Edited version of private advice

Authorisation Number: 1052145101326

Date of advice: 4 August 2023

Ruling

Subject: Employee share scheme

Question 1

Will the Company be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 for the irretrievable cash contributions it makes to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, ordinary shares in the Company pursuant to the Share Plan and the Rights Plan?

Answer

Yes.

Question 2

Will section 83A-210 of the Income Tax Assessment Act 1997 apply to modify the income year in which the Company can claim a deduction under section 8-1 of that Act for the irretrievable cash contributions it makes to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, ordinary shares in the Company pursuant to the Rights Plan?

Answer

No.

Question 3

Where the Trustee of the Trust satisfies its obligations under either the Share Plan or the Rights Plan by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under section 6-5 or section 20-20 of the Income Tax Assessment Act 1997, or trigger a CGT event under Division 104 of that Act?

Answer

No.

Question 4

Will the provision of shares or rights to the employees of Subsidiary A or Subsidiary B under either the Share Plan or Rights Plan constitute a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No.

Question 5A

Will the irretrievable cash contributions made by Subsidiary A and Subsidiary B to the Trustee of the Trust pursuant to the Trust Deed, to fund the subscription for, or acquisition on-market of, ordinary shares in the Company in respect of participants in either the Share Plan or Rights Plan, constitute a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No.

Question 5B

Will the irretrievable cash contributions made by Subsidiary A and Subsidiary B to the Trustee of the Trust pursuant to the amended Trust Deed, to fund the subscription for, or acquisition on-market of, ordinary shares in the Company in respect of participants in either the Share Plan or Rights Plan, constitute a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No.

Question 6

Will the Commissioner make a determination under section 177F of the Income Tax Assessment Act 1936 that Part IVA of that Act applies to deny, in part or in full, any deduction claimed by the Company for the irretrievable cash contributions it makes to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, ordinary shares in the Company for the purposes of the Share Plan and Rights Plan?

Answer

No.

This ruling applies for the following periods:

For ruling questions 1, 2, 3 and 6, the income years ending 30 June 20XX to 30 June 20YY

For ruling questions 4, 5A and 5B, the fringe benefit tax years ending 31 March 20XX to 31 March 20YY

The scheme commenced:

In a particular income year

Relevant facts and circumstances

The Company is an Australian company with its shares listed on the Australian Securities Exchange.

The Company is an Australian resident for tax purposes and is the head company of a consolidated group that carries on a business. The Company does not derive non-assessable non-exempt income or exempt income from its business activities.

Subsidiary A and Subsidiary B are subsidiary members of the consolidated group and are the only employer entities of the group.

The Company operates two employee share plans as part of its remuneration and reward program for its employees: the Share Plan and the Rights Plan (collectively, the Plans). The Plans are governed by the respective plan rules.

The purpose of the Share Plan, as set out in the Share Plan rules, is to attract and retain skilled and experienced employees and encourage them to improve the longer-term performance of the Company and its returns to shareholders. Under the Share Plan, participants are provided with shares in the Company, for nil consideration, based on a portion of the Company's profit before tax. The shares are held within a trust (the Trust) that was established to facilitate the provision of shares to participants under the Plans. The shares are held on behalf of the participants until the end of the holding lock period.

The purpose of the Rights Plan, as set out in the Rights Plan rules, is to enable the group to provide variable remuneration, that is performance focussed and linked to long-term value creation for shareholders, to employees whose behaviour and performance have a direct impact on the group's long-term performance, create alignment between the interests of participants and shareholders, enable the group to compete effectively for the calibre of talent required for it to be successful, ensure that participants have commonly shared goals and assist participants to become shareholders. Under the Rights Plan, participants are granted with rights to acquire shares in the Company for nil consideration. The rights are subject to vesting conditions until the relevant vesting date. Upon vesting, the shares to which the rights relate are held within the Trust on behalf of the participants until a participant directs the transfer of legal ownership of the shares to themselves.

The Trustee of the Trust is an independent third party.

Subsidiary A and Subsidiary B will make cash contributions to the Trustee to fund the acquisition of shares in the Company. These contributions are irretrievable and non-refundable because the Company and its subsidiaries are not beneficiaries of the Trust and are not entitled to any part of the Trust fund (including shares held by the Trustee). In respect of the Rights Plan, contributions will generally be made to the Trustee after the rights are granted.

The Trust Deed provides that:

•         nothing in the deed confers on the Company any security interest, proprietary right, proprietary interest or beneficial interest in the shares or any other trust property

•         no distribution of income or capital or other financial benefit is to be provided to the Company from trust property

•         on termination of the Trust, any remaining trust property cannot be transferred to the Company

•         any contribution the Trust receives must be applied in accordance with the Plans to acquire shares or a right to acquire a beneficial interest in a share for allocation and transfer to participants under the Plans and for no other purpose

•         the Trustee is only required to comply with a direction provided to the Trustee to the extent that the Company pays all costs and expenses that are incurred by the Trustee in complying with the direction; and

•         the Trustee is not required to acquire shares if it does not receive sufficient payment from the Company or if it does not have sufficient funds to do so out of the property of the Trust.

On a particular date, the Trust Deed was amended and the amended Trust Deed took effect from that date onwards. The amended Trust Deed removed certain powers or duties that were considered not merely incidental to those activities described in paragraphs 130-85(4)(a) and (b) of the ITAA 1997. The Trustee confirmed that up to the date of amendment, the Trustee had not undertaken any of the powers or duties that had been removed by the amended Trust Deed.

Relevant legislative provisions

Part IVA of the Income Tax Assessment Act 1936

section 6-5 of the Income Tax Assessment Act 1997

section 8-1 of the Income Tax Assessment Act 1997

section 20-20 of the Income Tax Assessment Act 1997

Division 104 of the Income Tax Assessment Act 1997

section 83A-210 of the Income Tax Assessment Act 1997

section 136 of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision

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

Question 1

Detailed reasoning

You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income; or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income (subsection 8-1(1)).

However, you cannot deduct a loss or outgoing under section 8-1 to the extent that:

(a)  it is a loss or outgoing of capital or of a capital nature (paragraph 8-1(2)(a))

(b)  it is a loss or outgoing of a private or domestic nature (paragraph 8-1(2)(b))

(c)   it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income (paragraph 8-1(2)(c)); or

(d)  a provision of the Act prevents you from deducting it (paragraph 8-1(2)(d)).

Contributions made to the Trustee are an outgoing incurred by the Company

For the cash contributions made by the Company to the Trustee to be deductible under section 8-1, the contribution must be a permanent loss or outgoing to which the Company has definitely committed itself and there should be no circumstance in which the Company can retrieve any of the contributions. (Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339 and Spotlight Stores Pty Ltd v Commissioner of Taxation [2004] FCA 650).

According to the Trust Deed:

•         nothing in the deed confers on the Company any security interest, proprietary right, proprietary interest or beneficial interest in the shares or any other trust property

•         no distribution of income or capital or other financial benefit is to be provided to the Company from trust property; and

•         on termination of the Trust, any remaining trust property cannot be transferred to the Company.

Therefore, these contributions are irretrievable and non-refundable to the Company and the Company is taken to have incurred an outgoing for the purposes of subsection 8-1(1) when the cash contributions are paid to the Trustee.

Contributions are incurred by the Company in carrying on a business for the purpose of gaining or producing its assessable income

For an outgoing to be deductible under section 8-1, a nexus must exist between the outgoing and a business carried on for the purpose of gaining or producing assessable income (paragraph 8-1(1)(b)). (Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15).

The Company carries on a business for the purpose of gaining or producing assessable income.

The Plans are employee remuneration plans offered to the group's employees as part of the Company's remuneration framework.

The purpose of the Share Plan, as set out in the Share Plan rules, is to attract and retain skilled and experienced employees and encourage them to improve the longer-term performance of the Company and its returns to shareholders.

The purpose of the Rights Plan, as set out in the Rights Plan rules, is to:

• enable the group to provide variable remuneration, that is performance focussed and linked to long-term value creation for shareholders, to employees whose behaviour and performance have a direct impact on the group's long-term performance
• create alignment between the interests of participants and shareholders
• enable the group to compete effectively for the calibre of talent required for it to be successful
• ensure that participants have commonly shared goals; and
• assist participants to become shareholders.

The Trust was established to facilitate the acquisition, holding of, and allocation of shares in accordance with employee remuneration plans that the Company operates from time to time (including the Share Plan and Rights Plan). The cash contributions that the Company, via Subsidiary A and Subsidiary B, makes to the Trustee are to enable the Trustee to acquire the necessary shares to hold on trust for participating employees of the Plans. Under the terms of the Trust Deed:

•         any contribution the Trust receives must be applied in accordance with the Plans to acquire shares or a right to acquire a beneficial interest in a share for allocation and transfer to participants under the Plans and for no other purpose

•         the Trustee is only required to comply with a direction provided to the Trustee to the extent that the Company pays all costs and expenses that are incurred by the Trustee in complying with the direction; and

•         the Trustee is not required to acquire shares if it does not receive sufficient payment from the Company or if it does not have sufficient funds to do so out of the property of the Trust.

The shares are later provided to Share Plan participants after the expiry of the holding lock period and to Rights Plan participants once they provide a transfer request to the Trustee after their rights vest.

Based on the facts provided, it is evident that the character of the cash contributions to the Trustee is that of expenses incurred in remunerating the group's employees, and therefore, there is sufficient nexus between the contributions and the business carried on by the Company for the purpose of producing the Company's assessable income.

Accordingly, subsection 8-1(1) is satisfied.

Contributions are not an outgoing of capital or of a capital nature

A loss or outgoing is not deductible if it is a loss or outgoing of capital or of a capital nature (paragraph 8-1(2)(a)).

The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit and loss.(Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73).

Further, according to Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73, when considering whether an outlay is revenue or capital in nature, the following matters are relevant:

(a)  the character of the advantage sought

(b)  the manner in which it is to be used, relied upon or enjoyed; and

(c)   the means adopted to obtain it.

What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view (Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34). The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid (GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) [1990] HCA 25, Commissioner of Taxation v Citylink Melbourne Limited [2006] HCA 35).

It is evident that the advantage sought by the Company through its contributions to the Trustee is to align the interests of its employees with those of its shareholders and to attract, motivate and retain its employees. The shares awarded to participants of the Plans is expected to result in the betterment of the Company's business.

The advantage is not considered to have a lasting quality as the contributions which form the Trust's funds is permanently and entirely dissipated within a relatively short period of the contributions being made.

Further, the contributions made by the Company is expected to be recurrent and subject to continuous demand, so long as the Plans are in operation.

Therefore, it is considered that the contributions paid by the Company are on revenue account - that is, they are not an outgoing of capital or of a capital nature. Accordingly, paragraph 8-1(2)(a) does not apply.

Contributions are not private or domestic in nature, incurred in gaining or producing exempt income or non-assessable non-exempt income, nor disallowed by a provision of the Act

A loss or outgoing is not deductible if it is a loss or outgoing of a private or domestic nature (paragraph 8-1(2)(b)); incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income (paragraph 8-1(2)(c)); or a provision of 'this Act' prevents you from deducting it (paragraph 8-1(2)(d)).

The contributions to the Trustee are not private or domestic in nature and are not incurred in gaining or producing exempt income or non-assessable non-exempt income as those contributions are incurred by the Company in gaining or producing its assessable income and has the essential character of a business expense. Accordingly, paragraphs 8-1(2)(b) and (c) do not apply.

In respect of paragraph 8-1(2)(d), a loss or outgoing is not deductible if a provision of 'this Act' prevents you from deducting it. Subsection 995-1(1) defines 'this Act' to include the Income Tax Assessment Act 1936.

It is considered that the contributions to the Trustee would not fall within any of the provisions which operate to limit deductions. Accordingly, paragraph 8-1(2)(d) does not apply.

Question 2

Detailed reasoning

Section 83A-210 applies to determine the timing of the deduction of contributions provided under an employee share scheme arrangement, but only if the contribution is made before the ESS interest is acquired by the ultimate beneficiary under the 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. 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.

Subsection 83A-10(2) defines an 'employee share scheme' as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospect employees) of the company or subsidiaries of the company in relation to the employee's employment.

Subsection 83A-10(1) defines an 'ESS interest', in a company, as a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company.

The Rights Plan is considered to be a scheme under which rights to acquire a beneficial interests in the Company's shares (which are 'ESS interests' under subsection 83A-10(1)) are provided to the employees of the Company's subsidiaries in relation to their employment. Accordingly, the Rights Plan is an 'employee share scheme' as defined under subsection 83A-10(2).

As the Company will generally make irretrievable cash contributions to the Trustee after the rights are granted (that is, after a Rights Plan participant acquires the ESS interests), section 83A-210 will not apply for the purpose of determining the income year in which the Company can deduct those irretrievable contributions. This is because the contributions are not made before the 'acquisition time' as required by section 83A-210.

Accordingly, such contributions will be deductible under section 8-1 in the income year in which the contributions are made by the Company.

Question 3

Detailed reasoning

Section 6-5

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts.

The character of the subscription proceeds received by the Company from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt.(GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) [1990] HCA 25).

Where the Company issues the Trustee with new shares in itself, the character of the newly issued share is one of capital. Therefore, the receipt of the subscription proceeds takes the character of share capital, and 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.

Therefore, the subscription proceeds received the Company from the Trustee are capital receipts and will not be treated as ordinary income assessable to the Company under section 6-5.

Section 20-20

Subsection 20-35(1) states that your assessable income includes an assessable recoupment of a loss or outgoing if you can or have deducted the whole of the loss or outgoing for the current, or an earlier, income year.

Relevantly, subsection 20-20(3) states that an 'assessable recoupment' is an amount you have received as a recoupment of a loss or outgoing (except by way of insurance or indemnity) if you can deduct or have deducted the loss or outgoing for the current or an earlier income year under a provision listed in section 20-30 (which includes section 8-1 insofar that it relates to a deduction for a bad debt, rates or taxes).

The subscription proceeds that the Company receives from the Trustee is sourced from the irretrievable cash contributions it had made earlier to the Trustee and for which the Company can claim a deduction under section 8-1.

As the recoupment is not in relation to a bad debt, rates or taxes, the subscription proceeds will not be an 'assessable recoupment' under subsection 20-20(3) and will not be assessable income for the Company under section 20-35 (subsection 20-20(2) is not relevant as the subscription proceeds were not received by way of insurance or indemnity).

Division 104

Subsection 102-5(1) states that your assessable income includes your net capital gain (if any) for the income year.

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

Division 104 sets out all the CGT events for which you can make a capital gain or loss.

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 interests in the company.

As the Company's shares constitute an 'equity interest' (as defined in subsection 974-75(1)), 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 the Company under Division 104.

Question 4

Detailed reasoning

An employer is subject to fringe benefits tax in respect of their fringe benefits taxable amount for the year (subsection 66(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)). The fringe benefits taxable amount is determined based on fringe benefits provided during the year.

'Fringe benefit' is defined under 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 but does not include 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 of that Act applies (paragraph 136(1)(h) of the FBTAA).

Shares and Rights provided under the Plans are ESS interests provided under an employee share scheme

The definitions of 'ESS interest' and 'employee share scheme' were outlined in Question 2 above.

As set out in Question 2, the Rights Plan is considered an employee share scheme (as defined under subsection 83A-10(2)) under which rights to acquire beneficial interests in the shares (which are 'ESS interests' under subsection 83A-10(1)) are provided to employees of the Company's subsidiaries in relation to their employment.

The Share Plan is a scheme under which beneficial interests in the shares (which are 'ESS interests' under subsection 83A-10(1)) are provided to employees of Subsidiary A and Subsidiary B in relation to their employment. Accordingly, the Share Plan is also an 'employee share scheme' as defined under subsection 83A-10(2).

The Plans are employee share schemes to which Subdivision 83A-B or 83A-C will apply

Subsection 83A-20(1) states that Subdivision 83A-B applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

As shares and rights are provided to participants of the Plans for no consideration, they are acquired by those participants at a discount.

Therefore, Subdivision 83A-B would apply to those ESS interests (unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C would apply instead).

Conclusion

The provision of shares or rights to the employees of Subsidiary A or Subsidiary B under the Plans will not constitute a 'fringe benefit' by virtue of the exclusion under paragraph 136(1)(h) of the FBTAA.

Question 5A

Detailed reasoning

'Fringe benefit' is defined under subsection 136(1) of the FBTAA and does not include a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the ITAA 1997) (paragraph 136(1)(ha) of the FBTAA).

Subsection 995-1(1) defines 'employee share trust' as having the meaning given by subsection 130-85(4).

Subsection 130-85(4) defines an 'employee share trust', for an employee share scheme, as a trust whose sole activities are:

(a)  obtaining shares or rights in a company; and

(b)  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:

(i)     the company; or

(ii)    a subsidiary of the company; and

(c)   other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b).

Paragraphs 130-85(4)(a) and (b) of the definition of an employee share trust are satisfied because the Trustee:

•      acquires shares in the Company, and

•      ensures those shares (which are 'ESS interests' under subsection 83A-10(1)) are provided under the Share Plan and Rights Plan (which both are 'employee share schemes' as defined in subsection 83A-10(2)) to participants (who are employees of Subsidiary A or Subsidiary B) by allocating those shares to the participants in accordance with the Trust Deed and the rules of the respective plans.

Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'? sets out the Commissioner's view on the type of activities that are and are not considered merely incidental for the purposes of paragraph 130-85(4)(c).

Whether a trust is an 'employee share trust' for the purposes of subsection 130-85(4) requires an analysis of what the trustee actually does, not only the powers and duties that are prescribed in the trust's deed.

While the original Trust Deed contained certain powers or duties that were considered not merely incidental to those activities described in paragraphs 130-85(4)(a) and (b) of the ITAA 1997, the Trustee confirmed that up to the date of amendment, the Trustee had not undertaken any of the powers or duties that had been removed by the amended Trust Deed.

Accordingly, the Commissioner considers the Trust to be an 'employee share trust' for the purposes of subsection 130-85(4).

As the Trust is considered an employee share trust, the irretrievable contributions made by Subsidiary A and Subsidiary B will not constitute a 'fringe benefit' by virtue of the exclusion under paragraph 136(1)(ha) of the FBTAA.

Question 5B

Detailed reasoning

The criteria for a trust to be an 'employee share trust' were explained in Question 5A above.

The amended Trust Deed contains only powers and/or obligations that are merely incidental as required by subsection 130-85(4)(c).

Accordingly, the Trust will be considered an 'employee share trust' for the purposes of subsection 130-85(4).

As the Trust, operating pursuant to the amended Trust Deed, will be considered an employee share trust, the irretrievable contributions made by Subsidiary A and Subsidiary B will not constitute a 'fringe benefit' by virtue of the exclusion under paragraph 136(1)(ha) of the FBTAA.

Question 6

Detailed reasoning

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

The Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust where the conditions of Division 83A of the ITAA 1997 are met.

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

Therefore, having regard to the 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 the Company to obtain a tax benefit.