold those unallocated trust shares for that particular plan

•                     the Trustee must, when directed to allocate shares to a participant in accordance with the Trust Deed, only use the unallocated trust shares if the participant is to be allocated shares as a participant under the relevant plan, and

•                     if the board wishes the Trustee to hold any of the unallocated trust shares for a different plan, or for those shares to be used to allocate shares to a participant under a different plan, it must notify the Trustee in writing.

Forfeited shares

The board may from time to time by notice in writing direct the Trustee to hold or reallocate any forfeited shares (or the proceeds of sale of such forfeited shares):

•                     for the benefit of one or more participants, or

•                     for the benefit of any of the plans.

Income and capital distribution

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 trust shares held by the Trustee on behalf of the participants

•                     the proceeds of sales arising from the sale by the Trustee of rights under a rights issue on behalf of a participant, and

•                     transactions or events related to trust shares or property related to or arising from trust shares held by the Trustee on behalf of the participant.

Other matters

From 1 July 2021 to 6 February 2023, all participants to Plan A and Plan B were employees of employing companies of the TCG or otherwise had a relationship with those companies which are similar to employment for the purpose of section 83A-325 of the ITAA 1997.

Reasons for decision

All legislative references are to the provisions of the ITAA 1936 or to provisions of the ITAA 1997, unless otherwise of 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, 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 carries on a business which provides it with assessable income. Company operates an employee share scheme, as defined by subsection 83A-10(2), as part of its remuneration strategy.

Under the Plans, Company grants shares and options to participants and makes irretrievable cash contributions to the Trustee (in accordance with the Plans and the Trust Deed) which the Trustee will use to acquire shares for allocation to participants.

Incurred in carrying on a business

Company must provide the Trustee with any funds required by the Trustee to comply with its obligations to acquire Shares under the Trust Deed.

The cash contributions made by Company to the Trustee are irretrievable as:

•                     all funds received by the Trustee from Company will constitute accretions to the corpus of the Trust and will not be repaid to Company, except where the Trustee subscribes for shares in accordance with the Trust Deed, the Plans or relevant terms of participation, and

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

Company 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 for the acquisition of shares to satisfy grants of ESS interests that 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 employee share scheme for employees of the Company group. Costs incurred are likely to be in relation to more than one grant of ESS interests, and Company intends to continue satisfying the ESS interests 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.

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 will be entitled to deduct an amount under section 8-1 for irretrievable cash contributions it makes to the Trustee to acquire shares to satisfy ESS interests issued under the Plans.

Question 2a

Detailed Reasoning

In addition to the reasoning provided in Question 1, Company incurs ongoing administration costs for operating the Trust and has appointed the Trustee to administer the Trust. Company must pay all trust expenses which includes all expenses, outgoings, costs and charges incurred in operating the Plans (including any amount of income or other tax payable by Company or the Trustee in relation to the Plans and the costs of the audit of the Trust but excludes any costs directly related to selling and transferring trust shares or exercising options).

These costs are regular and recurrent which are deductible under section 8-1 as they are costs necessarily incurred by Company in operating the employee share scheme 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 Company (as confirmed in Taxation Determination 2022/8 (TD 2022/8) Income tax: deductibility of expenses incurred in establishing and administering an 'employee share scheme.

Question 2b

Detailed Reasoning

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 incurred in relation to the taxpayer's business.

Section 40-880 contains limitations and exceptions in subsections 40-880(3) to (9) which may prevent a deduction from being allowed. Relevantly, subsection 40-880(3) provides that the expenditure is only deductible to the extent that the business is carried on for a taxable purpose.

TD 2022/8 sets out the Commissioner's view on the deductibility of expenses in establishing, amending and administering an employee share scheme. It provides that:

•                     establishment expenses are outgoings associated with the creation of an ESS and include fees and start-up costs incurred to establish or implement the employee share trust (EST) and the ESS plan rules (paragraph 6)

•                     amendment expenses are outgoings associated with the fees and costs incurred in altering or updating an established EST and ESS plan rules (paragraph 9)

•                     establishment and amendment expenses to establish or implement an EST are capital in nature (paragraph 4 and 7)

•                     expenses incurred to amend an ESS are deductible to the employer company under section 40-880 to the extent the business is carried on for a taxable purpose (paragraph 8)

•                     the limitation and exceptions in subsection 40-880(4) to (9) do not prevent establishment and amendment expenses from being deductible under section 40-880 (paragraph 28).

As noted in the response to Question 1, Company carries on a business which produces assessable income.

Company directly incurs various establishment and implementation costs including initial costs to establish the Trust, and services provided by Company's accounting, tax and legal advisors.

As per paragraphs 4 to 9 and paragraph 28 of TD 2022/8, these costs, including the services provided by Company's accounting, tax and legal advisors associated with establishing and amending the Trust Deed are deductible over five years under section 40-880.

Question 3

Detailed Reasoning

Section 83A-210 applies to determine the timing of the deductions, but only in respect of the cash contributions provided to the Trust to purchase shares in excess of the number required to grant the relevant ESS interest to the ultimate beneficiary arising in the year of income under an employee share scheme. The effect of section 83A-210 is to deem the timing an employer incurred the outgoing to be the time when the ESS interest is acquired by the ultimate beneficiary, rather than the time when the employer makes the contribution to the trust: see 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 Plans are an employee share scheme for the purpose of subsection 83A-10(2) as they are schemes under which ESS interests are provided to employees in relation to their employment or engagement with Company.

Company's employee share scheme contains a number of interrelated components which include the provision of irretrievable cash contributions by Company 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 Plans, to acquire ESS interests.

The deduction for the irretrievable cash contribution can only be deducted from the assessable income of Company 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 the participant under the Plans.

Indeterminate rights

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

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

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

Question 4

Detailed Reasoning

Section 6-5

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In an employee share scheme, where the trustee subscribes to the company for an issue of shares and pays the full subscription price for the shares, the company receives a contribution of share capital from the trustee.

The character of the subscription proceeds received by Company from the Trust can be determined by the character of the right or thing disposed of in exchange for the receipt. Where Company issues the Trust with new shares in itself, the character of the newly issued share is one of capital. Therefore, the receipt of the subscription proceeds by Company takes the character of share capital and 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.

When Company receives subscription proceeds from the Trustee where the Trustee has subscribed to new shares in Company to satisfy obligations to participants, those subscription proceeds received are a capital receipt and will not be treated as ordinary income under section 6-5.

Section 20-20

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.

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. 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. Therefore, the receipt of the subscription proceeds does not constitute an assessable recoupment under subsection 20-20(2).

Subsection 20-20(3) provides that an amount received by you as a 'recoupment' of a loss or outgoing, except by way of insurance or indemnity, is an 'assessable recoupment' if you can deduct an amount for the loss or outgoing in the current or a prior income year because of a provision listed in the table in section 20-30.

None of the provisions listed in section 20-30 are relevant to the current circumstances. Therefore, the subscription amount also does not constitute an assessable recoupment under subsection 20-20(3).

Division 104

A capital receipt will only be included as an assessable capital gain only if it arises as a result of a CGT event (section 102-20).

The only CGT events that may have possible application to the receipt of the subscription proceeds are CGT event D1 (Creating a contractual or other rights) and CGT event H2 (Receipt for event relating to a CGT asset).

Paragraphs 104-35(5)(c) and 104-155(5)(c) respectively provide that CGT event D1 and CGT event H2 do not apply if a company issues or allots equity interest or non-equity shares in the company.

As the shares constitute an "equity interest" (see subsection 974-75(1) of the ITAA 1997), neither CGT event D1 nor CGT event H2 will occur.

Since no CGT event occurs, the subscription proceeds will not be assessable as a capital gain to Company.

Therefore, when the Trust satisfies its obligations under the Plans by subscribing for new shares in Company, the subscription proceeds will not be included in the assessable income of Company under section 6-5 or section 20-20 nor trigger a CGT even under Division 104.

Question 5

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 where the conditions of Division 83A are met.

In this case, the employee share 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 eight factors set out in subsection 177D(2), the Commissioner has concluded that the employee share trust is not being entered into or carried out for the dominant purpose of enabling Company to obtain a tax benefit.

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 (f) to (s) of the definition.

Paragraph (h) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA excludes a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C applies.

The Commissioner accepts that a share granted under Plan B is an ESS interest under paragraph 83A-10(1)(a), being a beneficial interest in a share in a company and Plan B is an employee share scheme under subsection 83A-10(2). A share is also an ESS interest to which subsection 83A-105(4) applies. Eligible participants acquire the interest in lieu of future salary or wages they otherwise would earn (in line with subsection 83A-105(4)(i)) (Taxation Ruling TR 2001/10: Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements).

Accordingly, the provision of shares under Plan B will not be subject to fringe benefit taxes 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 a fringe benefit in subsection 136(1) of the FBTAA.

Indeterminate rights

The Commissioner accepts that options granted under the Plan A that may be satisfied in cash instead of shares are indeterminate rights.

At the time the options are granted, it may be unclear if paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA applies because those options may be satisfied in cash instead of shares. Hence, they may not be ESS interests within the meaning of subsection 83A-10(1).

Where the options are ultimately satisfied with shares instead of cash, section 83A-340 will operate to treat those options to have always been ESS interests within the meaning of subsection 83A-10(1). In these circumstances, the Plan A will constitute an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which ESS interests are provided to employees of Company or other employer entities within the Company group in relation to their employment. Accordingly, the provision of options under the Plan A will not be subject to fringe benefits taxes 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 a fringe benefit in subsection 136(1) of the FBTAA.

Where the options are later exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the option and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon the exercise of rights granted under an employee share scheme.

Where the options are ultimately satisfied with cash instead of shares, the granting of the options will be viewed as a series of steps in the payment of salary or wages, and not a separate benefit to the payment of salary or wages which are excluded from the definition of a fringe benefit by paragraph 136(1)(f) of the FBTAA.

This outcome is consistent with ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits.

Question 7

Detailed Reasoning

An employer's liability to fringe benefit taxes arises under section 66, 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, under paragraph (ha) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an 'employee share trust' 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 employee share trust, a trustee's activities must be limited to:

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

•                     ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph 130-85(4)(b)), or

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

As stated above in the response to Question 6, the Commissioner accepts that the Plans are an employee share scheme under subsection 83A-10(2) and shares and options granted under the Plans are ESS interests under paragraph 83A-10(1) in respect of an employee share scheme to which Subdivision 83A-B or 83A-C applies.

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

•                     the Trust acquires shares in a company, namely Company

•                     the Trust 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 Plans.

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 for a purpose other than to acquire shares in the employer company) 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 paragraphs 130-85(4)(a) and (b). The other activities undertaken by the Trustee are merely incidental under paragraph 130-85(4)(c).

Therefore, the irretrievable cash contributions made by Company, to fund the subscription for, or acquisition on-market of, Shares under the Plans will not be fringe benefits within the meaning of that definition in subsection 136(1) of the FBTAA.

Question 8

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 fringe benefits taxes than would be payable but for entering into the arrangement.

As stated above in response to Questions 6 and 7, without the provision of a fringe benefit, no amount will be subject to fringe benefits taxes. The benefits provided to the Trustee by way of irretrievable cash contributions to the Trust under the Plans are excluded from the definition of a fringe benefit for the reasons provided in response to Question 7. As these benefits have been excluded from the definition of a fringe benefit, the fringe benefits taxes liability is not any less than it would have been but for the arrangement.

The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company by the amount of tax benefit gained from the irretrievable cash contributions made by Company to the Trustee to fund the subscription for, or on-market acquisition of, shares.