Edited version of private advice

Authorisation Number: 1052324149786

Date of advice: 1 November 2024

Ruling

Subject: Employee share schemes

Question 1

Will Company X as head entity of the Company X income tax consolidated group (Company X TCG) 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 X to the trustee of the Company X Employee Share Trust (Trustee) to fund the subscription for or acquisition on-market of Company X shares by the Company X Employee Share Trust (Trust)?

Answer 1

Yes.

Question 2

Will Company X as head entity of the Company X TCG obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by Company X or any subsidiary member of the Company X TCG in relation to the on-going administration of the Trust?

Answer 2

Yes.

Question 3

Will irretrievable cash contributions made by Company X or any subsidiary member of the Company X TCG to the Trustee, to fund the subscription for or acquisition on-market of Company X shares by the Trust, be deductible to Company X at a time determined by section 83A-210 of the ITAA 1997 where contributions are made before the acquisition of the relevant ESS interests?

Answer 3

Yes.

Question 4

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

Answer 4

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 in full, any deduction claimed by Company X as head entity of the Company X TCG in respect of the irretrievable cash contributions made by Company X or any member of the Company X TCG to the Trustee to fund the subscription for or acquisition on-market of Company X shares by the Trust?

Answer 5

No.

Question 6

Will the provision of awards by Company X or the Employer Entities to Participants under the Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer 6

No.

Question 7a

Will the irretrievable cash contributions made by Company X or any subsidiary of Company X to the Trustee, pursuant to the Original Trust Deed and Amended Trust Deed, to fund the subscription for or acquisition on-market of Company X shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer 7a

No.

Question 7b

Will the irretrievable cash contributions made by Company X or any subsidiary of Company X to the Trustee, pursuant to the Newly Amended Trust Deed, to fund the subscription for or acquisition on-market of Company X shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer 7b

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 X to the Trustee, to fund the subscription for or acquisition on-market of Company X shares?

Answer 8

No.

The scheme commenced on:

In a particular income year

Relevant facts and circumstances

Company X

Company X is an Australian incorporated company involved in a particular industry.

Company X is the head entity of the Company X income tax consolidated group (Company X TCG) consisting of itself and its wholly owned Australian subsidiaries.

Company X's remuneration strategy seeks to align management's objectives with those of shareholders. Part of Company X's renumeration strategy is to recognise long term performance by rewarding participants with equity incentive awards which allow them to share in the growth and in the value of the business. This is implemented through the following share plans (collectively the 'Plans'):

•                     Plan 1

•                     Plan 2.

Company X will continue to operate Plan 1 under which there are a number of outstanding awards, however all equity awards to employees after Plan 1 was adopted are being made under Plan 2.

The employing resident entity (Employer Entity) is limited to Company X.

Consideration of the Australian tax treatment of cash contributions made by Company X to the Trust to satisfy awards made to foreign employees does not form part of this ruling.

The scope of this Ruling is limited to offers made to employees under the Company X Plan 1 and the Company X Plan 2 who engage in activities that derive assessable income in Australia.

The Board will not elect to settle Rights in cash.

Plan 1

Plan 1 was adopted by Company X's Annual General Meeting on a certain date. The terms and conditions of Plan 1 are set out in the Plan 1 Rules.

The terms on which Participants are invited to participate in Plan 1 are set out in the Plan 1 Offer Letter.

Broadly under Plan 1, the Board may issue an invitation to Employees granting to Employees a number of awards (for nil consideration), being the right to acquire a fully paid ordinary share in Company X (Share) (or to receive a Cash Equivalent Value, at the discretion of Company X) and will only vest once the board determines that any relevant conditions have been satisfied.

Plan 2

Plan 1 was adopted by Company X's Annual General Meeting on a certain date. The terms and conditions of Plan 2 are set out in the Plan 2 Rules.

The terms on which Participants are invited to participate in Plan 2 are set out in the Plan 2 Offer Letter.

Broadly under Plan 2, the Board may issue an invitation to Employees granting to Employees a number of awards (for nil consideration), being the right to acquire a fully paid ordinary share in Company X (Share) (or to receive a Cash Equivalent Value, at the discretion of Company X) and will only vest once the board determines that any relevant conditions have been satisfied.

Company X Limited Employee Share Trust (Trust)

The Trust was established for the sole purpose of subscribing for, acquiring, holding and transferring shares for the benefit of Participants under the Plans.

The trustee of the Trust (Trustee) is an external trustee acting in an independent capacity on behalf of the beneficiaries of the Trust.

The Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997.

Under the Original Trust Deed, the Trust broadly operates as follows:

•                     Company X or a member of the Company X TCG will provide the Trustee with the funds required for the purchase of or subscription for shares in accordance with the Plans and all funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee.

•                     Company X or a member of the Company X TCG is likely to contribute funds, by way of capital contribution to the Trust when written notice ('Dealing Notice') is provided by the Board to the Trustee.

•                     These funds will be used by the Trustee to acquire the shares in Company X either by on-market purchase or via a subscription for new shares in Company X based on the Dealing Notice provided by Company X.

•                     Allocated Shares acquired by the Trustee must be allocated to the relevant Participants and held on their behalf as soon as reasonably practicable where required to do so, or permitted, by the relevant Plan Rules. Each Participant will be the beneficial owner of and absolutely entitled to their Allocated Shares.

•                     Unallocated Shares must be held by the Trustee on behalf of Participants and employees generally. The Trustee must deal with each Unallocated Share in the manner set out in a Dealing Notice from the Board.

•                     If the Unallocated Share is a Forfeited Share, the Trustee must dispose of that particular Unallocated Share provided that such disposal is in accordance with the Trust Deed.

•                     If the Trustee is not an associate of Company X, the Trustee must not exercise voting rights in relation to Unallocated Shares.

•                     At any time after expiry of the Restriction Period (if any), the Trustee must transfer the relevant number of shares into the name of the relevant Participant or any third party nominated by the Participant (i.e. legal title) upon a Withdrawal Notice being lodged with and approved by the Board.

•                     The Trustee can sell Allocated shares on behalf of a Participant where permitted to do so by the Participant, less any taxes and costs incurred by the Trustee to sell these shares, with the Participant receiving the balance of the proceeds.

•                     The Trustee is not entitled to receive from the Trust Assets or any Participant any fees, charges, commission or other remuneration for operating or administering the Trust. However, Company X must pay or reimburse to the Trustee from Company X' own resources any such fees, charges, commission or other remuneration incurred by the Trustee, as Company X and the Trustee agree from time to time.

•                     In the event that the Trust is terminated, the Trustee must not pay any of the Surplus Assets to any Group Company. Group Company is defined as Company X and each of its subsidiaries.

On a particular date, the Trust Deed was amended and the amended Trust Deed took effect from that date onwards. On a particular date the amended Trust deed was amended and the newly amended Trust Deed took effect from that date onwards. The newly amended Trust Deed removed certain powers or duties that were considered not merely incidental to those activities described in paragraphs 130-85(4)(a) and (b) of the ITAA 1997. The Trustee confirmed that up to the date of amendment, the Trustee had not undertaken any of the powers or duties that had been removed by the amended Trust Deed and the newly amended Trust Deed.

Associated costs

Company X will incur various on-going costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust.

Company X has and will incur on-going administration costs associated with the company's accounting and legal advisors in relation to the Plans.

Company X will incur various costs in relation to the establishment of the Trust.

Company X will also incur costs in managing its own tax affairs in relation to the Employee Share Scheme.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 20-20

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

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 Division 104

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

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Question 1

Summary

Yes, Company X will be entitled to a deduction under section 8-1 of the ITAA 1997 in respect of the irretrievable cash contributions made by Company X to the Trustee of the Trust to fund the subscription for, or acquisition on-market of Company X shares, as the contributions are part of an on-going series of payments in the nature of remuneration of Company X's employees.

Detailed reasoning

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, 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 X is an Australian company involved in a certain industry. Company X operates employee share schemes (ESS) as part of its remuneration strategy.

Under the Plans, Company X grants awards to employees and makes cash contributions to the Trust (in accordance with the Newly Amended Trust Deed) which the Trustee uses to acquire Shares (either on-market or by subscription) for allocation to Participants to satisfy their Awards or allocation of Shares.

Company X must provide the Trustee with all the funds required to enable the Trustee to subscribe for, or acquire, the Company X shares.

The cash contributions made by Company X to the Trust are irretrievable and non-refundable to Company X in accordance with the Newly Amended 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 and

•                     On termination of the Trust, the Trustee must not pay any of the Surplus Assets to any Group Company.

Therefore, if Company X makes a cash contribution to the Trust to acquire or subscribe for Company X shares to satisfy the grant of Awards pursuant to the Plans, the amount has been incurred for the purposes of subsection 8-1(1) of the ITAA 1997.

The costs incurred by Company X for the acquisition of shares to satisfy its obligations under the Plans in respect of the grant of Awards or Shares arise as part of Company X's remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. As such, it is incurred in the process of carrying on a business for gaining or producing Company X's assessable income.

The cash contributions will be an outgoing incurred for periodic (rather than once-off) funding of an ESS for employees of Company X. The cash contributions are made as part of an ongoing process of remunerating employees, with the Trust expected to acquire shares regularly. Nothing in the facts suggests any intention for any contribution to be retained in the Trust for an extended period of time.

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.

Company X will be entitled to a deduction under section 8-1 of the ITAA 1997 in respect of the irretrievable cash contributions made by Company X to the Trustee of the Trust to fund the subscription for, or acquisition on-market, of Company X shares.

Question 2

Summary

Yes, the on-going administration costs incurred by Company X associated with the services provided by the Trustee of the Trust are deductible to Company X under section 8-1 of the ITAA 1997 as they are costs necessarily incurred in operating the ESS while carrying on its business for the purpose of gaining or producing its assessable income.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, incurred in producing exempt or non-assessable non-exempt income or where a provision of the tax law prevents the deduction.

Company X carries on a business in a particular industry. Company X operates an ESS as part of its remuneration strategy.

Company X has and will incur various on-ongoing administration costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust.

Pursuant to the Newly Amended Trust Deed, the Trustee is not entitled to receive from the Trust any remuneration in respect of its performance of its obligations as trustee of the Trust. Instead, Company X is required to pay or reimburse to the Trustee any fees, commission or other remuneration incurred by the Trustee, as Company X and the Trustee agree from time to time.

These costs are regular and recurrent employment expenses which are deductible to Company X under section 8-1 of the ITAA 1997 as they are costs necessarily incurred in operating the ESS while carrying on its business for the purpose of gaining or producing its assessable income.

For completeness, these costs are not capital or of a capital nature as the loss or outgoings are regular and recurrent and are part of the ordinary employee remuneration costs of the company (see also ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible).

Question 3

Summary

Yes, pursuant to section 83A-210 of the ITAA 1997, where irretrievable cash contributions are made at a time before the Participants acquire the relevant ESS interest, the irretrievable cash contribution can only be deducted from the assessable income of Company X in the income year when the ESS interest is acquired by the Participant under the Plans.

Detailed reasoning

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.[1]

However, section 83A-210 of the ITAA 1997 modifies this rule in certain circumstances in respect of contributions provided by an employer to a trust to purchase shares 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 a beneficiary under an arrangement, rather than the time when the employer makes the contribution to the trust, if the contribution was made before the ESS interests are acquired. Further information is available in 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.

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. Shares that are purchased by the Trustee to satisfy its obligation under the Company X ESS, and subsequently granted to Company X Participants pursuant to the Plans, are ESS interests for the purposes of section 83A-210.

The Company X ESS satisfies the definition of an 'employee share scheme' in subsection 83A-10(2) as it is a scheme under which ESS interests in Company X are provided to the Participants of Company X in relation to their employment with Company X.

The granting of the ESS interest to the Participants, the provision of the cash contributions to the Trustee, the acquisition and holding of shares by the Trustee and the allocation of shares to Participants are all interrelated components of the Company X ESS. All the components constitute an arrangement for the purposes of section 83A-210 that must be carried out so that the scheme can operate as intended.

Company X will make irretrievable cash contributions to the Trust and intends to only hold sufficient shares in the Trust to settle obligations arising from awards currently on issue under the Plans.

An award provided under the Plans is an indeterminate right because that award entitles the employee to acquire either a share or cash, to be determined at a future time at the discretion of Company X. Although the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate right will, pursuant to section 83A-340, be treated as if it had always been an ESS interest.

Section 83A-210 applies equally to contributions made in respect of ESS interests and indeterminate rights. Therefore, an irretrievable cash contribution in respect of an indeterminate right is taken to have been paid at the acquisition time of the ESS interest. 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 the 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 ITAA 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 deduction in relation to the 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 that this participating employee acquired this ESS interest.

Therefore, where irretrievable cash contributions are made at a time before the Participants acquire the relevant ESS interest, the irretrievable cash contribution can only be deducted from the assessable income of Company X in the income year when the ESS interest is acquired by the Participant under the Plans, as provided by section 83A-210 of the ITAA 1997.

Question 4

Summary

No, if the Trust satisfies its obligation under the Plans by subscribing for new shares in Company X, the subscription proceeds will not be included in the assessable income of Company X under section 6-5 of the ITAA 1997 (because it is capital in nature); section 20-20 of the ITAA 1997 (because it is not an assessable recoupment); or trigger a CGT event under Division 104 of the ITAA 1997 (because it is excluded by paragraphs 104-35(5)(c) and 104-155(5)(c) of the ITAA 1997).

Detailed reasoning

Section 6-5

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. The expression 'income according to ordinary concepts' is not a defined term. However, case law has identified certain factors which may assist in determining whether a receipt is properly characterised as income according to ordinary concepts.

As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In GP International Pipecoaters v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 64 ALJR 392; (1990) 93 ALR 193; (1990) 21 ATR 1; 90 ATC 4413; [1990] HCA 25 (Pipecoaters), the High Court of Australia found that:

To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

The character of the subscription proceeds received by Company X from the Trust can be determined by the character of the right or thing disposed of in exchange for the receipt. Where Company X 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 accordingly, is of a capital nature.

In conclusion, the subscription proceeds should not be treated as ordinary income assessable in the hands of Company X under section 6-5 of the ITAA 1997.

Section 20-20

Subsection 20-20 relevantly provides for the assessment of recoupment received by way of insurance or indemnity or under a provision listed in section 20-30.

By its very nature, the subscription proceeds received by Company X from the Trust will not represent an amount received by way of insurance or indemnity. There is no insurance contract involved; and the receipt does not arise because of a statutory right or contract of indemnity nor 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.

As for subsection 20-20(3), an amount that Company X receives as recoupment of a loss or outgoing, except by way of insurance or indemnity, is an assessable recoupment if such loss or outgoing is deductible 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 are relevant to the current circumstances. Therefore, the subscription amount also does not constitute an assessable recoupment under subsection 20-20(3) of the ITAA 1997.

Division 104

A capital receipt will only 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/or CGT event H2 (Receipt for event relating to a CGT asset).

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 ordinary shares of Company X constitute 'equity interests' (see subsection 974-75(1) of the ITAA 1997), neither CGT event D1 nor CGT event H2 will occur.

Accordingly, the subscription proceeds will not be assessable as a capital gain to Company X.

Question 5

Summary

No, Part IVA of the ITAA 1936 will not apply to deny, in part or in full, any deduction claimed by Company X in respect of the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for or acquisition from other shareholders of Company X 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, 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 X to obtain a tax benefit.

Question 6

Summary

No, the provision of rights to acquire ordinary shares or shares by Company X to employees under the Plans will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986 as they are excluded by paragraph 136(1)(h) of the FBTAA 1986 as ESS interests acquired under an 'employee share scheme'.

Detailed reasoning

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA 1986, 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 1986 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 1986 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. Shares that are purchased by the Trustee to satisfy its obligation under the Plans, and subsequently granted to Company X Participants pursuant to the Plans, are ESS interests for the purposes of section 83A-10(1).

Therefore, Company X's ESS constitutes an 'employee share scheme' within the meaning of subsection 83A-10(2) because it is a scheme under which ESS interests in Company X are provided to the employees of Company X in relation to their employment with Company X.

As the rights to acquire ordinary shares or shares granted under the Plans will be acquired by the employees at a discount, they are ESS interests to which subdivision 83A-B of the ITAA 1997 applies.

Accordingly, the provision of rights to acquire ordinary shares or shares by Company X to Participants under the Plans will not be subject to FBT on the basis that they are acquired by Participants under an 'employee share scheme' (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 1986.

In addition, when a right to acquire ordinary shares 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 right to acquire shares and not in respect of employment (refer ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

Question 7a

Summary

No, the irretrievable cash contributions made by Company X to the Trustee pursuant to the Original Trust Deed and Amended Trust Deed, to fund the subscription for or acquisition on-market of Company X shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986 by virtue of the exclusion in paragraph 136(1)(ha) of the FBTAA 1986 on the basis that the Original Trust Deed and the Amended Trust Deed satisfy the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997.

Detailed reasoning

Paragraph (ha) of subsection 136(1) of the FBTAA 1986 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) of the ITAA 1997.

Subsection 130-85(4) provides that an employee share trust, for an employee share scheme, is a trust whose sole activities are:

(a) obtaining shares or rights in a company; and

(b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of:

(i) the company; or

(ii) a subsidiary of the company; and

(c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b).

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

•                     The Trust acquires shares in a company, namely Company X and

•                     The Trust ensures that ESS interests as defined in subsection 83A-10(1) are provided under an employee share scheme (discussed above in Questions 3 and 6) by allocating those shares to the Participants of Company X in accordance with the Original Trust Deed and Amended Trust Deed and the Plans.

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 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'? (TD 2019/13).

According to paragraph 13 of TD 2019/13, 'investing in assets other than shares or rights to shares in the employer company' is not an activity that is 'merely incidental' as it is not a natural incident or consequence of administering an ESS.[2] Neither is the provision of 'additional benefits to participants and/or employees, over and above the delivery of the ESS interests or resulting shares and any dividend equivalent payment that accrues directly from the employee's ESS interest'.

However, whilst the relevant trust documents may include powers and/or duties that are broad reaching, the mere existence of those powers or duties in the trust document does not, of itself, mean that the trustee has breached the requirements to be an employee share trust. In examining whether the requirements of subsection 130-85(4) are met, it is necessary to examine the actual activities that the trustee has undertaken.[3]

Company X has confirmed that the Trustee has not undertaken any of the activities in Clauses of the Original Trust Deed and clauses of the Amended Trust Deed. Therefore, while the Original Trust Deed and the Amended Trust Deed contain powers and/or duties that are not merely incidental, the Commissioner is satisfied that the Trust does satisfy the definition of an employee share trust on the basis that the Trustee has not in fact breached the requirements to be an employee share trust in subsection 130-85(4) of the ITAA 1997.

Question 7b

No, the irretrievable cash contributions made by Company X to the Trustee pursuant to the Newly Amended Trust Deed, to fund the subscription for, or acquisition on-market Shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986 by virtue of the exclusion in paragraph 136(1)(ha) of the FBTAA 1986 on the basis that the Newly Amended Trust Deed satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997.

Detailed reasoning

The Newly Amended Trust Deed provides for certain amendments.

Accordingly, the Newly Amended Trust Deed contains only powers and/or duties that are merely incidental, as required by subsection 130-85(4)(c) of the ITAA 1997.

The Newly Amended Trust Deed, therefore, satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 and, in turn, paragraph 136(1)(ha) of the FBTAA 1986 applies to exclude the irretrievable cash contributions made by Company X to the Trustee under the Newly Amended Trust Deed from being a fringe benefit.

Question 8

Summary

No, the Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount to the Company X Employer Entities.

Detailed reasoning

PS LA 2005/24 Application of General Anti-Avoidance Rules (PSLA 2005/24) provides guidance on the application of Part IVA of the ITAA 1936 and other general anti-avoidance rules. In respect of section 67 of the FBTAA 1986, guidance is provided at paragraphs 185 to 188 of PSLA 2005/24.

As discussed above, the irretrievable cash contributions made by Company X to the Trustee (pursuant to the Trust Deeds) will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986. Therefore, the fringe benefits liability is not any less than it would have been but for the existence of the arrangement.

In conclusion, the Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount by the amount of the tax benefit gained from the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for, or acquisition from other shareholders of, shares in Company X.

[1] Paragraph 15 of TR 97/7.

[2] See also paragraph 11 of TD 2019/13.

[3] Paragraph 6 of TD 2019/13.