Edited version of private advice

Authorisation Number: 1052256202087

Date of advice: 27 June 2024

Ruling

Subject: Employee share scheme

Will Company A obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for or acquisition from other shareholders of Company A shares by the Trust?

Answer

Yes.

Question 2

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

Answer

Yes.

Question 3

Will Company A obtain an income tax deduction under section 25-5 of the ITAA 1997 in relation to tax advisor fees on the implementation and ongoing operation of the Trust?

Answer

Yes.

Question 4

Will irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition from other shareholders of Company A shares by the Trust, be deductible to Company A at the time the contribution is made as determined by section 8-1 of the ITAA 1997?

Answer

Yes.

Question 5

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

Answer

No.

Question 6

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for or acquisition from other shareholders of Company A shares by the Trust?

Answer

No.

Question 7

Will the Deferred Payment constitute an amount paid in exercising the right in calculating the market value of the Awards under Division 83A of the ITAA 1997, for the purposes of determining Company A's reporting obligations under Division 392 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No.

Issue 2 Employee share scheme - fringe benefits tax

Question 8

Will the provision of the following be a Fringe Benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA):

(a)  provision of Awards under the Plan?

(b)  provision of Shares in satisfaction of the exercise of the Awards?

Answer

(a)  No.

(b)  No.

Question 9

Will the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition from other shareholders of Company A shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA?

Answer

No.

Question 10

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company A and other employer entities within Company A by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition from other shareholders of Company A shares?

Answer

No.

This ruling applies for the following period:

Questions 1 - 7:

Income year ended 30 June 20XX

Questions 8 - 10:

Income year ended Fringe Benefits Tax (FBT) year ended 31 March 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Company A is an unlisted Australian private company. Company A is seeking to implement an employee share plan (Plan).

The Plan is part of Company A's remuneration strategy and aims to ensure the long-term creation of value in Company A by:

•         Rewarding eligible participants (Participants) with options granted by Company A (Awards). Each Award represents a right to be issued a special class of share in the capital of Company A (Shares), subject to the terms of the Plan and the terms and conditions on which they are invited to participate in the Plan (Invitation).

•         Assisting with the retention of key talent personnel.

A Trust has been established in accordance with the terms of the Trust Deed to facilitate the implementation of the Plan.

Awards

•         The Plan will operate under the rules stated in the Plan.

Deferred Payment

The Participant must pay the Deferred Payment at a time when certain conditions are met.

The amount of the Deferred Payment will be specified in the Invitation., The Invitation also states 'you may exercise that Award for nil consideration...' It goes on to say 'To avoid doubt, the Plan Shares granted to you will be subject to Deferred Payment...'

The Deferred Payment will not be required to be made if stated in the Invitation or determined by the Board in its absolute discretion.

If the Participant does not make the Deferred Payment within the specified timeframe, the Shares may be forfeited in accordance with the Plan. The Awards and Shares may also be forfeited in certain situations such where the Participant becomes a leaver, and other actions of the Participant, such as the failure to satisfy certain conditions, fraudulent or dishonest actions, insolvency or other similar events.

Where the shares are forfeited, the Participant must surrender ownership of the shares for an amount equal to the Forfeiture Value.

A Participant is restricted from disposing of the Plan Shares, unless it is in accordance with the Plan, the Invitation, the Constitution or any Shareholders Agreement. The Invitation states that the Plan Shares cannot be disposed of until an Exit Event is likely to occur. If the Exit Event is an Initial Public Offering (IPO), the Participant is prevented from disposing of the Plan Shares until the second anniversary of the date of completion of the IPO.

Employee Share Trust

The Trust will be established to facilitate opportunities to align the interests of employees with the future growth and profitability of Company A and to administer the current and any future employee incentive plans by Company A for the benefit of Participants of the Plan.

The Trust will be used to facilitate the acquisition of Shares acquired by Participants. The Trust will have the additional role of acquiring other Shares following vesting/exercise of the Awards.

The trustee of the Trust will be an independent third party (Trustee).

The Trust will operate as outlined in the Trust Deed.

Timing of contributions

Company A will not provide cash contributions to the Trust prior to the grant of Awards. More typically, Company A will wait until receipt of the exercise notice from Participants before providing the Trust with the cash necessary to acquire Shares to satisfy the acquisition / subscription of shares related to those Awards. Accordingly, the contribution is made in respect of a particular Company A employee.

Use of the Trust to facilitate the Plan

It is intended that the Trust will be used to hold Shares for employees of Company A pursuant to the Plan.

In summary, some of the commercial benefits of using the Trust include:

•         Provides capital management assistance and flexibility for Company A.

•         Gives effect to disposal restrictions on the Shares allowing key shareholders to keep control over Company A ownership by preventing the disposal of shares to third parties.

•         Greater flexibility for Company A to accommodate the long-term incentive arrangements both now and into the future for different employee and executive groups as Company A continues to expand operations and therefore employee numbers.

•         Providing an external vehicle through which Shares in Company A can be acquired and possibly held on behalf of the relevant Participant. This assists Company A to satisfy corporate law requirements relating to a company dealing in their own shares.

•         Enables the implementation of the Plan in line with the Group's policies on employee share plans.

Costs

It is anticipated that Company A will directly incur the tax advisor costs relating to the implementation and other ongoing administration costs in relation to the Trust, including but not limited to:

•         Employee plan record keeping

•         Production and dispatch of holding statements to Participants

•         Costs incurred in the acquisition of Shares from other shareholders, such as brokerage costs and the allocation of such shares to Participants, and

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

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177A(5)

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 section 177CB

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(1)

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1936 subsection 177F(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 8-1(2)

Income Tax Assessment Act 1997 section 8-10

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 Subsection 20-20(2)

Income Tax Assessment Act 1997 Subsection 20-20(2)

Income Tax Assessment Act 1997 section 25-5

Income Tax Assessment Act 1997 subsection 25-5(1)

Income Tax Assessment Act 1997 subsection 25-5(4)

Income Tax Assessment Act 1997 subdivision 83A-C

Income Tax Assessment Act 1997 subdivision 83A-B

Income Tax Assessment Act 1997 subsection 83A-10(1)

Income Tax Assessment Act 1997 subsection 83A-10(2)

Income Tax Assessment Act 1997 section 83A-15

Income Tax Assessment Act 1997 subsection 83A-35

Income Tax Assessment Act 1997 section 83A-100

Income Tax Assessment Act 1997 section 83A-205

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 83A-315

Income Tax Assessment Act 1997 section 104-35(5)(c)

Income Tax Assessment Act 1997 section 104-155(5)(c)

Income Tax Assessment Act 1997 subsection 130-85(4)

Income Tax Assessment Act 1997 subsection 974-75(1)

Income Tax Assessment Regulations (ITAR) 1997 regulation 83A-315.01

Income Tax Assessment Regulations (ITAR) 1997 regulation 83A-315.02

Income Tax Assessment Regulations (ITAR) 1997 regulation 83A-315.03

Income Tax Assessment Regulations (ITAR) 1997 regulation 83A-315.05

Income Tax Assessment Regulations (ITAR) 1997 regulation 83A-315.08

Income Tax Assessment Regulations (ITAR) 1997 regulation 83A-315.09

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Taxation Administration Act 1953 Division 392 of Schedule 1

Taxation Administration Act 1953 section 392-5 of Schedule 1

Taxation Administration Act 1953 subsection 392-5(3) of Schedule 1

Taxation Administration Act 1953 subsection 392-5(4) of Schedule 1

Taxation Administration Act 1953 subsection 392-5(2) of Schedule 1

Taxation Administration Act 1953 subsection 392-10(1) of Schedule 1

Taxation Administration Act 1953 section 392-15 of Schedule 1

Reasons for decision

Question 1

Summary

Company A will obtain an income tax deduction pursuant to section 8-1 of the ITAA 1997 in respect of the irretrievable cash contributions made to the Trustee to fund the subscription for or acquisition from other shareholders of Company A shares by the Trust.

Detailed reasoning

A deduction is allowable under subsection 8-1 of the ITAA 1997 for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, pursuant to subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature.

Company A carries on a business and intends to operate an employee share scheme (ESS) as part of its remuneration strategy.

Under the Plan, Company A will grant Awards to employees and make irretrievable contributions to the Trust in accordance with the Plan and the Trust Deed which the Trustee will use to acquire Shares (either from an existing shareholder or by subscription) for allocation to Participants to satisfy their rights.

Incurred in carrying on a business

Company A must provide the Trustee with all the funds required to act as requested under the Trust Deed.

The contributions made by Company A are irretrievable and non-refundable to Company A in accordance with the Trust Deed as all funds provided by Company A are not repayable. The Trustee may only carry out activities that constitute the management of an ESS plan in accordance with the Trust Deed.

Additionally, the Trustee agrees that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' contained in subsection 130-85(4).

Company A will grant Awards under the Plan as part of its remuneration and reward program for Participants. The costs incurred by Company A for the acquisition of Shares to satisfy the Awards that arise as part of these remuneration arrangements, and contributions to the Trust, are part of an on-going series of payments in the nature of remuneration to its employees.

Not capital or of a capital nature

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

While the contributions may secure an enduring or lasting benefit for the employer that is independent of the year-to-year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be sufficiently small. Therefore, the payments are not capital, or of a capital nature.

Accordingly, Company A will be entitled to deduct an amount under section 8-1 of the ITAA 1997 for irretrievable cash contributions it makes to the Trustee of the Trust to acquire Shares to satisfy the Awards issued pursuant to the Plan.

Question 2

Summary

Company A will obtain an income tax deduction under section 8-1 of the ITAA 1997 in relation to costs associated with the on-going administration of the Trust.

Detailed reasoning

As discussed above in Question 1, section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income, except where the outgoings are of a capital nature.

Company A carries on a business of the provision of lending and finance solutions to self-employed borrowers. Company A plans to operate an ESS as part of its remuneration strategy.

Company A will incur on-going administration costs associated with the services provided by the Trustee in respect of the Plan. Under the Trust Deed, Company A must also pay all costs associated with the administration of the Trust.

The costs are regular and recurrent, and are necessarily incurred by Company A in administering the ESS while carrying on its business for the purpose of gaining or producing its assessable income. For this reason, they are also not capital in nature.

Accordingly, Company A will be entitled to deduct an amount under section 8-1 of the ITAA 1997 in respect of the costs incurred in relation to the on-going administration of the Trust.

This view is consistent with Taxation Determination TD 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an employee share scheme which states at paragraph 10 that ongoing expenses associated with the administration of the ESS are deductible under section 8-1 of the ITAA 1997.

Question 3

Summary

Company A will obtain an income tax deduction under section 25-5 of the ITAA 1997 in relation to tax advisor fees on the implementation and ongoing operation of the Trust.

Detailed reasoning

Section 8-10 of the ITAA 1997 states that if more than one income tax deduction provision applies to an amount, the most appropriate provision should be used (i.e. the specific provision should override the general provision).

Division 12 of the ITAA 1997 sets out particular types of deductions that are dealt with by a specific provision of either the ITAA 1936 or the ITAA 1997. Section 25-5 of the ITAA 1997 is one such provision listed in Division 12 dealing with tax-related expenses.

Subsection 25-5(1) of the ITAA 1997 allows a deduction for tax-related expenses, including managing your tax affairs.

Subsection 25-5(4) of the ITAA 1997 denies deductions under section 25-5(1) for capital expenditure. It further states that expenditure will not be considered capital merely because the tax affairs concerned relate to matters of a capital nature.

Under the Trust Deed, Company A must pay all costs associated with the administration of the Trust, which would include tax advisor fees.

To the extent Company A incurs costs in managing its tax affairs, Company A will be entitled to deduct these expenses under subsection 25-5(1) of the ITAA 1997.

Question 4

Summary

The irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition from other shareholders of Company A shares by the Trust, will be deductible to Company A at the time the contribution is made as determined by section 8-1 of the ITAA 1997.

Detailed reasoning

As determined in question 1, Company A will be entitled to deduct an amount under section 8-1 of the ITAA 1997 for irretrievable cash contributions it makes to the Trustee of the Trust to acquire Shares to satisfy the Awards issued pursuant to the Plan.

It is often the case that an outgoing will be both incurred and paid in the same year of income, and as such, the amount is deductible in that income year for the purposes of section 8-1 of the ITAA 1997.

However, section 83A-210 of the ITAA 1997 applies to determine the timing of the deductions, but only in respect of the cash contributions provided to another entity to purchase shares in excess of the number required to grant the relevant ESS interest to the ultimate beneficiary arising in the year of income under an ESS. 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 Interpretive Decision ATO ID 2010/103 Income Tax - Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

The Plan is an ESS for the purposes of subsection 83A-10(2) of the ITAA 1997, as it is a scheme under which beneficial interests in Company A shares (which are ESS interests under subsection 83A-10(1)) are granted to employees as a result of their employment.

The Plan contains a number of interrelated components which includes the provision of irretrievable cash contributions by Company A to the Trustee. These contributions enable the Trustee to acquire Company A shares for the purpose of enabling each participant, indirectly as part of the Plan, to acquire ESS interests.

The deduction for the irretrievable cash contribution can only be deducted from the assessable income of Company A in the income year when the relevant beneficial interest in a share in Company A is acquired by a participant under the Plan.

Question 5

Summary

If the Trust satisfies its obligation under the Plan by subscribing for new shares in Company A, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or 20-20 of the ITAA 1997, nor trigger a CGT event under Division 104 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997

Section 6-5 of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

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

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

This view is supported by the reasoning in ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee.

When Company A receives subscription proceeds from the Trustee where the Trustee has subscribed to new Shares to satisfy obligations to Participants, those subscription proceeds received are a capital receipt and will not be treated as ordinary income under section 6-5 of the ITAA 1997.

Section 20-20 of the ITAA 1997

Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year.

Company A will receive an amount for the subscription of the Shares by the Trustee. There is no insurance contract in this case, so the amount is not received by way of insurance. The amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. Therefore, the receipt of the subscription proceeds does not constitute an assessable recoupment under subsection 20-20(2) of the ITAA 1997.

Subsection 20-20(3) of the ITAA 1997 provides that an amount received by you as a 'recoupment' of a loss or outgoing, except by way of insurance or indemnity, is an 'assessable recoupment' if you can deduct the loss or outgoing in the current or a prior income year because of a provision listed in the table in section 20-30.

None of the provisions listed in section 20-30 of the ITAA 1997 are relevant to the current circumstances. Therefore, the subscription amount also does not constitute an assessable recoupment under subsection 20-20(3).

Division 104 of the ITAA 1997

A capital receipt will be included as an assessable net capital gain only if it arises as a result of a CGT event (section 102-20 of the ITAA 1997).

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) or both.

Paragraphs 104-35(5)(c) and 104-155(5)(c) of the ITAA 1997 respectively provide that CGT event D1 and CGT event H2 do not apply if a company issues or allots equity interests or non-equity shares in the company.

As the Company A Shares constitute an 'equity interest' (see subsection 9-75(1) of the ITAA 1997), neither CGT event D1 nor CGT event H2 will occur.

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

Question 6

Summary

The Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for or acquisition from other shareholders of Company A shares by the Trust.

Detailed reasoning

Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, 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 Company A to obtain a tax benefit.

Question 7

Summary

The Deferred Payment will not constitute an amount paid to exercise the right in calculating the market value of the Awards under Division 83A of the ITAA 1997, for the purposes of determining Company A's reporting obligations under Division 392 of Schedule 1 to the TAA.

Detailed reasoning

Division 392 of Schedule 1 to the TAA

Section 392-5 of Schedule 1 to the TAA requires an entity (the provider) to give a statement to the Commissioner and to an individual if they provide ESS interests to the individual for a financial year and Subdivisions 83A-B or 83A-C of the ITAA 1997 apply to the interest in the following circumstances:

• if the provider provides ESS interests to the individual during the year and Subdivisions 83A-B or 83A-C of the ITAA 1997 apply to the interests, or
• if a provider provided ESS interests to the individual during the year, or an earlier year, Subdivision 83A-C of the ITAA 1997 applies to the interests and an ESS deferred taxing point for the ESS interests occurs during the year.

Relevantly, Subdivision 83A-C applies to participants, if at the time they acquired the ESS interests, the Plan genuinely restricted them from immediately disposing them (subsections 83A-105(1) and (6)).

Subsection 392-5(2) of Schedule 1 to the TAA provides that the statement must be in the approved form. Subsection 392-5(3) provides a list of information that may be required to be disclosed within the approved form.

When paragraph 392-5(1)(b) of Schedule 1 to the TAA applies, paragraph 392-5(3)(e) lists information the provider is to provide which includes:

• The amount paid, after the time of acquisition but not after the ESS deferred taxing point.
• The providers estimate of the market value of the interest at the ESS deferred taxing point.

The note to subsection 392-5(3) of Schedule 1 to the TAA states:

Regulations made for the purposes of section 83A-315 of the ITAA 1997 may substitute different amounts for the market values of the ESS interests: see section 392-15 in this Schedule.

Section 392-15 of Schedule 1 to the TAA states that specific provisions of the ITAA 1997 have effect for the purposes of this Division in the same way as they have for the purposes of Division 83A of that Act. Paragraph 329-15(c) specifies section 83A-315 of the ITAA 1997, which is about market values and discounts.

Section 83A-315 of the ITAA 1997 provides that if the regulations specify an amount in relation to an ESS interest, that amount should be used instead of the market value of the interest. To avoid doubt, this rule also applies to the market value component of any calculation for the purposes of Division 83A, such as whether there is a discount given in relation to the interest and any amount of the discount.

Regulations in Part 2-40 of the Income Tax Assessment (1997 Act) Regulations 2021 (ITAR 1997)

Regulations 83A-315.01 to 83A-315.09 in Part 2-40 of the ITAR 1997 apply when valuing unlisted rights to acquire shares under an ESS for the purposes of Division 83A of the ITAA 1997.

Subregulation 83A-315.01(1) provides that for the purposes of subsection 83A-315(1) of the ITAA 1997, the amount specified in relation to an ESS interest that is an unlisted right that must be exercised within 15 years after the day when the beneficial interest in the right was acquired is, at the choice of the individual:

(a)  the market value of the right,

(b)  or the amount determined by the application of regulations 83A-315.02 to 83A-315.09.

Regulation 83A-315.03 of the ITAR 1997 states that if the lowest amount that must be paid to exercise the right to acquire the beneficial interest in a share is nil or cannot be determined, the value of the right on a particular day is the same as the market value of the share on that day.

Approved Form

The ATO approved form 'Employee share scheme statement' requires reporting of the 'Discount from taxed up front schemes' and the 'Discount from deferral schemes'.

For deferral schemes (Subdivision 83A-C), the discount is equal to the market value of the ESS interests at the ESS deferred taxing point, reduced by the cost base of the interests.

When an amount 'must be paid to exercise the right'

The ITAR 1997 refers to an amount that 'must be paid to exercise the right'.

The requirement to pay the Deferred Payment only becomes due and payable within 30 days of either of two future events. That is, there will not be a presently existing liability to make the Deferred Payment until after the rights are exercised. At that time, the obligation to make the Deferred Payment is merely impending.

The Deferred Payment is not required to acquire the Awards or to exercise them.

Therefore, the Deferred Payment will not constitute an amount that must be paid to exercise the right in calculating the market value of the Awards under Division 83A of the ITAA 1997, for the purposes of determining Company A's reporting obligations under Division 392 of Schedule 1 to the TAA.

Instead, the amount, or lowest amount, that must be paid to exercise the right will be nil. In accordance with regulation 83A-315.03 of the ITAR 1997, the market value of the right will be the market value of the relevant share on that particular day.

Issue 2 - fringe benefits tax

Question 8

Summary

a)    The provision of Awards (options or rights) for Company A shares under the Plan will not be subject to FBT on the basis that they are acquired by Participants under an ESS (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

b)    When Awards (options or rights) are later exercised, they will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the Award and not in respect of employment.

Detailed reasoning

Section 66 of the FBTAA assigns an employer's liability to FBT and provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax.

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

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

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

It is accepted that the relevant Plan is an ESS, the rights or options provided under the respective Plan are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of Awards (options or rights) for Company A shares under the Plans will not be subject to FBT on the basis that they are acquired by Participants under an ESS (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

When Awards (options or rights) are later exercised, they will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the Award and not in respect of employment.

Question 9

Summary

The cash contribution made by Company A to fund the subscription for or acquisition from other shareholders of Company A Lending Solutions shares by the trustee will not be a fringe benefit on the proviso the Trustee administers the Trust according to the terms of the Trust Deed.

Detailed reasoning

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

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

In particular, paragraph (ha) of the 'fringe benefit' definition excludes a benefit constituted by the acquisition of money or property by an employee share trust within the meaning of subsection 130-85(4) of the ITAA 1997.

In examining whether the requirements of subsection 130-85(4) of the ITAA 1997 are met, it is the activities of the trustee in relation to a particular trust that is relevant. To qualify as an employee share trust, a trustee's activities must be limited to those described in paragraphs 130-85(4)(a), (b) and (c).

Paragraph 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

• The Trust acquires shares in a company, namely Company A; and
• The Trust ensures that ESS interests as defined in subsection 83A-10(1) (being options or rights in the Plans) are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Deed and the Plan.

The Trust will satisfy the definition of an "employee share trust" as defined above, and in particular, it will satisfy the sole activities test given the terms of the Trust Deed, and that the Trust will not engage in any activities which the Commissioner has expressed do not satisfy the sole activities test.

Provided the Trustee administers the Trust according to the terms of the Trust Deed, the activities of the Trust will be an "employee share trust", as defined in subsection 130-85(4) of the ITAA 1997.

The cash contribution made by Company A to fund the subscription for or acquisition from other shareholders of Company A shares by the trustee will not be a fringe benefit.

Question 10

Summary

The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount by the amount of the tax benefit gained from the irretrievable contribution made to the Trustee of the Trust to fund the acquisition of Company A shares under the scheme.

Detailed reasoning

Section 67 of the FBTAA involves arrangements to avoid or reduce FBT. Essentially, it is the general anti-avoidance provision in the FBTAA and its operation is comparable to Part IVA of the ITAA 1936, in that the section requires the identification of an 'arrangement' and a 'tax benefit', includes a sole or dominant purpose test, and is activated by the making of a determination by the Commissioner.

As determined at question 9 above, the irretrievable cash contributions made by Company A to the Trustee do not constitute fringe benefits within the meaning of subsection 136(1) of the FBTAA, nor would the granting of ESS interests (or cash payments) to Participants under the Plan, if an employee share trust was not used. Therefore, there is no tax benefit as the fringe benefits liability is not any less than it would have been, but for the existence of the arrangement (nil FBT liability).

Therefore, the Commissioner will not seek to make a determination that section 67 of the FBTAA applies to the scheme.