Edited version of private advice

Authorisation Number: 1052259904924

Date of advice: 21 June 2024

Ruling

Subject: Employee share scheme

Question 1

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

Answer

Yes.

Question 2

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

Answer

No.

Question 3

Will the irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition of Plan Shares constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 4

Will the provision of Plan Shares under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

This ruling applies for the following period:

Income tax year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

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

•         Company A Employee Benefits Plan Rules (Plan Rules), and

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

Company A XXX (Company A) is listed on the Australian Securities Exchange (ASX). Ordinary shares are the sole class of shares on issue.

Company A is the head company of the income tax consolidated group. The Company A group has foreign subsidiaries.

Company A Employee Benefits Plan

The Plan was established on 1 July 20YY to assist Company A to recruit, reward, retain and motivate its employees.

The Plan Rules are used to stipulate the terms under which the various awards are made to employees.

Under the Plan, eligible Australian employees can be offered an award which may consist of any number or type of security. A security includes the following:

•         a fully paid ordinary share in the capital of Company A (Plan Share)

•         an option (an option to receive a share by transfer or allotment granted to an employee under the Plan, subject to satisfaction of applicable conditions, including any vesting conditions, and compliance with any applicable exercise procedures) (Option)

•         a performance right (a conditional right to acquire one or more shares by transfer or allotment as set out in the relevant invitation to employees under the Plan) (Performance Right).

A security exercisable for Plan Shares in accordance with the Plan Rules, is defined as a convertible security in both the Plan Rules and Trust Deed (Convertible Security).

No awards will be offered to employees of foreign subsidiaries under the Plan, nor will the Company A Employee Share Plan Trust (the Trust) be used to satisfy awards to any foreign employees or for the provision of shares associated with the foreign subsidiaries.

The Plan broadly operates as follows:

•         the Company A Board (the Board) may from time to time determine that an employee may participate in the Plan. Participation in the Plan is voluntary, and no employee is required to participate in the Plan

•         an application to participate in the Plan must be made by the employee in accordance with the instructions that accompany the invitation, or in any other way the Board determines. By accepting the invitation, employees become participants in the Plan and are bound by the terms and conditions of the invitation, including the Plan Rules, and Company A's Constitution

•         Options and Performance Rights will be governed by the Plan until they lapse in accordance with the Plan Rules; or have vested and are exercised and allocated because of the exercise. Unless the Board determines otherwise, no payment is required for the grant of an Option or Performance Right. Options and Performance Rights are personal and may not be transferred or exercised by any other person except to the extent necessary to enable a participant's legal personal representative to exercise in accordance with the Plan Rules

•         The Board may determine in its full discretion that, in respect of some or all of a participant's vested Options or Performance Rights, instead of issuing Plan Shares or purchasing shares on market and transferring them, Company A will pay a cash amount to the participant equivalent to the market value of the shares (as determined by the Board) that would otherwise have been allocated to the participant

•         If the invitation provides that any Plan Shares are subject to any restrictions as to the disposal or other dealing by a participant for a period, the Board may implement any procedure it deems appropriate to ensure the compliance by the participant with this restriction, including but not limited to imposing an ASX Holding Lock (where applicable) on the Plan Shares or using an employee share trust to hold the Plan Shares during the relevant restriction period

•         For the avoidance of doubt, notwithstanding any other Plan Rule, a share allocated to a participant under the Plan may not be disposed of or otherwise dealt with by that participant at any time when the participant would be precluded from dealing in shares pursuant to Company A's internal regulations for dealings in its securities (including pursuant to the Company A's Securities Trading Policy, or otherwise as determined by the Board)

•         Unless otherwise stated in the invitation or determined by the Board, a Convertible Security which has not yet vested will be forfeited immediately on the date that the Board determines (acting reasonably and in good faith) that any applicable vesting conditions have not been met or cannot be met by the relevant date

•         Where a participant who holds Convertible Securities becomes a Leaver, all unvested Convertible Securities will automatically be forfeited by the participant, unless the Board otherwise determines in its discretion to permit some or all of the Convertible Securities to vest, subject to the Listing Rules

•         Subject to the terms of any Trust Deed (if applicable) or invitation, the participant is entitled to receive all dividends and other distributions or benefits payable to the Participant or to the Trustee in respect of the Plan Shares

•         Unless or until Plan Shares are allocated to a participant following vesting or exercise (as applicable) of their Convertible Securities, the participant has no interest in those shares in respect of which the Convertible Security was granted

•         Where, in the opinion of the Board, a participant acts fraudulently or dishonestly; or is in breach of his or her obligations to Company A, the Board may deem any unvested Securities held by the participant to have lapsed where unvested Securities have not lapsed automatically, or deem any vested Securities held by the participant to have lapsed where vested Securities have not been exercised, and

•         Where Plan Shares have been allocated to the participant following the exercise of Convertible Securities, the Board may appoint an officer of the company as the participant's agent and attorney to sell the Plan Shares and/or transfer those Plan Shares into the name of the company's nominee. Where any Plan Shares already allocated to the participant following the exercise of Convertible Securities have been sold by the participant, require the participant to pay to the company all or part of the proceeds realised on that sale.

If the Options or Performance Rights are cash settled, the cash settlement will not be actioned via the Trust, it will be actioned via Company A's payroll system as a cash bonus.

Company A Employee Share Plan Trust

The Trust was established for the sole purpose of obtaining shares for the benefit of participants under the Plan. The Trust Deed was executed on 1 July 20YY.

The Trust acquires shares on behalf of participants or in advance of allocating those shares to participants which are held by the Trust on an unallocated basis.

Broadly the Trust operates as follows:

•         Company A and the Trustee agree that, subject to the terms of the Trust Deed, the Trust has been established to be an employee share trust whose sole activities are consistent with subsection 130-85(4) of the ITAA 1997

•         Company A must provide the Trustee with any funds required to comply with its obligations. The Trustee is not required to acquire shares if it does not receive sufficient payment from Company A or if it does not have sufficient funds to do so out of the property of the Trust or if sufficient shares are not otherwise available for purchase

•         The Trust Assets, other than those referred to in the Trust Deed, and the unallocated Plan Shares, are to be held by the Trustee on trust for the participants to be nominated by Company A from time to time in accordance with the terms of the Trust Deed and the Plan Rules until the termination of the Trust under the Trust Deed or by operation of law

•         The Trustee agrees that in respect of each participant, the Plan Shares, the proceeds of sales arising from the sale of rights under a rights issue on behalf of that participant, and accretions and other Trust Assets related to or arising from Plan Shares held by the Trustee on behalf of the participant, will at all times, be held by the Trustee on Trust for and on behalf of each participant on the term of the Trust Deed and subject to the relevant Plan Rules

•         The Plan Trustee agrees that each participant is absolutely entitled to those allocated Plan Shares held by the Trustee on their behalf, all Trust Assets in respect of those allocated Plan Shares and all other benefits and privileges attached to or resulting from holding those Plan Shares. The Trustee agrees that it will deal with Plan Shares and any Trust Assets in respect of Plan Shares in accordance with the directions of Company A and will not be held liable for having acted on such information provided by Company A

•         The Trustee must not participate in any rights issue (not being by way of a bonus share issue) to acquire shares or securities in respect of the unallocated share without the express consent of Company A

•         Before the allocation or transfer the Trust Deed, the Plan Trustee must not exercise any voting rights in relation to the unallocated shares and is not permitted to pay income or accrued capital from unallocated Plan Shares to any employee who does not hold a beneficial interest in Company A under the Trust

•         The Trustee must establish and maintain a separate share account or record in respect of each participant

•         Nothing in the Trust Deed confers, or is intended to confer, on Company A any encumbrance, proprietary right or proprietary interest in the shares acquired by the Trustee under the Trust Deed, and at no time will Company A, or any related Body Corporate of Company A of the Trustee be entitled to obtain any beneficial interest in the Trust Assets, other than in respect of the Trustee's right of indemnity set out in the Trust Deed

•         Forfeiture of shares by a participant will result in the Plan Shares being held by the Trustee for the benefit of participants generally from time to time as though they were unallocated Plan Shares, or for the benefit of any company plan as directed by Company A

•         On termination of the Trust, the Trustee must wind up the Trust and transfer the allocated Plan Shares and all other benefits and privileges attached to or resulting from those allocated Plan Shares that are in the form of capital or income to the relevant participant in the manner as directed by Company A. The balance of the capital or income of the Trust to which no participant is entitled may be applied in whole or in part as the Trustee thinks fit, pursuant to the Trust Deed, and

•         Upon termination of the Trust, the Plan Trustee must not pay any balance under the Trust Deed to Company A or a company in the group.

Contributions to the Trust

Company A is the employer entity which provides contributions to the Trustee of the Trust to fund the subscription for, or acquisition of Plan Shares pursuant to the Plan Rules and Trust Deed. Company A will arrange for the Trustee to subscribe for newly issued shares or to purchase shares from existing shareholders so that the shares can be provided to participants in accordance with the Plan.

All funds received by the Trustee will constitute an increase to corpus, represented by Trust Assets, and no participant is entitled to receive these funds. Further, any contributions to the Trustee are irretrievable and under no circumstances may the Trustee repay to Company A or any company in the group, any amount received as contributions for the acquisition of shares (other than to subscribe for new shares as issued by the company).

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Subsection 177D(2)

Income Tax Assessment Act 1936 Section 177F

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 8-1(1)

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-B

Income Tax Assessment Act 1997 Section 83A-C

Income Tax Assessment Act 1997 Subsection 130-85(4)(a)

Income Tax Assessment Act 1997 Subsection 130-85(4)(b)

Income Tax Assessment Act 1997 Subsection 130-85(4)(c)

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)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(f)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(h)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(ha)

Reasons for decision

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

Question 1

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

Company A operates the Plan as part of its remuneration strategy and reward program for employees. Company A grants awards to participants and makes irretrievable contributions to the Trustee (in accordance with the Plan Rules and the Trust Deed) to fund the acquisition of Plan Shares by the Trust for allocation to participants.

Incurred in carrying on a business

Company A must provide the Trustee with all the funds required to act as requested. The contributions made by Company A are irretrievable and non-refundable to 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 an employee share trust in subsection 130-85(4).

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

Not capital or of a capital nature

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

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

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

Question 2

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 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 3

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax.

One benefit excluded from being a 'fringe benefit', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an employee share trust within the meaning of the ITAA 1997.

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

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

•         The Trust acquires shares in Company A, and

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

Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'?

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental.

As the activities listed in the Trust Deed are consistent with the requirements of subsection 130-85(4), including activities which the Commissioner considers are 'merely incidental' under paragraph 130-85(4)(c) (set out in paragraph 12 of TD 2019/13), it is considered that the Trust meets the definition of an employee share trust for the purposes of the ITAA 1997.

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

Question 4

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 (h) of subsection 136(1) of the FBTAA excludes the following from being a 'fringe benefit':

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

The Commissioner accepts that the Plan is an employee share scheme, the awards for Plan Shares provided under the Plan are ESS interests and that Subdivision 83A-C applies to those ESS interests.

Accordingly, the provision of awards under the Plan will not be subject to FBT on the basis that they are acquired by participants under an employee share scheme and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

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