Edited version of private advice

Authorisation Number: 1052128245169

Date of advice: 28 July 2023

Ruling

Subject: Employee share scheme

Question 1

Will Company A obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of irretrievable cash contributions made by Company A to the trustee of the Company A Employee Share Trust (Trustee) to fund the subscription for, or acquisition on-market, of fully paid ordinary shares in Company A (Company A Shares) to satisfy ESS interests issued in respect of the Company A Performance Rights Plan (the Plan)?

Answer

Yes.

Question 2a

Will the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market, of Company A Shares to satisfy ESS interests issued pursuant to the Plan, be deductible under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests by participants under the Plan?

Answer

Yes.

Question 2b

Will the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market, of Company A Shares to satisfy ESS interests issued pursuant to the Plan, be deductible under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests by participants under the Plan?

Answer

Yes.

Question 3

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company A for the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market, of Company A Shares pursuant to the Plan?

Answer

No.

Question 4

Will the provision of Performance Rights under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

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

Answer

No.

The private rulings for question 1-3 inclusive apply for the following periods:

Income tax year ended 30 June 2023

Income tax year ended 30 June 2024

Income tax year ended 30 June 2025

Income tax year ended 30 June 2026

Income tax year ended 30 June 2027

The private rulings for question 4-5 inclusive apply for the following periods:

Fringe benefits tax year ended 31 March 2023

Fringe benefits tax year ended 31 March 2024

Fringe benefits tax year ended 31 March 2025

Fringe benefits tax year ended 31 March 2026

Fringe benefits tax year ended 31 March 2027

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below including the following documents, or relevant parts of them, which are to be read with the description:

•         Company A Performance Rights Plan Rules

•         Template Offer Letter - Performance Rights Plan Invitation Letter and Terms of Invitation (Offer Letter), and

•         Company A Employee Share Trust Deed executed (Trust Deed).

Company A is listed on the Australian Securities Exchange.

Company A is the head company of an income tax consolidated group (Company A Group).

The wholly-owned subsidiaries of Company A are Australian resident employer entities. These entities employ Australian staff and make contributions for their employees to Company A. Company A then provides these contributions to the Trustee.

The Company A Performance Rights Plan

The Company A Performance Rights Plan (the Plan) was established to provide employees with an incentive plan which recognised their ongoing contribution to the achievement of Company A Group's long-term strategic goals.

Under the Plan, eligible Australian employees are granted performance rights at nil cost (Performance Right). Each Performance Right is a right to acquire a Company A Share provided certain performance and service-related conditions (Performance Conditions) are met over the performance period and the vested Performance Right is validly exercised.

The Plan was originally approved at Company A's Annual General Meeting and the first grant of Performance Rights occurred shortly thereafter.

The Plan Rules were introduced in August 2015. The Plan Rules were subsequently reviewed in November 2022.

The Plan broadly operates as follows:

•         It is at the discretion of the Company A Limited Board to operate the Plan and extend an invitation to grant Performance Rights to eligible employees (rule 2.1(a) of the Plan Rules).

•         to participate in the Plan, eligible employees must deliver an application to Company A in response to the Offer Letter (rule 2.2(g) of the Plan Rules). By accepting the offer under the Plan, eligible employees are bound by the Offer Letter, the Terms of Offer, the Plan Rules, the Share Trading Policy and Company A's Constitution.

•         subject to the terms attaching to the Performance Rights as determined by the Board and specified in the Offer Letter, each Performance Right entitles the participant to one Company A Share (rule 2.2(a) of the Plan Rules). If any of the terms specified in the Offer Letter are inconsistent with the Plan Rules, then the Offer Letter will prevail.

•         if the application is accepted, then the eligible employee becomes a participant. No amount is payable by the participant to participate in the Plan.

•         once the extent to which Performance Conditions have been satisfied (as determined by the Board and specified in the Offer Letter) and the Performance Rights vest, Company A must issue or procure the transfer of Company A Shares to, or for the benefit of participants (rule 5.1 of the Plan Rules). A Performance Right has a nil exercise price.

•         Where, in the opinion of the Board, a participant acts fraudulently or dishonestly; or is in breach of his or her obligations to Company A Group, a Performance Right will be deemed to have lapsed or forfeited (rule 4.6 of the Plan Rules).

•         Performance Rights may not be transferred without the consent of the Board (rule 3 of the Plan Rules). The Board will only allow a transfer of a Performance Right in exceptional circumstances, such as the death or permanent disability of the participant. Where the participant purports to transfer a Performance Right other than in accordance with rule 3(a) of the Plan Rules, the Performance Right immediately lapses.

As at March 2023, a number of unvested Performance Rights were outstanding with respect to grants already made under the Plan. The total number of Performance Rights outstanding could fluctuate depending on joining/leaving employees.

The Company A Employee Share Trust

Before June 2023, Company A did not use an employee share trust arrangement to facilitate the acquisition, holding of, and allocation of Company A Shares to participants in accordance with the Plan. All Company A Shares to satisfy prior vested Performance Rights were either acquired on market by a third party or were issued (as new Company A Shares) by Company A.

The Company A Employee Share Trust (Trust) was established as an independent legal entity to facilitate the acquisition, holding of, and allocation of Company A Shares for the benefit of participants under the Plan. The Trust Deed was executed on 9 June 2023.

The Trustee of the Trust is not a member of the Company A Group.

Broadly the Trust operates as follows:

•         Company A and the Trustee agree that, subject to clauses 1.4 and 1.7 of the Trust Deed, the activities of the Trustee are limited to managing the Plans and conducting other activities that are merely incidental as the Trustee considers necessary to carry out the objects of the Trust, consistent with subsection 130-85(4)

•         The Trustee will subscribe for, purchase or otherwise acquire Company A Shares or rights which the Trustee is authorised to acquire on such terms and conditions as it thinks fit, and do all things incidental to this activity (clause 4.1(b) of the Trust Deed)

•         Company A must keep the Trustee in funds necessary to do any act requested by the Board (clause 5.2(b) of the Trust Deed)

•         The Trustee has the power to transfer the General Trust Property or Allocated Trust Property to the participants in accordance with the Trust Deed and the Plan Rules (clause 4.1(e) of the Trust Deed)

•         The Trustee holds General Trust Property on trust for all beneficiaries and in the manner required by the Plan Rules. The Trustee may, subject to clause 2.2 of the Trust Deed, pay, apply or set aside any part of the General Trust Property for the benefit of the beneficiaries (clause 2.1 of the Trust Deed)

•         The Trustee is precluded from exercising voting rights in relation to the General Trust Property if it is not an associated entity of Company A. If it is an associated entity of Company A, the Trustee may vote in respect of the Company A Shares, but only to the extent consistent with the Trustee's fiduciary duties (clauses 2.2(c) and 2.2(d) of the Trust Deed)

•         The Trustee agrees that it will set aside and hold for the benefit of identified participants (each an Allocated Trust Property Beneficiary) any part of the Trust Fund (Allocated Trust Property)(clause 3.1(a) of the Trust Deed)

•         In relation to the Allocated Trust Property, the Trustee must act at all times in accordance with the Plan Rules (clause 3.1(b) of the Trust Deed)

•         While Company A Shares are held in trust as Allocated Trust Property, a participant will be entitled to dividends or distributions and voting rights (clause 3.2 of the Trust Deed)

•         Allocation or issue of Company A Shares to a participant will occur as soon as practicable following valid exercise of vested Performance Rights

•         Where permitted to do so by the participant, the Trustee may sell or otherwise dispose of Company A Shares, rights or privileges on behalf of a participant, and do all things incidental to this activity (clause 4.1(c) of the Trust Deed)

•         Company A may not acquire any interest in the Capital (or corpus) and may not be entitled to any income of the Trust Fund (clause 2.1(f) of the Trust Deed). Upon termination of the Trust, Company A acknowledges it is not a beneficiary nor does it have any entitlement to any part of the Trust Fund, including any Company A Shares that form part of the Trust Fund, at any time (clause 7(c) of the Trust Deed)

•         Forfeiture of Company A Shares by a participant will result in the Company A Shares being held by the Trustee as General Trust Property (clause 3.3 of the Trust Deed)

•         The Trustee must establish and maintain a separate Trust Share Account or record in respect of each participant (clause 4.5(a) of the Trust Deed)

•         The Trustee is not obliged to act in accordance with a request or direction made by the Board if it has not been provided with sufficient funds to comply with the request or direction. In particular, a direction from the Board to the Trustee to subscribe for or purchase Company A Shares is only effective if the Trustee has been provided with sufficient funds for the subscription or purchase by Company A Limited or a participant (clause 4.2(g) of the Trust Deed), and

•         On termination of the Trust, the Trustee must wind up the Trust and transfer the Trust Fund, or the proceeds on sale of the Trust Fund, to the appropriate beneficiaries, at the discretion of the Trustee, having regard to any corresponding request from the Board; sell or convert into money any remaining investments of the Trust; pay out any debts and liabilities in relation to the Trust, with the balance of the Trust to be distributed at the discretion of the Trustee, having regard to and not inconsistent with the object of the Trust (clause 7 of the Trust Deed).

Contributions to the Trust

The Trust is funded by cash contributions paid by Company A Limited to the Trustee for the acquisition of Company A Shares in accordance with the Trust Deed for the benefit of participants (clause 5 of the Trust Deed).

Company A must make contributions as required under the Trust Deed to provide the Trustee with sufficient funds to acquire Company A Shares. In determining the amount of funds to be contributed at any point in time, the Board may take into account the following matters:

•         the number of Performance Rights granted to employees under the Plan

•         the market value of Company A Shares at the relevant time

•         the number of Company A Shares held by the Trust at the relevant time

•         the likelihood of Performance Rights vesting; and

•         the Board's expectations regarding Company A's share price performance and volatility over the short and longer term.

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

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Company A (Questions 1-3) and Company A's employer entities (Questions 4-5).

This is to explain how we reached our decision. This is not part of the private ruling.

Questions 1 to 3 - application of the single entity rule in section 701-1

The consolidation provisions of the ITAA 1997 allow wholly-owned groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 the subsidiary members of an income tax consolidated group are taken to be parts of the head company. As a consequence, the subsidiary members cease to be recognised as separate entities during the period that they are members of the income tax consolidated group with the head company of the group being the only entity recognised for income tax purposes.

The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997.

As a consequence of the SER, the actions and transactions of the subsidiary members of the Company A income tax consolidated group are treated, for income tax purposes, as having been undertaken by Company A as the head company of the Company A Group. For this reason, questions 1-3 of this private ruling apply to Company A.

Questions 4 to 5

The SER in section 701-1 has no application to the Fringe Benefits Tax Assessment Act 1986. The Commissioner has therefore provided a ruling to the employer entities in Company A Group.

Legislative references in these reasons for decision are to provisions of the ITAA 1997 unless otherwise indicated

Question 1

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

Company A operates the ESS as part of its remuneration strategy and reward program for employees.

Under the Plan, Company A grants Performance Rights to participants and makes irretrievable contributions to the Trustee (in accordance with the Plan Rules, the Offer Letter and the Trust Deed) to fund the acquisition of Company A Shares (either on-market or by subscription) by the Trust for allocation to participants on the vesting of their Performance Rights.

Incurred in carrying on a business

Company A must provide the Trustee with all the funds required to act as requested (clause 5.2(b) of the Trust Deed).

The contributions made by Company A are irretrievable and non-refundable to Company A in accordance with the Trust Deed as all funds provided by Company A are not repayable (clauses 2.1(f) and 7(c) of the Trust Deed). Additionally, the Trustee agrees that the Trust will be managed and administered so that it satisfies the definition of an employee share trust in subsection 130-85(4) (clauses 1.4 and 1.7 of the Trust Deed).

The irretrievable cash contributions incurred by Company A are paid to the Trustee for the acquisition of Company A Shares, in satisfaction of the vesting of Performance Rights granted as part of its remuneration and reward program. Therefore, the contributions are part of recurrent expenditure incurred by Company A in the nature of remuneration of employees.

Not capital or of a capital nature

The costs are an outgoing incurred for periodic funding of a bona fide ESS and are likely to be in relation to more than one grant of Performance Rights (rather than being one-off). This further indicates that the irretrievable contributions are ongoing in nature and part of the broader remuneration expenditure of Company A.

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, Company A is entitled to deduct an amount under section 8-1 for irretrievable cash contributions it makes to the Trustee to acquire Company A Shares to satisfy Performance Rights granted pursuant to the Plan.

Question 2a

Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to the Trustee to purchase Company A Shares in excess of the number required to satisfy the relevant Performance Rights granted to employees in the year of income from the grant of Performance Rights. Further information is available in ATO Interpretative Decision ATO ID 2010/103 Income Tax - Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

The Plan is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests (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.

The Plan contains a number of interrelated components which includes the provision of irretrievable cash contributions by Company A to the Trustee. These contributions enable the Trustee to acquire Company A 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 will only be available to Company A in the income year in which the relevant beneficial interest in a Company A Share, or beneficial interest in a Performance Right to a beneficial interest in a Company A Share, is acquired by a participant under the Plan.

Indeterminate rights

Where employees acquire rights and the entitlement to a share or specific number of shares is uncertain, the rights granted to employees are indeterminate rights for the purposes of section 83A-340. In this circumstance, a Performance Right is not a right to acquire a beneficial interest in a Company A Share until the time when the Board determines the extent to which the Performance Conditions are satisfied, and the Performance Right vests and become exercisable.

Once it is determined that a Performance Right will be satisfied by provision of a Company A Share, section 83A-340 operates to treat these Performance Rights as though they had always been rights to acquire beneficial interests in that number of Company A Shares.

If irretrievable contributions are provided to the Trustee before Performance Rights are acquired (and they do subsequently become ESS interests), then section 83A-340 operates to deem the Performance Rights to always have been ESS interests. Where this occurs, section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1. In such a case, a deduction for the contribution to fund the Performance Rights would be available to Company A in the income year in which participants acquired the Performance Rights.

Question 2b

Consistent with the analysis in question 2a (above), where the contribution is made after the acquisition of the relevant ESS interests, irretrievable cash contributions made by Company A to the Trustee to fund the subscription for or acquisition on-market of Company A Shares to satisfy the ESS interests granted to participants will be deductible in the income year in which the contribution is made by Company A.

Question 3

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 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 Company A to obtain a tax benefit.

Question 4

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (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 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 ESS, the Performance Rights for Company A Shares provided under the Plan are ESS interests and that Subdivision 83A-C applies to those ESS interests.

Accordingly, the provision of Performance Rights under the Plan will not be subject to FBT on the basis that they are acquired by participants under an ESS (to which Subdivision 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.

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

Question 5

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

One benefit excluded from being a 'fringe benefit', pursuant to paragraph (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 of the ITAA 1997.

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 Company A, and

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

Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase '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 activities that the Trustee is permitted to undertake under the Trust Deed, particularly in relation to those listed in clause 4, are indicative of those required to administer an employee share trust and are merely incidental to the primary purposes stated in paragraphs 130-85(4)(a) and (b). This is consistent with the objects of the Trust, namely for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under subsection 130-85(4) (clause 1.4 of the Trust Deed). Additionally, clause 1.7 of the Trust Deed requires the Trustee to administer the Trust so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4).

Therefore, the cash contribution made to the Trustee to fund the subscription for, or acquisition on-market, of Company A Shares will not be a fringe benefit.