Edited version of private advice

Authorisation Number: 1052269028153

Date of advice: 2 July 2024

Ruling

Subject: Employee share scheme

Question 1

Are irretrievable cash contributions made by Company A to the trustee of the Company A Employee Share Plan Trust (the Trustee) to fund the subscription for, or acquisition of Plan Shares by the Trustee to satisfy ESS interests pursuant to the Plan, deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to Company A at a time determined by section 83A-210 of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes.

Question 2

Will irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for, or acquisition of, Plan Shares to satisfy ESS interests issued by the Trustee under the Plan, be deductible to Company A under section 8-1 of the ITAA 1997 in the income year when the contributions are made, if the contributions are made in the same income year or in a year that is after the acquisition of the relevant ESS interests by participants?

Answer

Yes.

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 Ltd (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).

Reasons for decision

Question 1 and 2

Company A is entitled to deduct an amount under section 8-1 in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or on-market acquisition of Plan Shares to satisfy the issue of ESS interests under the Plan.

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

The effect of section 83A-210 is to deem the time an employer incurred the outgoing to be the time the ESS interest is acquired by the beneficiary, rather than the time the employer makes the contribution to the trust ( ATO Interpretative Decision ATO ID 2010/103 Income tax - Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust).

The Plan is an employee share scheme for the purpose of subsection 83A-10(2) as it is a scheme under which ESS interests are provided to employees in relation to their employment. Company A makes irretrievable cash contributions to the Trustee to enable the Trustee to acquire Plan Shares for the purpose of enabling each participant, indirectly as part of the Plan, to acquire ESS interests.

In circumstances where contributions are made by an employer at a time other than before the employee acquires the ESS interest, section 83A-210 has no application and the general rule under section 8-1 applies to determine the income year in which the amount is deductible.

Therefore, irretrievable cash contributions made after the employee acquires the ESS interests under the Plan are deductible in the income year in which the contributions are made provided the Performance Rights or Options are satisfied by provision of shares so that section 83A-340 operates to treat the Performance Rights or Options as always having been an ESS interest.

Indeterminate rights

As Performance Rights or Options provided under the Plan can be settled by payment of a cash equivalent amount, at the time the Performance Rights or Options are acquired by the employee, they are not rights to acquire a beneficial interest in a share, but are indeterminate rights pursuant to section 83A-340.

Once the Board determines that it will not exercise its discretion to pay a cash equivalent amount but will satisfy the Performance Rights and Options by Plan Shares, section 83A-340 will operate to treat the indeterminate right as if it had always been a right to acquire a beneficial interest in shares, and therefore an ESS interest for the purposes of section 83A-210.

If an indeterminate right becomes an ESS interest, deductible contributions made in respect of those rights can be claimed in the income year when the ESS interest is deemed to have been acquired under section 83A-340 (this will be the year in which the indeterminate right was granted to an employee). Once this has been established, such contributions can be matched to ESS interests issued to the employee, and where necessary, the relevant earlier income year assessments can be amended to allow the deduction (Item 28 of subsection 170(10AA) of the Income Tax Assessment Act 1936).

It is important to note that an indeterminate right which is satisfied by the provision of cash never becomes an ESS interest and the irretrievable cash contribution to the Trust in respect of the provision of that right is permanently deferred. However, where that ESS interest is subsequently issued to another participating employee, this employee becomes the 'ultimate beneficiary' and the deduction is available in the income year the participating employee acquired this ESS interest.

If irretrievable cash contributions are provided to the Trustee before these rights are acquired (and they do subsequently become ESS interests by virtue of section 83A-340), section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1 to be the income year in which participants originally acquired the Performance Rights or Options under the Plan.