Edited version of private advice

Authorisation Number: 1052292556133

Date of advice: 19 August 2024

Ruling

Subject: Employee share schemes

Question 1

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 of Company A Employee Share Scheme Trust (Trust) to fund the subscription for or acquisition on-market of Company A shares by the Trust to satisfy Performance Rights (Rights as defined in the relevant facts and circumstances) issued under the Company A Plan Rules (Plan Rules)?

Answer

Yes.

Question 2A

Will Company A obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by Company A in relation to the on-going administration of the Trust?

Answer

Yes.

Question 2B

Will Company A obtain an income tax deduction, pursuant to section 25-5 of the ITAA 1997, in respect of costs incurred by Company A in relation to managing the tax affairs of the Trust?

Answer

Yes.

Question 3

Will irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A shares by the Trust to satisfy Rights issued under the Plan Rules, be deductible 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 4

If the Trust satisfies its obligation under the Plan Rules 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 5

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 on-market of Company A shares by the Trust to satisfy Rights issued under the Plan Rules?

Answer

No.

Question 6

Will the provision of Rights or shares by Company A to employees under the Plan Rules be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No.

Question 7

Will the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A shares under the Plan Rules, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer

No.

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to the Employer Entities 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 on-market of Company A shares under the Plan Rules?

Answer

No.

This ruling applies for the following periods:

For Questions 1 to 5:

1 July 20XX to 30 June 20XX

For Questions 6 to 8:

1 April 20XX to 31 March 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.    Company A is an ASX listed company which listed on the ASX on XX MONTH 20XX.

2.    Company A carries on a business in Australia.

3.    Company A has established a remuneration strategy that supports and drives the achievement of Company A's business strategy.

4.    At Company A, the remuneration of executives is evaluated against comparative positions in similar companies and industries. The remuneration of executives at Company A is comprised of the following elements:

(a)          Fixed remuneration, which includes base pay and other benefits; and

(b)          Performance linked remuneration, which consists of:

a.            Short term incentives (part cash and part Performance Rights issued under the Plan Rules); and

b.            Long term incentives (Performance Rights issued under the Plan Rules).

5.    In 20XX, the Board approved the adoption of the Plan to allow the delivery of the new Short term incentives and Long term incentives awards. The Plan is administered in accordance with their terms as summarised below.

Company A Executive Incentive Plan

6.    The Plan is designed to be flexible and allows the Board to offer employees (Participants) a range of awards as described in the Plan Rules.

7.    Broadly, the Plan operates as follows:

a)            The Board in its absolute discretion may offer the following (Awards) to Employees (Rule XX):

a.            Options (Rule XX)

b.            Performance Rights (Rule XX)

c.            Service Rights (Rule XX)

d.            Deferred Share Awards (Rule XX)

e.            Exempt Share Awards (Rule XX)

f.             Cash Rights (Rule XX)

g.            Stock Appreciation Rights (Rule XX)

b)            Each offer to the Employees must be documented in writing in an Invitation Letter (Rule XX). Broadly, the Invitation Letter will outline the following amongst other terms:

a.            Name and address of the Participant;

b.            Type of Award(s) being offered;

c.            Number of Award(s) being offered;

d.            Vesting conditions (if any);

e.            Issue Price and/or Exercise Price (if any);

f.             Expiry Date (if any); and

g.            Restriction Period (if any).

c)            For the avoidance of doubt, the offer of an Award may only be accepted by the Employee to whom the offer is made (Rule XX).

d)            Once the employee has received the invitation, the employee may accept participation in the Plan on the terms described in that Invitation in any manner as described in Rule XX.

e)            As soon as reasonably practicable following the receipt of acceptance of an invitation (subject to Rules XX and XX), the Company will issue the relevant Awards to the Employee (Rule XX).

f)             Participation in the Plan does not give the Participant a legal or beneficial interest in a Share prior to its allocation to the Participant, not any entitlement to a Share, otherwise than in accordance with the Offer and the Plan Rules (Rule XX).

g)            The Awards may be subject to vesting conditions, as set out in the Invitation Letter. In order for the Rights to vest and subsequently be exercised, these vesting conditions must be satisfied or otherwise waived by Company A (Rule XX and XX).

h)            If the vesting conditions specified in the Offer are not wholly satisfied or waived in accordance with the Plan Rules, the Participant's rights in relation to the relevant Award will lapse except to the extent otherwise provided by the Offer or unless the Board determines otherwise, and the Participant will be treated as having never held any right or interest in the lapsed Award. (Rule XX)

i)              A Participant is, subject to Rule XX, entitled to exercise an Award on or after the Vesting Date and any exercise must be for a minimum number or multiple of Shares specified in the terms of the Offer. (Rule XX).

j)              The vested Awards will not be automatically exercised unless it is otherwise specified in the Invitation Letter (Rule XX). The Participant will be required to deliver an Exercise Notice to the Company in the manner as described in Rule XX before any vested Awards can be exercised by the Participant. Any vested Awards not exercised by the Expiry Date will automatically lapse.

k)            If the Board determines it is not appropriate to issue or transfer Shares and instead of issuing or transfer Shares as required upon the exercise of an Award by a Participant, Company A may make a cash payment to the Participant equivalent to the Fair Market Value as at the date of exercise of the Award (less any unpaid Exercise Price applicable to the exercise of the Award) multiplied by the relevant number of Shares required to be issued or transferred to the Participant upon exercise of the Award (Rule XX).

l)              The Shares issued under the Plan will receive dividend and voting rights and rank equally with the existing issued Company A ordinary shares at the time of allotment (Rule XX).

m)           Company A may, in its discretion, either issue new Shares or cause existing Shares to be acquired or a combination of both, to be transferred to the Participant to satisfy the Company's obligations under the Plan (Rule XX). The Company A Shares may be acquired by an appointed trustee that may subscribe for or acquire and hold Company A Shares, Options, and other Company A securities either on behalf of the Participants or for the purposes of the Plan (Rule XX).

n)            Any Plan Shares allotted and issued, or transferred by Company A to a Participant will rank equally with all existing Shares on and from the date of issue or transfer (Rule XX). A Participant may exercise any voting rights attaching to Plan Shares registered in the Participant's name (Rule XX).

o)            In the event of a Change of Control, the Board will have the absolute discretion to deal with all unvested and vested Awards in any manner, including the extent to which the Vesting Conditions will be waived, the number of unvested Awards to be retained, and the extent to which the original Awards are to be replaced by new Awards (Rule XX).

8.    Since 20XX, Company A has offered Performance Rights to a number of Executive employees. As of the date of application, Company A expects Performance Rights to be offered on an annual basis and is unlikely to offer other types of Awards under the Plan. Performance Rights may be offered under the Plan as a long term incentive and/or short term incentive.

Performance Rights

9.    The Performance Rights (Rights) offered under the Plan are rights over shares in Company A for nil consideration. In order to receive shares, the Participant must satisfy the Vesting Conditions specified in their Invitation Letter. On the basis that these have been satisfied, the Participant will be entitled to shares in the company. On exercise of the vested Rights (nil exercise price), the shares may be acquired and held in the Trust on behalf of the Participant. The Participant can then apply to have the shares sold or withdraw the shares from the Trust.

10.  Broadly, the Rights offered under the Plan operate according to the Plan Rules and as follows:

1)            The Rights are Restricted Awards until they are exercised or expired (Rule XX). Therefore, the Participant is not permitted to sell, transfer, mortgage, pledge, charge, grant security over or otherwise dispose of any Rights that have not been exercised during the Restriction Period, unless the Board determines otherwise. (Rule XX).

2)            To ensure the Restricted Awards are not disposed of during the Restriction Period, Company A may implement any procedures it considers appropriate including applying a holding lock in respect of the Shares (Rule XX).

3)            The Rights will generally be issued to Participants for nil consideration and have a nil exercise price.

4)            The exercise of Rights may be subject to Vesting Conditions, as set out in the Invitation. These Vesting Conditions may typically include performance conditions and service condition. The Rights will only vest if the Vesting Conditions are met.

5)            If the Participant's employment with Company A is terminated before the Rights are vested, the number of unvested Rights that will vest will generally be determined as follows:

a.            In the case of resignation or termination with cause, all Rights will lapse;

b.            In the case of retrenchment or redundancy, a pro-rata number of Rights will vest as determined in accordance with the following formula: Number of days from grant date to termination date divided by number of days from grant date to vesting date multiplied by number of Rights issued; and

c.            In the case of death or permanent disability, the Board has sole discretion over the number of Rights that will vest.

6)            A Participant has no dividends or voting rights until vested Rights have been exercised and the shares to which the Rights relate have been registered in the name of the Participant.

7)            Rights and/or Shares held by the Trustee on the Participant's behalf will be forfeited and cease to exist in the following instances:

a.            Where unvested Rights do not become vested Rights by the end of the applicable vesting period, or if the Board determines that vesting conditions are incapable of being satisfied by the end of the vesting period.

b.            In the event of misconduct (such as fraud, defalcation or gross misconduct), the Board may determine that a Participant's Rights (whether vested or unvested) and/or Shares held in the Trustee are forfeited.

c.            If a Participant is ineligible to hold their office for the purposes of Part 2D.6 of the Corporations Act, the Participant shall forfeit their Rights (whether vested or unvested) and/or Shares held in the Trustee.

d.            Where any of the events detailed in clause XX of the Clawback Policy in relation to the Plan occur. This stipulates that in the events contemplated by this clause, unvested Rights and/or unexercised Rights will be forfeited for no consideration or compensation.

Company A Employee Share Scheme Trust

11.  The Trust was established in MONTH 20XX as a sole purpose trust for the purpose of acquiring, allocating, holding and transferring shares in connection with equity incentive plans established by Company A for the benefit of Participants in those plans.

12.  The Trustee of the Trust is an independent third party.

13.  The Trust Deed was originally executed on X MONTH 20XX. Parties to the Trust Deed are Company A and the Trustee.

14.  A Deed of Variation was executed on X MONTH 20XX which varied the Trust Deed by replacing clause XX of the Trust Deed.

15.  A further Deed of Variation was executed on X MONTH 20XX. The Deed of Variation removed clause XX of the Trust Deed.

16.  The term Trust Deed (for the purposes of this ruling) refers to the Company A Trust Deed dated X MONTH XX amended by the Deeds of Variation (Trust Deed).

Operation of the Trust

17.  Broadly, the Trust operates as follows:

•         The Trustee declares and agrees that in respect of each Participant:

o   The Plan Shares held by the Trustee on behalf of that Participant;

o   Prior to their distribution in accordance with clause XXX, the proceeds of sales arising from the sale by the Trustee of rights under a Rights Issue on behalf of that Participant; and

o   Trust Assets related to or arising from Plan Shares held by the Trustee on behalf of that Participant,

will at all times be held by the Trustee on trust for and on behalf of that Participant on the terms of the Trust Deed and subject to the relevant Plan Rules and relevant Terms of Participation (Clause XXX)).

•         Each participant is absolutely entitled to those Plan Shares held by the Trustee on their behalf, all Trust Assets in respect of those Plan Shares and all other benefits and privileges attached to or resulting from holding those Plan Shares (Clause XXX).

•         The Trust Assets, other than those referred to in clause XXX 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, the relevant Plan Rules, and the relevant Terms of Participation until termination of the Trust under this Deed or by operation of law (Clause XXX).

•         At no time will Company A, any Related Body Corporate of the Company or the Trustee have or 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 clause XXX (Clause XXX).

•         The Trustee in its reasonable discretion has the full power to do all things a trustee is permitted to do by law in respect of the Trust, the Plan Shares and the Trust Assets as set out in Clause XXX.

•         The Trust is managed and administered so that it satisfies the definition of 'employee share trust' as defined in subsection 130-85(4) of the ITAA 1997 (Clause XXX).

•         The Trustee is not permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the Trust and the Trust Assets or for the purpose of giving effect to, and carrying out, the trusts, powers and discretions conferred on the Trustee by the Trust Deed or the law (Clause XXX).

•         The Trustee is not permitted to carry out activities which result in the Participants being provided with additional benefits other than the benefits that arise from the relevant Plan Rules and/or relevant Terms of Participation (Clause XXX).

•         Company A must pay to or reimburse the Trustee for any and all expenses properly incurred by the Trustee, including any fees, commission or remuneration as Company A and the Trustee may agree from time to time (Clause XXX).

•         Company A must provide the Trustee the funds required for the purchase of Shares in accordance with the Plan Rules (refer Clause XXX).

•         These funds are used by the Trustee to acquire shares in Company A either on-market or via a subscription for new shares in Company A based on written instructions from Company A (refer Clause XXX).

•         Subject to clause XXX, all funds received by the Trustee from Company A will constitute Accretions to the corpus of the Trust and will not be repaid to the Company and no specific Participant shall be entitled to receive such funds (Clause XXX).

•         Where the Plan Rules stipulate that the Shares are to be held by the Trustee on behalf of Participants, the Trustee will hold the Company A Shares as Shares in respect of an identified Participant(s) (i.e. on an allocated basis) (refer Clause XXX).

•         Where the Plan Rules include that the Shares may be held by the Trustee on behalf of Participants or employees, the Trustee will hold the Company A Shares as unallocated plan shares for Participants generally (refer Clause XXX).

•         In relation to Unallocated Plan Shares, the Trustee:

o   is precluded from exercising voting rights in relation to the unallocated plan shares (refer Clause XXX);

o   may apply any capital receipts, dividends or other distributions received in respect of any Unallocated Plan Shares to purchase further Shares to be held on trust for the purposes of the Trust (Clause XXX);

o   must not participate in any Rights Issues in respect of any Unallocated Plan Shares (clause XXX); and

o   must hold any bonus shares issued in respect of the Unallocated Plan Shares on trust for the purposes of the Trust Deed (clause XXX).

•         A Participant will have an absolutely vested and indefeasible entitlement to receive from the Trustee all dividends or distributions actually paid by Company A on all Plan Shares held by the Trustee in respect of the Participant (refer clause XXX).

•         The Participant will be entitled to voting rights in relation Plan Shares in their account (refer clause XXX).

•         The Trustee can sell Shares on behalf of an employee where permitted to do so by the Participant (refer Clause XXX).

•         In its discretion, Company A may from time to time by notice in writing direct the Trustee to hold any Forfeited Shares as Unallocated Plan Shares (Clause XXX).

Contributions to the Trust

18.  Company A does not and will not pay cash contributions to the Trust prior to the issue of Awards under the Plan Rules to Participants.

19.  Where possible, Company A will wait until the Awards vest and to receive 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.

20.  However, where it makes commercial sense to do so, Company A may make cash contributions to the Trust prior to the Awards vesting.

Costs incurred by Company A

21.  Company A incurs various costs in the on-going administration of the Trust, which includes costs associated with the services provided by the Trustee of the Trust such as:

•         Employee plan record keeping;

•         Production and dispatch of holding statements to employees;

•         Costs incurred in acquisition of shares on market e.g., 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 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

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

Income Tax Assessment Act 1997 section 8-10

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 25-5

Income Tax Assessment Act 1997 subsection 25-5(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-210

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 104-155

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

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

Income Tax Assessment Act 1997 section 995-1

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)

Reasons for decision

Question 1

Subsection 8-1(1) of the ITAA 1997 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, under 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.

Incurred carrying on a business

Company A carries on a business and has established a remuneration strategy which includes the Plan and is considered as an ESS.

Under the Plan Rules, Company A may grant Awards including Rights to employees and makes cash contributions to the Trust (in accordance with the Trust Deed) which the Trustee uses to acquire shares (either on-market or by subscription) for allocation of Shares to Participants pursuant to the Plan Rules.

Company A provides the Trustee with all the funds required to enable the Trustee to subscribe for, or acquire, Company A shares.

The cash contributions made by Company A to the Trust are irretrievable and non-refundable to Company A in accordance with the Trust Deed, as:

•         All funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee (Clause XX of the rust Deed); and

•         On termination, Company A (or any other member of the Group) will not be a beneficiary of the Trust and will have no interests in the Shares held by the Trust (Clauses XX and XX of the Trust Deed).

Since Company A makes irretrievable cash contributions to the Trust to acquire or subscribe for Shares to satisfy the Awards pursuant to the Plan Rules, the amount has been incurred for the purposes of subsection 8-1(1) of the ITAA 1997.

The costs incurred by Company A for the acquisition of shares to satisfy grants of ESS interests arise as part of its remuneration strategy. The cash contributions made by Company A to the Trust to acquire or subscribe for shares to satisfy the Awards including Rights pursuant to the Plan Rules are part of an ongoing series of payments in the nature of remuneration of its employees. Therefore, subsection 8-1(1) is satisfied.

Not capital or of a capital nature

The costs will be an outgoing incurred for periodic funding of an ESS for employees of Company A. Costs incurred are likely to be in relation to more than one grant of shares, and Company A intends to continue making contributions on a regular basis as part of the ongoing process of remunerating Participants and the Trust is expected to acquire shares regularly. This indicates that the irretrievable cash contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure for 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, and paragraph 8-1(2)(a) is not satisfied.

Accordingly, Company A will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee to acquire shares to satisfy ESS interests issued under the Plan Rules.

Question 2A

As discussed above in Question 1, section 8-1 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 in Australia.

Company A will incur on-going administration costs associated with the services provided by the Trustee in respect of the Plan which are set out in the facts and circumstances. These costs are of an on-going nature that are not separately deductible under a more specific section of the ITAA 1997. The ongoing administration costs would also not include any establishment or amendment costs. Under clause XX of the Trust Deed, Company A must also pay all costs or reimburse all expenses incurred by the Trustee which would include costs associated with the administration of the Trust.

Therefore, Company A's ongoing administrative costs of the Trust are necessarily incurred in carrying on its business for the purpose of producing its assessable income.

Furthermore, the costs are not capital in nature given the advantage sought by the costs are not to add to its profit-making structure, the expenses are regular and recurrent, and their essential character is that of a working expense of the business.

Accordingly, Company A will be entitled to deduct costs incurred in relation to the on-going administration of the Trust under section 8-1 (Taxation Determination TD 2022/8 Income Tax: deductibility of expenses incurred in establishing and administering an employee share scheme).

Question 2B

Section 8-10 of the ITAA 1997 states that if more than one provision applies, the most appropriate provision should be used.

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 ITAA 1997. Section 25-5 is such a provision listed in Division 12 dealing with tax-related expenses, such as managing a taxpayer's tax affairs (subsection 25-5(1)).

Accordingly, to the extent that Company A incurs costs in managing the tax affairs of the Trust, including obtaining accounting, tax and legal advice in relation to the Plan Rules, Company A will be entitled to deduct these tax-related expenses under subsection 25-5(1).

Question 3

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 Rules 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 Rules, 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 Rules are deductible in the income year in which the contributions are made provided the Rights are satisfied by provision of shares so that section 83A-340 operates to treat the Rights as always having been an ESS interest.

Indeterminate rights

As Rights provided under the Plan Rules can be settled by a cash equivalent amount (refer Rule X of the Plan Rules), they are not rights to acquire a beneficial interest in a share, but are indeterminate rights pursuant to section 83A-340.

Once the Board of Company A determines that the Right will be satisfied by the provision of the share in Company A, 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 Rights under the Plan Rules.

Question 4

Section 6-5

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

The term 'income according to ordinary concepts' is not a defined term. However, case law has identified certain factors to be taken into consideration.

The characterisation of the subscription proceeds received by Company A from the Trust can be determined by the character of the right or thing disposed of in exchange for the subscription proceeds (GP International Pipecoaters v. Federal Commissioner of Taxation [1990] HCA 25). 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, which is of a capital nature.

Accordingly, the subscription proceeds should not be treated as ordinary income assessable in the hands of Company A under section 6-5.

Section 20-20

Section 20-20 relevantly provides for the assessment of recoupments received by way of insurance or indemnity, or if it is a recoupment of a loss or outgoing that is deductible because of a provision listed in the table in section 20-30.

The subscription proceeds received by Company A from the Trust would not represent an amount received by way of insurance or indemnity as there is no insurance contract and the receipt does not arise because of a statutory or contractual right of indemnity nor in the nature of compensation.

None of the provisions listed in section 20-30 are relevant to a receipt of subscription proceeds.

Therefore, the subscription proceeds received by Company A from the Trust does not constitute an assessable recoupment under section 20-20.

Division 104

A capital receipt will only be included as an assessable net capital gain 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/or CGT event H2 (Receipt for event relating to a CGT asset).

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

As the shares constitute 'equity interests' (per subsection 974-75(1)), neither CGT event D1 nor CGT event H2 will occur.

Accordingly, the subscription proceeds will not be assessable as a capital gain to Company A under Division 104.

Question 5

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 6

An employer's liability to fringe benefits tax (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 definition.

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.

An 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employee's employment.

An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

Indeterminate rights

The Commissioner accepts that the Plan Rules is an ESS as a Right (other than those ultimately settled in cash) granted under the Plan Rules is an ESS interest under paragraph 83-10(1)(b), being a beneficial interest in a right to acquire a share in a company.

As discussed under Question 3, the Commissioner also accepts Rights granted under the Plan Rules that may be satisfied in cash instead of shares are indeterminate rights (Rule XX of the Plan Rules) pursuant to section 83A-340. At the time that Rights are granted under the Plan Rules, it may be unclear if paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA applies because those Rights may be satisfied in cash instead of shares. Hence, they may not be ESS interests within the meaning of subsection 83A-10(1).

Where the Rights are ultimately satisfied with shares instead of cash, section 83A-340 will operate to treat those Rights to have always been ESS interests within the meaning of subsection 83A-10(1). In these circumstances, the Plan Rules will satisfy the definition of 'employee share scheme' in subsection 83A-10(2) as it is a scheme under which ESS interests in Company A (that is, Rights that are settled with Shares) are provided to the employees of Company A in relation to their employment with Company A.

Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states:

This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

As Participants may acquire Rights or shares under the Plan Rules at a discount or for nil consideration (i.e. at a discount), they are ESS interests under subsection 83A-20(1) to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies.

Accordingly, the provision of Rights or shares by Company A to Participants under the Plan Rules 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 136(1)(h) of the FBTAA.

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

For completeness, where the Rights granted under the Plan Rules is ultimately satisfied with cash instead of shares, the granting of the Rights under the Plan Rules will be viewed as a series of steps in the payment of salary or wages, and not a separate benefit to a payment of salary or wages which are excluded from the definition of fringe benefit by paragraph 136(1)(f) of the FBTAA.

The outcome is consistent with ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits.

Question 7

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.

Paragraph 136(1)(ha) of the FBTAA excludes from the definition of 'fringe benefit':

(ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997)

Therefore, for the irretrievable cash contributions to be excluded from the definition of 'fringe benefit', the trust must be an 'employee share trust' as defined in subsection 130-85(4).

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 are relevant. To qualify as an 'employee share trust', a trustee's activities must be limited to:

•         obtaining shares or rights in a company (paragraph 130-85(4)(a))

•         ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the ESS to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph 130-85(4)(b))

•         other activities that are merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and (b) (paragraph 130-85(4)(c)).

In the present case, paragraphs 130-85(4)(a) and (b) are satisfied because:

•         the Trust acquires shares in Company A

•         as stated above in response to question 3, the Commissioner accepts that the Plan Rules is an ESS under which ESS interests are provided to Participants

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

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 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'?.

In the present case, the objects of the Trust are for the sole purpose of undertaking activities that are in line with the definition of an 'employee share trust' under subsection 130-85(4), including paragraph 130-85(4)(c). The other activities undertaken by the Trustee are merely incidental to managing the Plan Rules.

Therefore, paragraph 136(1)(ha) of the FBTAA applies to exclude the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition of, Shares pursuant to the Plan Rules from being a fringe benefit.

Question 8

Section 67 of the FBTAA is a general anti-avoidance provision of the FBTAA. Subsection 67(1) of the FBTAA is satisfied where a person, or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer, or the eligible employer and another employer, to obtain a tax benefit.

The Commissioner will only make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement.

As stated above in response to question 7, without the provision of a fringe benefit, no amount will be subject to FBT. The irretrievable cash contributions made by Company A to the Trustee pursuant to the Trust Deed will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA for the reasons outlined in response to question 7. As these benefits have been excluded from the definition of a fringe benefit, the FBT liability is not any less than it would have been but for the arrangement.

Therefore, the Commissioner will not seek to make a determination that section 67 applies to increase the aggregate fringe benefits taxable amount to the Employer Entities 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 on-market of, Company A shares by the Trustee pursuant to the Plan Rules.