Edited version of private advice

Authorisation Number: 1052166068699

Date of advice: 6 September 2023

Ruling

Subject: Employee share schemes

In this ruling:

•         unhyphenated provisions (eg, section 177D) are in the Income Tax Assessment Act 1936 unless another Act is mentioned

•         hyphenated provisions (eg, section 6-5) are in the Income Tax Assessment Act 1997 unless another Act is mentioned

•         FBTAA means the Fringe Benefits Assessment Act 1986

•         SGAA means the Superannuation Guarantee (Administration) Act 1992

•         Sch1 to the TAA means Schedule 1 to the Taxation Administration Act 1953

•         Part IVA means Part IVA in the Income Tax Assessment Act 1936

•         Division 7A means Division 7A in the Income Tax Assessment Act 1936 (and similarly for Division 7)

•         Division 83A means Division 83A in the Income Tax Assessment Act 1997 (and similarly for Subdivisions 83A-B and 83A-C)

•         Subdivision 130-D means Subdivision 130-D in the Income Tax Assessment Act 1997.

Sample employee ruling

Question 1

Will the general anti-avoidance provisions under Part IVA apply to the scheme described?

Answer

No.

Question 2

Is Taxation Ruling TR 2010/6 Income Tax, Pay As You Go Withholding and fringe benefitstax; tax consequences on the issue, holding and redemption of bonus units as part of anemployee benefits trust arrangement applicable?

Answer

The Commissioner can't rule on this question.

Question 3

Does it make a difference if the trust becomes a major shareholder of the company?

Answer

The Commissioner can't rule on this question.

Question 4

What amount will be assessable income to the relevant employee (even if they participate indirectly through an associate) in the event that they are entitled to an employee redemption amount?

Answer

The amount to be included in their assessable income depends on whether they acquired units for no consideration or paid market value. For units acquired for no consideration, Division 83A applies and the employee will include the employee redemption amount less any cost base in their assessable income.

For units acquired at market value, Division 83A doesn't apply and the employee will include any capital gain or loss calculated under the capital gains tax (CGT) provisions.

Question 5

Will the employee be assessed on contributions made by the employee to acquire additional units in the trust?

Answer

No.

Question 6

Will the employee be liable to income tax on the value of units issued by the trust if the employer isn't liable for fringe benefits tax?

Answer

Yes.

Question 7

If the employee is liable to income tax on the market value provided in relation to the issue of units, will the market value be limited to the employee redemption amount (as defined in the trust deed)?

Answer

Yes, where the employee redemption amount reflects market value at the deferred taxing point.

Question 8

When the employee acquires units in the trust, and assuming the ESS deferred taxing point isn't the 15th anniversary of the date of acquisition under subsection 83A-115(6), and that the 30-day rule in subsection 83A115(3) doesn't apply, and that an exit event hasn't occurred, will the ESS deferred taxing point be when the employee ceases employment?

Answer

Yes.

Question 9

Will the employee be liable for capital gains tax on any capital gain made on redemption of employee units?

Answer

No, unless the redemption happens after the deferred taxing point.

Question 10

Where the employee has paid market value for the acquisition of additional units, will the employee be liable for capital gains tax on any capital gain made upon the redemption units?

Answer

Yes.

Question 11

Will the broad availability requirement in subsection 83A-105(2) be met if, although all employees are entitled to acquire ESS interests under the scheme, an invitation to participate will be based on employee performance such that at least 75% of the permanent employees of the employer who have completed at least 3 years of service (whether continuous or non-continuous) with the employer and who are Australian residents may not actually participate in the scheme?

Answer

Yes.

Employer ruling

Question 1

Will contributions paid by the employer or an associate to the employee share trust pursuant to the employee share trust deed constitute an income tax deduction under section 8-1?

Answer

Yes, for contributions made by the employer. Whether contributions would be deductible by an associate would depend on the identity and circumstances of the associate and why it made the contributions.

Question 2

When will contributions paid by the employer be deductible to the employer?

Answer

If employees acquire their ESS interests after the employer pays contributions under the scheme, then section 83A-210 will operate to make that contribution deductible in the income year in which employees acquire their interests.

If employees acquire their ESS interests at or before that time, section 8-1 will apply to make the contribution deductible in the income year in which the contribution was made.

Question 3

Will contributions paid by the employer to the trust constitute a 'fringe benefit' as defined in subsection 136(1) of the FBTAA?

Answer

No.

Question 4

Will contributions paid by the employer to the trust constitute an obligation under the SGAA?

Answer

No.

Question 5

Will the general anti-avoidance provisions under Part IVA apply to the scheme described?

Answer

No.

Question 6

Is Taxation Ruling TR 2010/6 Income Tax, Pay As You Go Withholding and fringe benefits tax; tax consequences on the issue, holding and redemption of bonus units as part of an employee benefits trust arrangement, applicable?

Answer

The Commissioner can't rule on this question.

Question 7

Does it make a difference if the trust becomes a major shareholder of the employer?

Answer

The Commissioner can't rule on this question.

Question 8

Will it make a difference if only one of the employees is invited to participate in the employee share scheme (ESS) or if additional employees are invited to participate in the ESS?

Answer

The Commissioner can't rule on this question.

Trustee ruling

Question 1

Will the general anti-avoidance provisions under Part IVA apply to the scheme described?

Answer

No.

Question 2

Is Taxation Ruling TR 2010/6 Income Tax, Pay As You Go Withholding and fringe benefits tax; tax consequences on the issue, holding and redemption of bonus units as part of an employee benefits trust arrangement applicable?

Answer

The Commissioner can't rule on this question.

Question 3

Does it make a difference if the trust becomes a major shareholder of the employer?

Answer

The Commissioner can't rule on this question.

Question 4

Will receipts from employee contributions (i.e. purchase price for additional units) be taxable income of the employee share trust?

Answer

No.

Question 5

Will receipts from employer contributions for the benefit of employees constitute assessable income of the trust?

Answer

No.

This ruling applies for the following period:

1 July XXXX to 30 June XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

1.            Company X (which we'll call the employer) is an Australian incorporated company operating an business.

2.            The employer has established an employee share scheme which confers beneficial interests in the employer's shares. We refer to this scheme as the 'Company X scheme', or simply 'the scheme'.

3.            The applicant submits the employer established the Company X scheme to attract, retain, motivate, and reward employees for their performance.

4.            Employees in management positions won't participate in any board decisions about their participation in the Company X scheme or any issue of scheme interests to them.

5.            The employer, and invited employees who participate and meet qualifying criteria, will be able to make contributions to the Company X scheme. The employer must pay contributions to the scheme to allow it to acquire shares in the relevant companies (Company X or its subsidiaries). All employer contributions, when made, will be attributable to identified employees.

6.            Company X will invite employees to participate in the Company X scheme. It will invite all existing employees of either Company X or its subsidiary companies. It will also invite new employees once they have achieved at least 1 year of continuous employment.

7.            The scheme's trust income will only be distributed to employees (or their associates). Trust income will be distributed to each unit holder annually, based on cash dividends from shares allocated to units. (The scheme documents explain that shares will be allocated to units and dividend rights broadly flow through to the unitholders.) The trust deed excludes the employer from receiving income or capital distributions, and any benefit under the trust.

8.            Since only employees and their associates may acquire units under the Company X scheme, the scheme can't distribute income or capital to anyone else.

9.            Conditions apply to employees who receive invitations and agree to become a unitholder. These conditions:

•         cause employees to lose their units when disqualifying events happen o limit employees' ability to redeem units by subjecting them to disqualifying discounts if units haven't been held for a qualifying period

•         restrict employees' (or their associates) ability to sell, transfer, or dispose of their units.

10.          The Company X scheme's trustee will manage the scheme's affairs. It's a corporate trustee. The trustee can only invest in shares in the employer or the employer's subsidiaries. The trustee may also make distributions of income or capital to employees or employees' associates under the trust deed's terms and conditions.

11.          Each year, the employer will make an offer to a group of employees. That group will form at least 75% of the employer's permanent employees who have completed at least 3 years of service (continuous or non-continuous) and are Australian residents. It's possible that less than 75% of employees will choose to participate in the scheme.

12.          Shares and unit prices will be based on the business's value. The value of the employer's business will be determined by an independent valuer each financial year. The underlying share price will be determined from this valuation. The net asset backing of units will reflect the share price, the number of shares held by the trustee, and the number of units on issue.

13.          The trust will issue units at market value. The market value of units should be equivalent to the market value of underlying shares in the company.

14.          Employees may also subscribe for units at market value, separately to any units they receive for no consideration.

15.          The only salary sacrifice arrangements involved in the Company X scheme will comply with subsection 83A-105(4).

16.          The Company X scheme doesn't involve the trustee making loans to employees (whether interest bearing or interest free and whether of a limited recourse nature or not).

17.          Unitholders can redeem their units for cash. When they redeem their units, unitholders become entitled to receive an employee redemption amount. That amount will be the cash value of the sale of the allocated shares referable to the units being redeemed after applying the disqualification discount (if applicable), and the net cost of sale.

18.          If a disqualifying event occurs, the unitholder will forfeit their units. Disqualifying events include if the employee:

•         becomes bankrupt

•         transfers, assigns, or creates some interest over a unit (or attempts to do any of those things)

•         becomes of unsound mind

•         is terminated for cause.

19.          The disqualification discount reduces the cash unitholders receive on redemption. An employee must hold the units for a designated time before they fully vest (in the sense that the disqualification discount is lifted). The discount reduces the amount of units (and therefore the underlying allocated shares) which are available to be sold by the trustee on the exiting employee's behalf.

20.          Table 1 describes the value entitlement under the Company X scheme.

Table 1: value entitlement under the Company X scheme

21.          The Company X scheme rules include a restriction on sale or transfer of the units.

22.          Unitholders are entitled to receive any dividends paid on allocated shares referable to their units held under the Company X scheme.

23.          The applicant supported their application with a trust deed for the Company X scheme, which we describe in Table 2. That deed refers to the employer as the company.

Table 2: trust deed summary

Assumptions

The start-up rules in section 83A-33 don't apply.

Subsections 83A-45(1), (2), (3), and (6) apply to the scheme.

The relevant ESS interests will have a market value greater than nil, whether determined by the general concept of market value, or the regulations under Division 83A of the Income Tax Assessment Regulations 1997.

All employees will leave employment within 15 years after they acquire their ESS interests.

There will be no 'exit events' as defined under the schemes.

ESS interests won't be disposed within 30 days after the deferred taxing point under sections 83A-115 or 83A-120.

Employees who subscribe for units will either pay no consideration, or full market value.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986

Section 136

Income Tax Assessment Act 1936

Section 6

Section 44

Section 103A

Section 109C

Section 109J

Section 109K

Section 109L

Section 109Y

Section 109ZB

Section 109ZD

Section 177A

Section 177C

Section 177D

Section 177F

Section 318

Income Tax Assessment Act 1997

Section 6-5

Section 6-10

Section 6-25

Section 8-1

Section 10-5

Section 15-2

Section 83A-10

Section 83A-20

Section 83A-33

Section 83A-45

Section 83A-105

Section 83A-110

Section 83A-120

Section 83A-210

Section 83A-310

Section 83A-315

Section 83A-320

Section 83A-340

Section 104-10

Section 108-5

Section 110-20

Section 110-25

Section 112-20

Section 116-20

Section 116-25

Section 130-80

Section 130-85

Section 995-1

Income Tax Assessment Regulations 1997

Regulation 83A-315.01

Superannuation Guarantee (Administration Act) 1992

Section 6

Section 11

Section 16

Section 19

Section 23

Taxation Administration Act 1953

Schedule 1 - Section 357-55

Schedule 1 - Section 359-5

Reasons for decision

In these reasons for decision:

•         unhyphenated provisions (eg, section 177D) are in the Income Tax Assessment Act 1936 unless another Act is mentioned

•         hyphenated provisions (eg, section 6-5) are in the Income Tax Assessment Act 1997 unless another Act is mentioned

•         FBTAA means the Fringe Benefits Assessment Act 1986

•         SGAA means the Superannuation Guarantee (Administration) Act 1992.

•         Sch1 to the TAA means Schedule 1 to the Taxation Administration Act 1953

•         Part IVA means Part IVA in the Income Tax Assessment Act 1936

•         Division 7A means Division 7A in the Income Tax Assessment Act 1936 (and similarly for Division 7)

•         Division 83A means Division 83A in the Income Tax Assessment Act 1997 (and similarly for Subdivisions 83A-B and 83A-C)

•         Subdivision 130-D means Subdivision 130-D in the Income Tax Assessment Act 1997.

Sample employee ruling

Question 1

Will the general anti-avoidance provisions under Part IVA apply to the scheme described?

Answer

No.

Reasoning

24.          Broadly, Part IVA applies to deny tax benefits obtained through schemes for the sole or dominant purpose of achieving them. We'll very loosely summarise some of the core provisions.

•         Section 177D says Part IVA applies if an entity entered into or carried out a scheme for the purpose of obtaining a tax benefit. The effect of subsection 177A(5) is that where an entity has multiple purposes, 'purpose' means 'dominant purpose'.

•         Subsection 177C(1) says tax benefits include amounts not included in assessable income, and allowable deductions.

•         Subsection 177D(2) lists factors relevant to determining purpose. Broadly, they address the manner, form, substance, time, and tax outcome of the scheme, changes in financial position, and connections between the parties.

•         Where Part IVA applies, section 177F allows the Commissioner to disallow the tax benefit.

25.          Part IVA doesn't apply on the facts presented. The facts disclose an employee share scheme to attract, retain, motivate, and reward employees. Aspects of the scheme may attract tax benefits, such as allowable deductions for the employer, or amounts not being included in an employee's assessable income in particular income years. However, considering the relevant factors, the dominant purpose of the scheme is to establish an employee share scheme to attract, retain, motivate, and reward employees. Any tax benefits would be incidental to that purpose, so Part IVA won't apply.

Question 2

Is Taxation Ruling TR 2010/6 Income Tax, Pay As You Go Withholding and fringe benefitstax; tax consequences on the issue, holding and redemption of bonus units as part of anemployee benefits trust arrangement applicable?

Answer

The Commissioner can't rule on this question.

Summary

26.          While we can't rule on this question, we nonetheless think the scheme dealt with in this ruling is outside the scope of TR 2010/6.

Reasoning

We can't rule on this question because it doesn't ask about a relevant provision.

27.          Section 359-5 of Sch1 to the TAA allows the Commissioner to make a written ruling on how he or she considers a relevant provision applies or would apply to you in relation to a specified scheme.

28.          Section 357-55 of Sch1 to the TAA says that provisions of Acts and regulations (of which the Commissioner has the general administration) may be relevant for rulings if they are about tax (defined as income tax), certain other taxes, levies, or duties, or the administration or collection of taxes, levies, and duties listed in the section.

29.          The question hasn't identified a relevant provision on which the Commissioner can make a ruling under Division 359 of Sch1 to the TAA. TR 2010/6[1] is a public ruling, not a provision of an Act or regulation administered by the Commissioner.

The scheme here doesn't feature bonus units: TR 2010/6 doesn't apply.

30.          While we can't give a ruling on whether a public ruling applies, we can give general guidance addressing the question.

31.          Very broadly, TR 2010/6 is about the tax consequences of an employee benefits trust arrangement involving bonus units. The tax consequences include income tax, PAYG Withholding, and FBT. TR 2010/6 applies to employee benefits trust arrangements with features described in paragraphs 5 through 7 of that public ruling. Some of the key features are that an employer pays contributions to a trust, which uses the contributions to make loans to employees to allow employees to purchase units in the trust. The employees may redeem the units to repay the loans. The trustee then issues bonus units with no rights attaching except a cancellation entitlement. The parties agree or understand that the redemption or cancellation amount for the bonus units is a reward for employment duties.

32.          TR 2010/6 doesn't apply to the scheme here. The employee share scheme here doesn't involve loans to employees or bonus units, or employees redeeming units to repay a loan. There are some common features, such as both schemes involving employees subscribing for units. It's also possible that the parties in both schemes understand that the units will be a reward for employment duties which operates like a bonus. However, TR 2010/6 doesn't apply because significant features of that public ruling - loans to employees, using the loan funds to subscribe for units, and redeeming 'bonus units' to repay the loan - aren't present in the scheme here.

Question 3

Does it make a difference if the trust becomes a major shareholder of the company?

Answer

The Commissioner can't rule on this question. Similar to Question 2, the question doesn't identify relevant provisions on which the Commissioner can rule.

Reasoning

33.          While we can't give a ruling on whether a public ruling applies, we can give general guidance addressing the question.

34.          To consider the question, we'll assume that a 'major shareholder' means a shareholder holding more than 10% of the company's share capital.

35.          Broadly, we think TR 2010/6 doesn't apply and that the arrangement would be treated the same way under the ESS rules even if the trust became a major shareholder in this sense.

•         Employees would still receive ESS interests if they were issued with units under the scheme.

•         Employees would be taxed under either Subdivision 83A-B or Subdivision 83A-C to the extent that their ESS interests were issued at a discount.

•         Employees may be eligible for deferred tax treatment under Subdivision 83A-C to the extent they met the relevant conditions.

•         Employee CGT consequences would be worked out under Subdivision 130-D.

•         The arrangement would likely be treated as an employee share trust if the circumstances were consistent with the trust's sole activities being to allow employees to acquire ESS interests under the scheme.

36.          However, we can't give definitive guidance that the tax consequences would be the same regardless of the trustee's shareholding. Some tax outcomes may be different if the trust became a majority shareholder with a controlling interest in the company, or its shareholding gave it substantial rights over the company's decision-making. That would be an unusual circumstance for an ESS scheme. While simply holding a large proportion of shares wouldn't necessarily prevent the scheme qualifying for ESS treatment, that circumstance could cause the ATO to examine the circumstances more closely to understand the purpose and effect of the scheme. Without meaning to be exhaustive, possible questions could include whether:

•         the trust's large shareholding had an ulterior purpose that might suggest other activities that could cause it to fail the sole activities test in subsection 130-85(4)

•         the arrangement had the sole or dominant purpose of obtaining a tax benefit

•         any outgoings associated with the scheme were incurred for a non-deductible purpose

•         there was any agreement or understanding between the parties which affected or varied the terms of the ESS

•         there were any circumstances suggesting the scheme wouldn't be carried out according to those terms.

Any of those circumstances could lead to different tax consequences, including under the ESS rules. For example, if there was any separate agreement or understanding which affected the ESS rules, that would be relevant in determining whether conditions such as the 'risk of forfeiture' and 'genuine disposal restriction' rules in section 83A-105 were met.

Question 4

What amount will be assessable income to the relevant employee (even if they participate indirectly through an associate) in the event that they are entitled to an employee redemption amount?

Answer

The amount employees include in their assessable income when they receive an employee redemption amount depends on whether they received the units for no consideration or paid market value.

For units acquired for no consideration, Division 83A applies and the employee will include the employee redemption amount less any cost base in their assessable income.

For units acquired at market value, Division 83A doesn't apply and the employee will include any capital gain or loss calculated under the capital gains tax (CGT) provisions.

Summary

37.          For employees who acquired their units for no consideration under the scheme, any amount included in the employee's assessable income upon receiving an employee redemption amount will be limited to the amount included under Subdivision 83A-C, unless that redemption happens after the deferred taxing point. For completeness, employees who dispose of their interests after the deferred taxing point may need to include any capital gain from subsequent CGT events in their assessable income.

38.          Employees who purchase their units at market value will also need to include in their assessable income any capital gain from any CGT event happening on receiving their employee redemption amount.

Detailed reasoning

This arrangement will be treated as an employee share scheme under Division 83A and employees will receive beneficial interests in rights.

39.          We'll briefly cover some foundation rules about assessable income.

•         Section 6-5 includes ordinary income in assessable income.

•         Section 6-10 includes statutory income in assessable income.

•         Subsection 6-25(1) says that amounts included as assessable income under two provisions (including as ordinary income) will only be included once in that income year, and won't be included in any other income year.

•         Subsection 6-25(2) says rules about statutory income prevail over rules about ordinary income unless a contrary intention appears.

•         Section 10-5 has a list of provisions about statutory income, which may vary or replace amounts which would otherwise be ordinary income. The entry for employee share schemes lists Subdivisions 83A-B and 83A-C.

40.          Since statutory income rules prevail over ordinary income, we'll consider whether the employee share scheme rules in Division 83A apply.

41.          Very broadly, the ESS rules include the value of a discount under an ESS scheme in your assessable income. If Subdivision 83A-B applies, the discount is included in your assessable income immediately. However, if deferred taxation under Subdivision 83A-C applies, you include an amount in your assessable income at the deferred taxing point.

42.          We'll address some foundation concepts about the ESS rules.

43.          ESS interests are defined in two ways. Subsection 83A-10(1) says an ESS interest (in a company) is:

•         a beneficial interest in a share in the company, or

•         a beneficial interest in a right to acquire beneficial interests in a share in the company.

44.          Subsection 83A-10(2) says employee share schemes are schemes under which ESS interests in a company are provided to employees or associates, in relation to the employee's employment.

45.          The ESS rules apply to treat ESS interests held through trusts as being held by beneficiaries. Section 83A-320 says if you hold an interest in a trust whose assets include shares, and the interest corresponds to a particular number of the shares, then Division 83A treats them as holding a beneficial interest in the number of shares allocated to their interests.

46.          Here, section 83A-320 will treat shares held through the trust as being held directly by the participating employees. Once the company issues shares to the trust, the shares will be allocated to units, and units will be issued to employees. Each unit will correspond to a particular number of shares, so Division 83A will apply to treat employee unitholders as having beneficial interests in the shares allocated to their units.

47.          Employees under the Company X scheme will acquire ESS interests. They receive beneficial interests in shares under the first limb of the definition in subsection 83A-10(1). If employees choose to subscribe for units, shares will be allocated to units, and the units will be issued to them, so they'll have beneficial interests in the underlying shares, rather than rights.

48.          For completeness, the scheme will also be an employee share scheme. The units are issued to employees in respect of employment because only employees are invited to subscribe for units, under a scheme which purports to be set up for employees' benefit. Since beneficial interests in shares attach to those units, the trustee will be also providing ESS interests to employees under the scheme.

The taxing point is deferred if employees meet conditions in Subdivision 83A-C; otherwise, the discount is taxed upfront under Subdivision 83A-B.

49.          Subdivision 83A-B applies by default where Subdivision 83A-C doesn't apply. Subdivision 83A-B applies where you acquire an interest under an ESS at a discount: subsection 83A-20(1). Subsection 83A105(1) says that Subdivision 83A-C applies, and not Subdivision 83A-B, where the conditions to that subsection are met.

50.          Very broadly, Subdivision 83A-C gives deferred tax treatment to ESS interests where the employee is prevented from disposing of those interests, and other conditions are met. These conditions are set by section 83A-105. For ESS interests that are beneficial interests in shares, the taxing point happens at the earliest time when the employee isn't prevented from disposing of them, or after 15 years. While some conditions are common to all interests, some different conditions apply depending on whether the ESS interests are classified as rights or shares.

51.          Where Subdivision 83A-C applies, section 83A-110 includes the ESS interest's market value, worked out at the deferred taxing point (reduced by any cost base) in the employee's assessable income.

52.          There's also a rule for forfeited interests. Section 83A-310 may apply so that Division 83A doesn't apply. Broadly, the employee must forfeit the interest or lose a right (without disposing or exercising it). Further, that forfeiture or loss can't be a result of:

•         the employee's choice (except a choice to leave employment or to let a right lapse or be cancelled), or

•         a scheme condition that protects the employee against a fall in the ESS interest's market value.

The employer's scheme meets the common conditions in Subdivision 83A-C.

53.          For deferred tax treatment under Subdivision 83A-C, there are four conditions common to both rights and shares.

•         Subdivision 83A-B would (apart from section 83A-105) apply to the scheme: paragraph 83A105(1)(a).

•         After applying section 83A-315, there's still a discount given in relation to the interest: paragraph 83A-105(1)(aa).[2]

•         Section 83A-33, about start-ups, doesn't reduce the amount to be included in your assessable income: paragraph 83A-105(1)(ab).

•         Subsections 83A-45(1), (2), (3), and (6) apply to the interest: paragraph 83A-105(1)(b).

54.          Section 83A-315 is about market value. Section 83A-315 says that whenever Division 83A requires you to use market value, you should instead use the amount specified in regulations. The only relevant regulations are in Division 83A of the Income Tax Assessment Regulations 1997. Regulation 83A315.01 says where unlisted rights must be exercised within 15 years, you can choose market value, or amounts determined by regulations 83A-315.02 through 83A-315.09.

55.          Under the Company X scheme, any units issued without consideration will meet the common conditions. The units are issued for no consideration, so employees will have received them at a discount. We've assumed that the ESS interests will have a market value greater than nil under either the general concept or the regulations, so the ESS interests will still be issued at a discount after applying section 83A-315. We've assumed that the start-up rules won't apply, and the rules in subsections 83A-45(1), (2), (3), and (6) are met.

56.          In contrast, any units purchased at market value won't meet the common conditions: employees will have purchased them at market value, so they won't have received them at a discount.

57.          Since we've concluded that Company X scheme ESS interests are beneficial interests in shares, (rather than rights to acquire beneficial interests in shares), we'll apply the conditions specific to shares.

The employer meets the conditions applying to beneficial interests in shares: it meets the broad availability and real risk of forfeiture requirements.

58.          ESS interests that are beneficial interests in shares need to meet two conditions for the deferred tax treatment to apply. These are set by paragraph 83A-105(1)(c). First, when you acquire the ESS interest, at least 75% of permanent employees who have completed at least 3 years' service must be entitled to acquire ESS interests under the scheme <subsection 2>. Second, either:

•         when you acquire the ESS interest, there's a real risk that you will forfeit it under the scheme conditions <subsection 3> or

•         broadly, the ESS interest is provided under a salary sacrifice arrangement. <subsection 4>

59.          The word 'entitled', used in the first condition, isn't defined, but the Macquarie Dictionary says 'entitled' means having a legitimate claim to a right, title, etc.[3]

60.          On the second condition, there's some ATO guidance on the requirement about a real risk of forfeiture. ATO ID 2010/61[4] and web-guidance[5] explain the ATO view about when an ESS provides that ESS interests will be forfeited if the employee doesn't complete a minimum term of employment. We accept that there's a real risk of forfeiture where the minimum term of employment is:

•         at least 12 months, or

•         at least 6 months where the maximum deferral is no more than 3 years.

61.          The employer will meet the first condition. Each year, the employer will make an offer to a group of employees inviting them to subscribe for units. That group will form at least 75% of permanent employees who are Australian residents and have completed at least 3 years' service with Company X or participating companies. While it's possible some of those employees might elect not to accept their units, they will be entitled to acquire units. When each employee acquires their interests, at least 75% of Australian resident permanent employees with at least 3 years' service will have been entitled to acquire ESS interests under the scheme.

62.          The employer will also meet the second condition. Employees under the Company X scheme are at real risk of forfeiture when they acquire their ESS interests under the scheme. The rules mean that employees will effectively forfeit their units if they don't complete 6 years of employment after their units are issued. Employees can redeem their units for cash or have units transferred to them when a redemption event happens, which includes leaving employment. However, the trust deed says the disqualification discount on leaving employment is 100% (bringing the entitlement to 0%) where the employee has held the units for less than 6 years. We accept the 100% disqualification discount amounts to forfeiture, because their ESS interests have no economic value if realised in that period. Following the ATO's guidance, the real risk of forfeiture condition is met because the ESS interests will be at risk for more than 12 months.

63.          For completeness, we don't think there's a real risk of forfeiture after the 6-year period ends. For the employee, there will still be a disqualification discount of at least 20% until 10 years pass. But we don't think a partial reduction of an employee's entitlement amounts to forfeiture.

64.          Both conditions applying to beneficial interests in shares are met, so the Company X scheme will be eligible for deferred tax treatment under Subdivision 83A-C.

65.          It follows that section 83A-110 operates to include the market value of the interest in the employee's assessable income at the deferred taxing point, reduced by the interest's cost base.

66.          We determine the deferred taxing point in Question 8.

67.          For completeness, Division 83A wouldn't include amounts in an employee's assessable income if they forfeit their interests under the scheme in circumstances covered by section 83A-310.

Conclusion: employees (who don't forfeit their interests) will include the market value of their interests in assessable income for units issued at a discount, and may have capital gains in some circumstances.

68.          For units issued for no consideration, the Company X scheme qualifies for deferred tax treatment for the reasons given at paragraphs 51 to 65.

69.          For those units, it follows that Subdivision 83A-C will apply this way. Section 83A-110 will include the market value of the employee's interests in their assessable income in the income year of the deferred taxing point, less any cost base. The deferred taxing point will be when the employee leaves employment.

70.          We don't need to address whether any amounts from receivingtheir ESS interests could be assessable to the employee under other provisions. Employees receiving ESS interests will apply Division 83-A at the deferred taxing point (assuming section 83A-310 doesn't apply). If amounts from the same transaction could also be assessed under other provisions (whether ordinary income or statutory income), section 6-25 will apply so that the amounts are not assessed twice.

71.          Employees won't be subject to CGT if they receive their employee redemption amount on leaving employment (for the reasons discussed in Question 8) but might be subject to CGT if they dispose of their units after that point (for the reasons discussed in Question 9).

72.          Employees may also have capital gains where they purchase units at market value. In that case, the ESS rules in Subdivision 83A won't apply because employees haven't acquired ESS interests at a discount. See our reasons in Question 10.

Question 5

Will the employee be assessed on contributions made by the employee to acquire additional units in the trust?

Answer

No.

Reasoning

The value of contributions, or purchased units, won't be included in employees' assessable income under these schemes.

73.          We discussed the ESS rules in Question 4.

74.          The ESS rules aren't relevant to this question. For purchased/additional units, the employees will purchase units at market value. That means they won't acquire their ESS units at a discount.

75.          Section 6-5 includes ordinary income in assessable income.

76.          There's ATO and academic guidance about ordinary income. TR 2006/3[6] at paragraph 85, TD 2016/18[7] at paragraph 15, and an academic work by Parsons,[8] list some considerations derived from case law.

The nature of a payment is determined by the character of the payment in the recipient's hands (the character of the expenditure for the payer isn't determinative). Characterising the payment is an objective test, considering all facts and a broad view of the taxpayer's total situation. Payments that are received periodically, are consideration for services or business activity, or from isolated profit-making transactions may be income. But there must be some sense of 'gain' derived beneficially by the taxpayer.[9] Amounts received from surrendering capital assets, capital gains, windfall gains, and contributions of capital don't have the character of income.

77.          Employee contributions wouldn't be assessed to the employee under section 6-5. The contribution is an outgoing by the employee, not a gain to them. From the employee's perspective, the only thing they are receiving or gaining from the transaction is the unit they are buying with that contribution, and that unit would be a capital asset in their hands.

78.          Section 15-2 includes allowances, gratuities, compensation, benefits, bonuses, and premiums provided to you in respect of or in relation to (directly or indirectly) any employment or services rendered by you. This is so whether the things were provided in money or in other form. The value of ESS interests to which Subdivisions 83A-B or 83A-C isn't included in assessable income under section 15-2.

79.          Section 15-2 wouldn't be relevant because neither the contribution nor the purchased unit would be compensation, or a bonus or benefit, for employment or services rendered by the employee. They are only participating in the ESS because they are employees, so arguably the purchased unit is 'in respect' or 'in relation to' employment in an indirect sense. But it can't be characterised as a bonus or benefit - they've simply bought something at fair value from someone who happens to be their employer. (We conclude in Question 10 that purchased units won't be taxed under the ESS provisions in Division 83A, so the exclusion for ESS interests isn't relevant.)

80.          We haven't identified any other provisions under which employees could be assessed on contributions they make to acquire units in the trust.

81.          We conclude that employees won't be assessed on contributions they make to acquire additional units in the trust.

Question 6

Will the employee be liable to income tax on the value of units issued by the trust if the employer is not liable for fringe benefits tax?

Answer

Yes, but only to the extent that the unit value is taxed at the deferred taxing point under the ESS provisions or reflected in a capital gain on a later disposal.

Reasoning

82.          We concluded at Question 4 that units acquired for no consideration would be taxed under Subdivision 83A-C of the ESS rules.

83.          Subdivision 83A-C applies to include the market value of the units at the deferred taxing point in employee's assessable income.

84.          For units covered by the ESS rules, employees may have capital gains if they later dispose of their interests after that deferred taxing point.

85.          We explain at Question 10 that units purchased at market value won't be covered by the ESS rules (because they aren't acquired at a discount) and would be subject to the normal CGT rules.

86.          We discussed some basic principles about income in Question 5 at paragraphs 75 to 79.

87.          Units acquired for no consideration won't be assessable to employees under other provisions. Even if the value of those units could be assessable as ordinary income under 6-5 or statutory income under some other provision (like section 15-2), then section 6-25 will operate so that the amounts aren't taxed twice.

88.          Units purchased at market value won't be assessed to employees under other provisions either. The employee is paying full market value for their units. From the employee's perspective, the only thing they are receiving or gaining from the transaction is the unit they are buying.

Question 7

If the employee is liable to income tax on the market value provided in relation to the issue of units, will the market value be limited to the employee redemption amount (as defined in the trust deed)?

Answer

Yes, where the employee redemption amount reflects market value at the deferred taxing point.

Reasoning

89.          We explained in our reasoning for Question 4 that units acquired for no consideration would qualify for deferred tax treatment under Subdivision 83A-C.

90.          Employees will include the market value of their ESS interests (determined at the deferred taxing point) in their assessable income, less cost base.

91.          We'll briefly cover 'cost base'.

•         The first element of cost base includes the money and market value of property paid to acquire a CGT asset (the remaining elements include incidental and ownership costs, and capital expenditure relating to the asset): section 110-25.

•         There's a market value substitution rule relevant to cost base. Where you didn't incur expenditure to acquire a CGT asset, the first element of cost base may be its market value where certain conditions apply: see section 112-20.

•         But this market value substitution rule doesn't apply to the extent it relates to you acquiring an ESS interest to which Subdivision 83A-C applies: see subsection 130-80(4).

92.          Under the scheme, employees have a choice to either:

•         have the trustee transfer them the shares attached to their units, or

•         sell the shares and pay them the employee redemption amount.

93.          The employee redemption amount reflects the cash value of the allocated shares sold, net of any selling costs.

94.          Very broadly, ATO guidance in other contexts suggests 'market value' means the price that fully informed buyers and sellers would reach, if bargaining at arm's length. See TD 2007/1[10] at paragraphs 12 through 14, TD 97/1[11], and the ATO website.[12]

95.          Whether the employee redemption amount reflects market value will depend on whether the buyer and seller are bargaining at arm's length under normal market conditions, and whether any selling costs reduce the employee redemption amount below that amount.

96.          For completeness, cost base is likely to be 'nil' for units acquired for no consideration. Employees won't have paid money or provided property to acquire their units, so the first element of cost base will be nil. The market value substitution rule won't apply. Cost base would be limited to amounts (if any) which qualified under the other elements.

97.          Units acquired for market value may produce a capital gain or loss on redemption for the reasons discussed in Question 10.

Question 8

When a participant acquires units in the trust, and assuming the ESS deferred taxing point isn't the 15th anniversary of the date of acquisition under subsection 83A-115(6) of the ITAA 1997, and that the 30-day rule in subsection 83A-115(3) doesn't apply, and that an exit event hasn't occurred, will the ESS deferred taxing point be when the employee ceases employment?

Summary

98.          Yes. The Company X scheme qualifies for deferred tax treatment under Subdivision 83A-C. The relevant taxing point will be the earliest time when employees aren't at risk of forfeiture and are no longer genuinely restricted from disposing of their ESS interests under the scheme. In this case, that will be when employees leave employment because they can't dispose of their ESS interests until that point, assuming that employees don't remain employed for 15 years, an exit event doesn't happen, and they don't dispose of their interests within 30 days of what would otherwise be the deferred taxing point.

Detailed reasoning

Different rules apply to determining the taxing point for beneficial interests in shares, and beneficial interests in rights.

99.          There are rules for determining the deferred taxing point where Subdivision 83A-C applies. Section 83A115 applies to shares, while section 83A-120 applies to rights.

100.        In both cases, the deferred taxing point is modified to be the disposal (or exercise) date, if that happens within 30 days of that deferred taxing point: see subsections 83A-115(3) and 83A-120(3).

101.        We've assumed that the 30-day disposal rule won't apply here.

The deferred taxing point for beneficial interests in shares will be the earliest time when there's no real risk of forfeiture and any genuine disposal restriction is lifted (or 15 years after acquisition if that happens to be earlier).

102.        We'll apply section 83A-115 to the Company X scheme, as employees will acquire beneficial interests in shares under this scheme.

103.        There are two possible deferred taxing points for shares. Subsection 83A-115(2) says the deferred taxing point is the earliest of the times mentioned in subsections (4) to (6). However, subsection (5), about ceasing employment, was repealed effective 1 July 2022.[13]

104.        Subsection (4) says the first taxing point is the earliest time when:

•         there's no real risk that you will forfeit or lose the interest under the ESS conditions, other than by disposing it, and

•         when the scheme no longer restricted you immediately disposing of the ESS interest.

105.        Subsection (6) says the second taxing point is the end of the 15-year period starting when you acquired the interest.

Under the Company X scheme, the deferred taxing point will be when employees leave employment: that's the earliest time when the genuine disposal restriction is lifted.

106.        The relevant taxing point will be when Company X's employees leave employment, unless an exit event happened. Only the first taxing point is relevant, because we've been asked to assume that the employee leaves before the 15-year period expires. We concluded at Question 4 at paragraph 62 that employees will be at risk of forfeiture for 6 years, unless an exit event happens. The effect of the ESS rules is that Company X's employees can't dispose those units or redeem them until they leave employment. The employees will be genuinely restricted from disposing of the units until they leave employment (sometime after the 6-year period ends) which will be earliest time when the two conditions in subsection (4) are met.

107.        For completeness, an employee leaving employment before the 6-year period would have no deferred taxing point. Under section 83A-310, Division 83A is taken never to have happened in relation to an ESS interest if the employee forfeits the interest or loses it, unless the forfeiture or loss happens through a choice not to exercise a right or to allow it to lapse. Employees who leave during that 6-year period would forfeit their beneficial interest in shares (unless an exit event happened), in which case section 83A-310 would apply, and Division 83A won't operate.

108.        It follows that Subdivision 83A-C will apply this way. Section 83A-110 will include the market value of a Company X's employee's interests in their assessable income in the income year of the deferred taxing point, less any cost base. The deferred taxing point will be when the employee leaves employment.

Conclusion: the deferred taxing point will be when employees leave employment.

109.        It follows that the deferred taxing point will be when employees leave employment, assuming that happens before 15 years after acquisition, and that they leave before any exit event.

Question 9

Will the employee be liable for capital gains tax on any capital gain made on redemption of employee units?

Answer

No, unless the redemption happens after the deferred taxing point.

Reasoning

Employees won't have capital gains from redeeming units they acquired for no consideration unless the deferred taxing point is fifteen years after acquisition.

110.        Very broadly, the CGT rules calculate gains and losses from CGT events, which usually relate to CGT assets.

•         Division 102 includes a net capital gain for an income year, determined by netting gains and losses from CGT events, in your assessable income

•         Many CGT events happen in respect of CGT assets; one example is CGT event A1 in section 104-10.

•         CGT assets include shares in companies and units in trusts: see Note 1 to section 108-5.

•         CGT event A1 happens when you dispose a CGT asset: subsection 104-10(1).

•         You dispose a CGT asset when there's a change of ownership from you to another entity, but not where there's a change in legal ownership without a change in beneficial ownership: subsection 104-10(2). (The ATO view is that CGT event A1 requires a change in beneficial ownership, but not necessarily legal ownership.[14])

•         For CGT event A1, you calculate capital gains and losses by comparing the capital proceeds from a CGT event with the asset's cost base: subsection 104-10(4).

•         Very broadly, capital proceeds are the money and the market value of property you receive in respect of a CGT event happening: section 116-20.

•         The first element of cost base includes the money paid and market value of property given to acquire a CGT asset (the remaining elements include incidental and ownership costs, and capital expenditure relating to the asset): section 110-25.

•         There's a market value substitution rule relevant to capital proceeds and cost base. Where you didn't incur expenditure to acquire a CGT asset, the first element of cost base may be its market value where certain conditions apply: see section 112-20. There's a similar rule for capital proceeds in section 116-25.

•         But these market value substitution rules don't apply to the extent they relate to you acquiring an ESS interest to which Subdivision 83A-C applies: see subsection 130-80(4).

111.        However, the CGT rules are modified for ESS interests by rules in Subdivision 130-D. For present purposes, we need only discuss one rule in section 130-80.

112.        This rule allows you to disregard any capital gain or capital loss to the extent that it results from a CGT event if certain conditions are met. Subsection 130-80(1) sets these conditions.

•         The event must happen in relation to an ESS interest you acquire under an employee share scheme. Paragraph (a).

•         It can't be CGT event E4, G1, or K8. Paragraph (b).

•         If Subdivision 83A-B applies, the time of the acquisition must be when the CGT event happens. Paragraph (c).

•         If Subdivision 83A-C applies, either the time of the acquisition must be when the CGT event happens, or the CGT event happens on or before the ESS deferred taxing point. Paragraph (d).

But subsection 130-80(2) says that the rule doesn't apply if Subdivision 83A-C applies, and the CGT event happens because you forfeit or lose the ESS interest (other than by disposing of it) on or before the deferred taxing point.

113.        Employees may have had a capital gain under the basic CGT rules.

•         Units and shares under the ESS are both CGT assets and ESS interests.

•         CGT event A1 will happen. Employees will own units in the trust. When they redeem the units, there will be a change in ownership of those units from them to the trustee. They won't retain any rights that would make them either a legal or beneficial owner of their former units in the trust.

•         Employees may have a capital gain. Their capital proceeds would be the money received or the market value of shares received for redeeming their units. They would have a capital gain to the extent the capital proceeds exceed their cost base. For units acquired for no consideration, the first element of cost base would be nil. The market value substitution rule doesn't apply to the acquisition of ESS interests.

114.        However, any capital gain is disregarded under the modified rule for ESS interests. The conditions in subsection 130-80(1) are met. CGT event A1 happens when the employees redeem their interests under the ESS. That disposal and CGT event directly relates to their ESS interests, and CGT event A1 isn't an excluded event. We concluded that Subdivision 83A-C applies to the ESS interests in Question 4 at paragraphs 53 through 65. We concluded at Question 8 at paragraphs 99 through 109 that the deferred taxing point will be when the employee leaves employment (assuming it isn't after 15 years). Employees can't redeem their units until they leave employment, so the CGT event will happen at the deferred taxing point (again, assuming the deferred taxing point doesn't happen after 15 years). The exclusion for forfeiting or losing an ESS interest won't be relevant.

115.        For completeness, employees may have a capital gain if the deferred taxing point is 15 years. If employees redeem their units after that time, the CGT event will happen after the deferred taxing point. The conditions in subsection 130-80(1) won't be met, meaning that employees redeeming their units after that time may have capital gains on redemption.

116.        This reasoning doesn't apply to units purchased for market value: see our reasoning to Question 10.

Question 10

Where the employee has paid market value for the acquisition of additional units, will the employee be liable for capital gains tax on any capital gain made upon the redemption of units?

Answer

Yes.

Reasoning

Employees who pay market value for additional units will need to include any capital gains they make when they redeem units: section 130-80 won't apply to disregard their capital gain.

117.        We discussed the basic CGT rules in Question 9.

118.        Employees may have a capital gain on redeeming units they acquired at market value. Units in the trust are CGT assets. They would dispose of their beneficial interest in that asset when they redeem the unit for cash or for shares. CGT event A1 would happen. They would have a capital gain if the money or market value of the shares exceeded their cost base for the unit.

119.        We also discussed the modified CGT treatment for ESS interests. To repeat, section 130-80 disregards capital gains and losses from CGT events where the conditions set out in subsection 130-80(1) are met.

•         The event must happen in relation to an ESS interest you acquire under an employee share scheme. Paragraph (a).

•         It can't be CGT event E4, G1, or K8. Paragraph (b).

•         If Subdivision 83A-B applies, the time of the acquisition must be when the CGT event happens. Paragraph (c).

•         If Subdivision 83A-C applies, either the time of the acquisition must be when the CGT event happens, or the CGT event happens on or before the ESS deferred taxing point. Paragraph (d).

120.        In context, we think subsection 130-80(1) only applies to ESS interests covered either by Subdivision 83A-B or Subdivision 83A-C: it doesn't extend to ESS interests which aren't covered by those Subdivisions.

•         The purpose of section 130-80 is to avoid double taxation: arrangements taxed under Division 83A shouldn't be subject to capital gains tax to the extent Division 83A has already taxed that gain.[15] Division 83A only taxes ESS interests if either Subdivision 83A-B or Subdivision 83A-C applies.

•         The 'and' after paragraph 130-80(1)(b), read together with the opening words in paragraphs 130-80(1)(c) and (d) ("if Subdivision 83A-B/83A-C applies"), implies that subsection 130-80(1) only operates where the arrangement qualifies for tax treatment under either of those Subdivisions.

•         Any alternative reading which suggested paragraphs (c) and (d) don't apply to arrangements not covered by either Subdivision 83A-B or Subdivision 83A-C would defeat the purpose of the provision.

121.        Subdivision 83A-B applies where employees have received their ESS interests at a discount: see section 83A-20.

122.        The same requirement applies to Subdivision 83A-C: see paragraph 83A-105(1)(a), which requires that Subdivision 83A-B would have applied to the interest.

123.        It follows that section 130-80 won't disregard capital gains for employees who redeem units which they acquired at market value. Neither Subdivision 83A-B nor Subdivision 83A-C will apply because employees haven't received their ESS interests at a discount. It follows that neither paragraphs 13080(1)(c) or (d) will apply, so employees won't meet the conditions for section 130-80 to disregard any capital gain.

Question 11

Will the broad availability requirement in subsection 83A-105(2) be met if, although all employees are entitled to acquire ESS interests under the scheme, an invitation to participate will be based on employee performance such that at least 75% of the permanent employees of the employer who have completed at least 3 years of service (whether continuous or non-continuous) with the employer and who are Australian residents may not actually participate in the scheme?

Summary

124.        Whether the broad availability requirement in subsection 83A-105(2) is met depends on whether, at that time, more than 75% of Australian resident permanent employees with at least 3 years' service are, or have been, entitled to acquire ESS interests under the scheme.

125.        Based on the facts, Company X employees will meet the broad availability requirement. They will be entitled to acquire units if they are made offers to subscribe for units under the scheme because the facts don't disclose any further requirements that they need to meet to be entitled to acquire units. The broad availability requirement will be met if those offers are made to more than 75% of the relevant group of employees.

Detailed reasoning

Under the Company X scheme, employees meet the broad availability requirement because all employees will have a choice to acquire units in the scheme.

126.        The broad availability requirement is a condition for deferred tax treatment under Subdivision 83A-C.

127.        We'll explain the broad availability requirement. Subsection 83A-105(2) requires that:

•         when you acquire your ESS interest

•         at least 75% of your employer's Australian resident permanent employees who have completed at least 3 years of service are, or had been,

•         entitled to acquire ESS interests under the scheme or under another scheme.

128.        The broad availability requirement is only relevant to ESS interests which are rights to acquire beneficial interests in shares. Paragraph 83A-105(1)(c) says this is a requirement for interests that are beneficial interests in shares. However, paragraph 83A-105(1)(d), about ESS interests which are rights to acquire a beneficial interest in a share, doesn't list subsection 83A-105(2) as a condition.

129.        Company X's employees will meet the broad availability requirement. They will be entitled to acquire units if they are made offers to subscribe for units under the scheme because the facts don't disclose any further requirements that they need to meet to be entitled to acquire units. The broad availability requirement will be met if those offers are made to more than 75% of the relevant group of employees.

Employer ruling

Question 1

Will contributions paid by the employer or an associate to the employee share trust pursuant to the employee share trust deed constitute an income tax deduction under section 8-1?

Answer

Yes.

Summary

130.        Yes. Employer contributions paid to the trust will be deductible under section 8-1. They meet the positive limbs of section 8-1 because they are incurred as part of a business carried on for the purpose of earning assessable income. They aren't excluded by any of the negative limbs.

Detailed reasoning

ATO guidance suggests employer contributions to an employee share trust will usually be deductible.

131.        Section 8-1 allows deductions which meet tests known as the positive and negative limbs.

•         For the positive limbs, subsection 8-1(1) allows deductions for losses or outgoings incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business for the same purpose.

•         For the negative limbs, subsection 8-1(2) disallows deductions for losses or outgoings that are capital or of a capital nature, private or domestic, relate to exempt or non-assessable-non-exempt income, or are disallowed by specific provisions.

132.        The ATO has guidance relevant to deductions for employee share and trust arrangements. We'll discuss several points from this guidance.

133.        TR 2018/7[16] says that contributions to employer remuneration trusts ('ERTs') may be deductible in certain circumstances. At paragraph [9], it says a contribution to an ERT is deductible to the employer under section 8-1 where:

•         it's an irrevocable payment of cash made when the employer carries on a business

•         it's made because the employer reasonably expects their business to benefit (eg, improvement in employee performance, morale, efficiency, loyalty)

•         it's intended to be permanently and entirely dissipated in remunerating employees of that business within a relatively short period.

134.        TR 2018/7 goes on to make some qualifying comments.

•         Relevant considerations include the nature and timing of the benefits, employee awareness of the scheme, and whether it has capacity to address the business-related need, function, or complaint. [10].

•         Contributions won't be deductible where the contribution is intended for the benefit of the owners, controllers, or shareholders. [14]

•         Capital advantages can be disregarded if they are small or dissipated in a short time. [18].

•         Contributions to an ERT might be non-deductible capital expenses if they acquire enduring improvements, provide employee loans, don't pass shares to employees promptly, or acquire arm's length investments to generate returns to pay employees, keeping the capital intact. [19]

135.        TD 2022/8[17] says that for an ESS, establishment expenses:

•         aren't deductible under section 8-1 because they are capital in nature

•         might be deductible over 5 years under section 40-880 to the extent the business is carried on for a taxable purpose. [4-5].

136.        ATO web-guidance[18] says:

•         generally there's no deduction available if you issue ESS interests to your employees

•         however, if you provide ESS interests under an upfront scheme eligible for a $1,000 reduction, you can deduct the concession up to $1,000

•         a general deduction may be available to you if you provide money or other property to an employee share trust to enable it to acquire securities to provide to your employees.

Employer contributions to the trust will be deductible: they are incurred in gaining or producing assessable income and aren't capital outgoings to the employer.

137.        While TR 2018/7 is about ERTs, the principles discussed in it would seem to extend to employee share schemes. We think employer contributions to allow a trust to acquire shares in the employer for an ESS arrangement would usually be deductible for the same reasons.

138.        On these facts, we accept that the employer will make contributions to the trust for a deductible purpose.

•         They will make contributions to allow it to acquire shares in the companies for the ESS's purposes.

•         The trust will allocate those shares to employee units under a scheme established to attract, motivate, and retain employees.

•         That purpose is part of carrying on business for the purpose of gaining or producing assessable income, meeting the positive limbs of section 8-1.

•         The negative limbs won't be triggered. We don't see anything in the facts to suggest that the contributions will have a capital character from the employer's perspective. The contributions won't be an initial outlay to establish the fund (which could be a capital outgoing as it may be paid to generate a lasting benefit for the company), as the facts suggest the trustee will expend the contributions in a short space of time by acquiring shares to allocate to employees. The other negative limbs aren't relevant on these facts.

139.        It follows that employer contributions to the trust will be deductible to the employer. The outgoings meet the positive limbs in section 8-1 because they are incurred in carrying on business for the purpose of gaining or producing assessable income, and won't be disallowed under the negative limbs.

140.        However, the same wouldn't necessarily apply where the contribution was made by an associate, rather than the employer. Whether the associate could claim a deduction would depend on the identity of the associate and the surrounding circumstances. The associate would need to demonstrate that it incurred the payment for a deductible purpose - we can't determine that without further details about which associate made the payment, and the extent (if any) to which the payment helped the associate gain or produce assessable income.

Question 2

When will contributions paid by the employer be deductible to the employer?

Answer

141.        If employees acquire their ESS interests after the employer pays contributions under the scheme, then section 83A-210 will operate to make that payment deductible in the income year in which employees acquire their interests.

142.        If employees acquire their ESS interests at or before that time, section 8-1 will apply to make that payment deductible in the income year in which payment was made.

Detailed reasoning

If the employer makes the contribution before employees acquire their ESS interests, section 83A-210 will apply to make the payment deductible at that acquisition time.

143.        We ruled in Question 1 that employer contributions would be deductible under section 8-1.

144.        Section 8-1 allows deductions when losses or outgoings are incurred.

145.        ATO guidance says you incur a loss or outgoing when you owe a money debt that you can't escape. TR 97/7[19] lists some general rules for determining when a loss or outgoing has been incurred at paragraph 6.

•         The taxpayer needn't have actually paid money if it's definitively committed to making a payment.

•         Merely contingent liabilities aren't incurred - the liability must be presently existing.

•         The amount doesn't need to be precisely ascertained.

•         Whether it's a presently existing liability is a question of law, considered in light of the circumstances.

•         Where there's no liability, it's deductible when paid.

146.        However, a specific rule may line the deduction up with when the individual acquires their ESS interest. Section 83A-210 says if:

•         you provide another entity with money or property for the purpose of enabling an individual to acquire (directly or indirectly) an ESS interest under an ESS scheme, and

•         that time occurs before the time the ultimate beneficiary acquires the ESS interest, then

•         for the purpose of determining the year in which you can deduct an amount in respect of providing that money or property, you are taken to have provided it at the acquisition time.

147.        ATO web-guidance[20] says:

•         the deduction would generally be available in the income year the money was paid to the share trust,

•         however, the ESS rules defer the timing of the deduction until your employee acquires the ESS interest.

148.        ATO ID 2010/103[21] confirms that section 83A-210 may still apply where the trust purchases 'excess' shares to hold in reserve to meet obligations to issue shares to employees in the next year.

149.        If employees acquire their ESS interests after the employer pays contributions under the scheme, then section 83A-210 will operate to make that payment deductible in the income year at the acquisition time.

150.        However, if employees acquire their ESS interests at or before the contribution, section 8-1 would apply as normal to make that payment deductible in the income year in which payment was made.

Question 3

Will the contributions paid by the employer to the trust constitute a 'fringe benefit' as defined in subsection 136(1) of the FBTAA?

Answer

No.

Reasoning

Employer contributions are excluded from the definition of fringe benefit.

151.        The section 136 FBTAA definition of fringe benefits excludes benefits constituted by the acquisition:

•         of an ESS interest under an employee share scheme to which Subdivisions 83A-B or 83A-C apply, or

•         benefits constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997).

152.        'Employee share trust' in that Act broadly means a trust whose sole activities are giving ESS interests to employees. Subsection 130-85(4) says an employee share trust, for an employee share scheme, is a trust whose sole activities are:

•         obtaining shares or rights in a company, and

•         ensuring that ESS interests in the company (that are beneficial interests in those shares or rights) are provided under the scheme to employees or their associates, or

•         other activities that are merely incidental to those ends.

153.        Employer contributions are excluded as fringe benefits. The contributions give the trust money, which it will use to buy shares in the company. The trust's deed requires it to allocate those shares to units, and it will issue those units to employees. Broadly, the trust deed prohibits the trustee from using trust funds for other purposes, and the facts say the trustee will administer the ESS in accordance with the deed. Therefore, it qualifies as an employee share trust. Contributions paid by the employer would be excluded as fringe benefits under the FBTAA.

Question 4

Will contributions paid by the employer to the trust constitute an obligation under the SGAA?

Answer

No.

Reasoning

Benefits constituted by acquiring ESS interests under an employee share scheme are excluded from Superannuation Guarantee payments.

154.        Broadly, the SGAA imposes a super guarantee charge where employers don't pay the minimum super guarantee by the due date.

•         Section 16 imposes an superannuation guarantee charge on a shortfall for a quarter.

•         Individual employee shortfalls are calculated by multiplying the total salary or wages paid by an employer to the employee for the quarter, multiplied by the charge percentage: section 19.

•         Section 11 says salary or wages excludes fringe benefits.

•         However, section 23 reduces the charge percentage by contributions made by an employer. The contribution is worked out by dividing the contribution by ordinary time earnings.

•         Section 6 defines ordinary time earnings to mean earnings in respect of ordinary hours of work (other than lump sums for leave), and also earning consisting of over-award payments, shiftloading, or commission.

155.        ATO guidance suggests benefits covered by the ESS rules won't be treated as salary or wages. SGR 2009/2[22] at paragraph 58 says that the Commissioner takes the view that other 'benefits' within the meaning of the FBTAA, given by employees to employers that are neither fringe benefits nor salary and wages, aren't salary or wages for SGAA purposes. It says the acquisition of a share, or a right to acquire a share, under an employee share scheme, isn't salary or wages for SGAA purposes.

156.        Applying the ATO view in SGR 2009/2, ESS interests won't be covered by the SGAA. Shares and rights to acquire shares under an ESS are excluded. By extension, benefits constituted by the acquisition of an ESS interest under an employee share trust wouldn't be salary or wages for SGAA purposes either.

Question 5

Will the general anti-avoidance provisions under Part IVA apply to the scheme described?

Answer

No.

Reasoning

157.        See our reasons in the employee ruling at Question 1.

Question 6

Is Taxation Ruling TR 2010/6 Income Tax, Pay As You Go Withholding and fringe benefits tax; tax consequences on the issue, holding and redemption of bonus units as part of an employee benefits trust arrangement applicable?

Answer

The Commissioner can't rule on this question.

Reasoning

158.        See our reasons in the employee ruling at Question 2.

Question 7

Does it make a difference if the trust becomes a major shareholder of the employer?

Answer

The Commissioner can't rule on this question.

Reasoning

159.        See our reasons in the employee ruling at Question 3.

Question 8

Will it make a difference if only one of the employees is invited to participate in the employee share scheme (ESS) or if additional employees are invited to participate in the ESS?

Answer

The Commissioner can't rule on this question.

Reasoning

The Commissioner can't issue a ruling because the question doesn't identify a relevant provision. We would consider declining to rule in any event as the question is hypothetical with no practical consequences for the applicant. We think the tax consequences would depend on the circumstances.

160.        Similar to Question 2 in the employee ruling, the applicant hasn't identified a relevant provision upon which we can rule.

161.        Section 359-35 of Sch 1 to the TAA allows the Commissioner to decline to make a private ruling if the ruling would prejudice or unduly restrict the administration of a taxation law.

162.        TR 2006/11[23] at paragraph 39 suggests two examples where the Commissioner may decline to rule include where:

•         the application is frivolous or vexatious or not seriously contemplated (such as a request where the scheme is merely hypothetical), or

•         the provision of a private ruling wouldn't have any practical consequences for you.

163.        We think it would be appropriate to decline to rule on this question even if the applicant had identified a relevant provision. The applicant has presented a scheme where the employers will make offers to a group of employees which include more than 75% of the permanent employees that are permanent residents with more than 3 years' service. This question contemplates only one employee will be invited to participate, which is different to the facts. It seems hypothetical and unlikely to have practical consequences for the client given the scheme presented.

164.        While we won't give a ruling on whether a public ruling applies, we can give general guidance addressing the applicant's question.

165.        It's possible (but not certain) that an arrangement like the current schemes, but where only one employee received an offer, would still be taxed under the ESS provisions.

•         The employee would still receive ESS interests if he or she was issued with units under the scheme.

•         That employee would be taxed under either Subdivision 83A-B or Subdivision 83A-C to the extent that his or her ESS interests were issued at a discount.

•         The employee may be eligible for deferred tax treatment under Subdivision 83A-C to the extent he or she met the relevant conditions. The 'broad availability' requirement would almost certainly be failed as one employee would most likely be less than 75% of the relevant group of employees. (Noting that requirement would be met where the employer had only one Australian resident permanent employee with 3 years' service.) However, that condition doesn't apply to ESS interests that are rights to acquire beneficial interests in shares: see subsections 83A-105(1) and (2).

166.        However, some tax outcomes may be different if only one employee was invited to participate. That would be an unusual circumstance which could cause the ATO to examine the circumstances more closely to understand the purpose and effect of the scheme. Without meaning to be exhaustive, possible questions could include whether:

•         the arrangement had an ulterior purpose that might suggest other activities that could cause it to fail the sole activities test in subsection 130-85(4) (and therefore not be an employee share trust)

•         the scheme's main purpose was to give benefits to a shareholder or associate, not to incentivise employees

•         the arrangement had the sole or dominant purpose of obtaining a tax benefit

•         any outgoings associated with the scheme were incurred for a non-deductible purpose (including whether a scheme which benefited only one employee had any benefit for the business)

•         there was any agreement or understanding between the parties which affected or varied the terms of the ESS

•         there were any circumstances suggesting the scheme wouldn't be carried out according to those terms.

Trustee ruling

Question 1

Will the general anti-avoidance provisions under Part IVA apply to the scheme described?

Answer

No.

Reasoning

167.        No for the same reasons as Question 1 in the employee ruling.

Question 2

Is Taxation Ruling TR 2010/6 Income Tax, Pay As You Go Withholding and fringe benefits tax; tax consequences on the issue, holding and redemption of bonus units as part of an employee benefits trust arrangement applicable?

Answer

The Commissioner can't rule on this question.

Reasoning

168.        See our reasons in Question 2 in the employee ruling.

Question 3

Does it make a difference if the trust becomes a major shareholder of the employer?

Answer

The Commissioner can't rule on this question.

Reasoning

169.        See our reasons in Question 3 in the employee ruling.

Question 4

Will receipts from employee contributions (i.e. purchase price for additional units) be taxable income of the employee share trust (trust)?

Answer

No.

Reasoning

170.        No. We conclude in Question 5 that receipts from employer contributions for the benefit of employees would be capital receipts in the trustee's hands. Receipts from employee contributions wouldn't be included in the trustee's assessable income under section 6-5 for the same reasons. Division 7A isn't relevant to employee contributions because they aren't made by a private company.

Question 5

Will receipts from employer contributions for the benefit of employees constitute assessable income of the trust?

Summary

171.        No. Receipts from employer contributions would be capital receipts in the trustee's hands, and not ordinary income. Division 7A won't apply. The conditions of section 109C are met because the employer is a private company, contributions are payments, and the recipient trust is a shareholder of the company. However, section 109ZB will apply to exclude Division 7A from operating because the contributions are made in respect of particular employees.

Detailed reasoning

Employer contributions aren't assessable income under section 6-5; they're capital contributions in the trustee's hands, not ordinary income.

172.        We discussed general principles of ordinary income in Question 5 at paragraphs 75 to 77 of the employee ruling.

173.        ATO ID 2002/965[24] ruled that a trustee wasn't assessable on employer contributions made to it under an employer's employee share scheme. On the facts, the trustee uses the funds in accordance with the trust deed for the sole purpose of the employee share scheme. ATO ID 2002/965 concluded that the contributions are capital receipts, not assessable under section 6-5 or section 6-10.

174.        Applying ATO ID 2002/965, employer contributions to the trust will be capital receipts in the trustee's hands, and won't be assessable under section 6-5.

175.        However, ATO ID 2002/965 didn't address whether Division 7A could apply to an employee share scheme.

Broadly, section 109C treats payments by private companies to shareholders or associates as dividends.

176.        Broadly, Division 7A treats payments, loans, and forgiven debts, where they relate to private companies and their shareholders, as dividends for tax purposes, but we only need consider the rules relevant to payments in this ruling.

177.        Again, broadly, section 44 includes dividends in a shareholder's assessable income. Subsection 44(1) includes dividends paid to the shareholder out of profits in a shareholder's assessable income where:

•         for residents, where the company's profits are derived from any source, and

•         for non-residents, where the company's profits are derived from Australian sources.

178.        Subsection 44(1A) says that dividends paid out of amounts other than profits are taken to be dividends paid out of profits.

179.        We'll explain the operative rule for 'payments' in section 109C. Subsection 109C(1) says a private company is taken to pay a dividend to an entity if it pays an amount and either:

•         the payment is made when the entity is a shareholder in the private company (or an associate of a shareholder), or

•         a reasonable person would conclude that the payment was made because the entity has been a shareholder (or associate) at some time.

180.        Subsection 109C(2), read with section 109Y, limits the amount of the dividend to the company's 'distributable surplus'. Distributable surplus is worked out under a formula in section 109Y.

181.        Section 960-100 confirms that trusts are treated as entities for tax purposes.

182.        Broadly, 'private company' is an incorporated company which isn't public.

•         Section 6 says 'private company' means a company that's a private company for the purposes of Division 7.

•         Section 6 says 'company' takes its meaning from section 995-1.

•         Section 995-1 says 'company' includes a body corporate. 'Body corporate' isn't defined in either tax act, but ATO guidance says it means an artificial entity with a separate legal existence, and includes entities created under the Corporations Act. See MT 2006/1[25] at paragraphs 30-34.

•         The effect of section 103A (in Division 7) is that private companies are companies which aren't public companies. Public company loosely means companies which have shares listed on a stock exchange or fall within a short list of other company types (they include government-controlled companies, non-profits, and cooperatives or similar bodies).

183.        'Associate', for a trust, includes any person who benefits under the trust. See section 109ZD read with paragraph 318(3)(a).

Subsection 109ZB(3) prevents the employer contributions being included in the trust's assessable income as deemed dividends because they're made in respect of identified employees.

184.        Section 109C may apply to deem a dividend here. The employers are private companies - they appear to be artificial legal entities created under the Corporations Act, and don't fit in any of the categories of public companies. Each company will pay amounts to the trust when it makes yearly contributions under the ESS. The trust will use those contributions to acquire shares in the company. The trust will therefore be a shareholder in the company after it first subscribes. The trust won't be a shareholder at the time of the first contribution. But all subsequent contributions will be payments made by the company to the trust at a time when the trustee is a shareholder. The elements of subsection 109C(1) are met.

185.        There are exclusions preventing Division 7A applying to deem dividends in Subdivisions D and F. We list and apply list the excluding rules most relevant to this ruling in Table 2.

186.        We explain in the last row of Table 2 that subsection 109ZB(3) applies to prevent the company being taken to pay a dividend.

Table 2: Excluding rules in Subdivisions D and F

187.        It follows that Division 7A won't apply to treat employer contributions as dividends to the trustee, so they won't be included as dividends in the trustee's assessable income under section 44.

Conclusion: employer contributions won't be included in the trustee's assessable income.

188.        It follows that employer contributions won't be included in the trustee's assessable income. The amounts won't be ordinary income to the trustee because they're capital in the trustee's hands. Subsection109ZB(3) operates to exclude Division 7A from including the contributions in the trustee's assessable income as deemed dividends.

[1] Taxation Ruling TR 2010/6 Income tax, Pay As You Go Withholding, and fringe benefits tax: tax consequences on the issue, holding, and redemption of bonus units as part of an employee benefits trust arrangement.

[2] Section 83A-315 allows for regulations to determine the market value of ESS interests; the only ESS regulations are in Division 83A of the Income Tax Assessment Regulations 1997, which apply to unlisted rights that must be exercised within 15years.

[3] Macquarie Dictionary Publishers (2023) The Macquarie Dictionary online, accessed at https://www.macquariedictionary.com.au <entry for 'entitled'> accessed 13 July 2023.

[4] ATO Interpretative Decision ATO ID 2010/61 Income Tax: Employee share scheme: real risk of forfeiture - minimum term of employment and good leaver provisions.

[5] ATO (Nov 2018) 'ESS - Real risk of forfeiture', (QC 27240), accessed at https://www.ato.gov.au on 17 July 2023.

[6] Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence, or cease business.

[7] Taxation Determination TD 2016/18 Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (SA) assessable income of the worker?

[8] Parsons RW (1985) Income Taxation in Australia: Principles of Income, Deductibility, and Tax Accounting, Law Book Company Limited [2.7] p. 26.

[9] Parsons RW (1985) Income Taxation in Australia: Principles of Income, Deductibility, and Tax Accounting, Law Book Company Limited [2.7, 2.38, and 2.41] p. 26 and p. 36.

[10] Taxation Determination 2007/1 Income tax: consolidation: in working out the market value of the goodwill of each business of an entity that becomes a subsidiary member of a consolidated group, should the value of related party transactions of each business of the entity be recognised on an arm's length basis? at paragraphs 12 through 14.

[11] Taxation Determination TD 97/1 Income tax: property development: if land, originally acquired as a capital asset, is later ventured into a business of development, subdivision and sale, how is the market value of the land calculated at the time it is ventured into the business?

[12] ATO (Jun 2023) 'Capital gains tax: Market valuation of assets' (QC 66067) accessed at www.ato.gov.au on 18 July 2023.

[13] Repealed by Schedule 10 to the Corporate Collective Investment Vehicle Framework and Other Measures Act 2022 (No. 8 of 2022): see Item 9 for the application of amendment (first 1 July after the Royal Assent date, which was 22 February 2022).

[14] Decision impact statement on Sandini Pty Ltd atf the Karratha Rigging Unit trust & Ors v Ellison & Ors [2018] FCAFC 44; see also Jagot J's judgment in that decision at paragraph [93].

[15] See the Explanatory Memorandum (House of Representatives) Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 at paragraphs 1.203 and 1.204.

[16] Taxation Ruling TR 2018/7 Income tax: employee remuneration trusts.

[17] Taxation Determination TD 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an employee share scheme.

[18] ATO (Dec 2015), 'Deduction by employers' (QC 47634) and 'Share trusts' (QC 47636) both accessed at https:www.ato.gov.au on 17 July 2023.

[19] Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' timing of deductions.

[20] ATO (Dec 2015), 'Share trusts' (QC 47636) accessed at https:www.ato.gov.au on 17 July 2023.

[21] 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.

[22] Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages'.

[23] Taxation Ruling TR 2006/11 Private Rulings.

[24] ATO Interpretative Decision ATO ID 2002/965 Income Tax - trustee not assessable on employer contributions made to it under the employer's employee share scheme.

[25] Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the morning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number.