Edited version of private advice

Authorisation Number: 1052344694906

Date of advice: 15 January 2025

Ruling

Subject: Employee share schemes

Question 1

Will Company X obtain an income tax deduction, under 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 for a trust (the Trustee) to fund the subscription for or acquisition on-market of ordinary shares in Company X (Shares) by the trust (the Trust)?

Answer

Yes.

Question 2

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

Answer

Yes.

Question 3

Will Company X obtain an income tax deduction, pursuant to section 40-880 of the ITAA 1997, in respect of the costs incurred by Company X in relation to the establishment of the Trust?

Answer

Yes.

Question 4

Will irretrievable cash contributions made by Company X to the Trustee to fund the subscription for, or acquisition on-market of, Shares 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' (as defined in subsection 83A-10(1) of the ITAA 1997)?

Answer

Yes.

Question 5

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

Answer

No.

Question 6

Will the Commissioner make a determination under section 177F that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or 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 on-market of Shares for the purposes of the Plan?

Answer

No.

Question 7

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

Answer

No.

Question 8

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

Answer

No.

Question 9

Will the Commissioner make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefit taxable amount to Company X, 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 Shares?

Answer

No.

For questions 1 to 6, this ruling applies for the following periods:

DD MM YYYY

For questions 7 to 9, this ruling applies for the following periods:

DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

1.  Company X is an Australian registered company that is listed on the Australian Stock Exchange (ASX).

2.  Company X is the head entity of a tax consolidated group.

3.  Company X established a trust to administer issues of performance rights and shares under Company X's equity plans.

The Company Plan

4.  The Plan is governed by the Plan Rules adopted by the Board.

5.  The Plan allows the Board to offer Awards to Eligible Employees.

6.  An Award may be made in the form of:

•                     A Right, being an entitlement to be allocated a Share or a Deferred Share (or receive a Cash Equivalent Value), which may be subject to service and/or performance-based Conditions, and/or

•                     A Deferred Share, being the award of a Share that is subject to a Trading Restriction, and which may also be subject to service and/or performance-based Conditions.

7.  For the purposes of this Ruling, an Eligible Employee who is granted Awards under the Plan is referred to as a Participant.

Granting and vesting of Awards

8.  The Board may, from time to time, operate the Plan and invite an Eligible Employee to apply for, or accept, a grant of Awards upon the terms of the Plan as determined by the Board.

9.  The Board will provide each Eligible Employee with a Grant Letter which contains information regarding the grant of Awards.

Unvested Awards

10.  Rights will be granted with an exercise price (which may be nil) and for no consideration unless otherwise stated in the Grant Letter.

11.  For each Right allocated, a Participant shall not be entitled to vote, receive dividends or distributions, or have any other rights of a Shareholder in respect of the Right until the underlying Shares (or Deferred Shares) are allocated to the Participant following vesting and, if applicable, Exercise (Participant elects to receive (or be allocated) the Shares with respect to their Award by complying with the applicable exercise procedure determined by the Board) of the Award.

12.  For each Deferred Share allocated, unless the Board determines otherwise, a Participant is entitled to vote, receive dividends or distributions, and have any other rights of an ordinary Shareholder in respect of the Deferred Share.

13.  Unless the Board determines otherwise, a Participant's unvested Awards will Lapse in whole or in part upon the first to occur of:

(a)          the date specified in the Grant Letter, or if no date is specified, 15 years after the Award was granted to the Participant

(b)          a circumstance or event described in the Rules or the Grant Letter that has the effect of Lapsing an Award, or

(c)          any Condition imposed under the Rules or a Grant Letter not being satisfied.

14.  The Board will only allow the transfer of an Award in exceptional circumstances, such as death or permanent disability.

15.  Where an Award is in the form of a Right that is settled in Deferred Shares, the Deferred Shares will be subject to a Trading Restriction from allocation until the end of the applicable Restriction Period.

Vesting of Awards

16.  Where an Award is subject to any Conditions, the Board will determine the extent to which the applicable Conditions have been satisfied and Awards Vest, and the date that the Awards will Vest.

17.  The Board must notify Participants of the extent to which any applicable Conditions have been satisfied and the date the Awards Vested or will Vest.

18.  Awards will Lapse, in full or in part, to the extent that the Board determines that the Conditions have not been satisfied, or in the Board's view, that the Conditions are incapable of being satisfied by the end of the relevant Period.

19.  After Vesting of Awards, Company X must:

(a)          for Rights that do not require Exercise, allocate or procure the transfer of the relevant number of Shares and/or Deferred Shares for each Vested Award,

(b)          for Rights that require Exercise, upon valid Exercise and payment of the Exercise Price, allocate or procure the transfer of the relevant number of Shares and/or Deferred Shares for each validly Exercised Award,to, or for the benefit of, the relevant Participant.

20.  Rights that have Vested (and where applicable, have also been Exercised) may be satisfied, at the discretion of the Board, in cash rather than Shares (or Deferred Shares), by payment to the Participant of the Cash Equivalent Value.

The Trust

21.  In accordance with the Plan Rules, the Trust Deed was executed and established the Trust for the sole purpose of subscribing for, acquiring, holding and transferring shares in connection with equity incentive plans established by Company X for the benefit of Participants in those plans. Unless otherwise defined, capitalised words in this section take their definition from the Trust Deed.

22.  The Trust is not involved in the process of satisfying any cash settled Awards under the Plan and any cash settled Awards will be settled outside the Trust directly by Company X.

23.  Company X will remunerate the Trustee for providing the trustee services.

24.  Company X must not establish any Plan which is to operate with the Trust without consulting with, and obtaining the written consent of, the Trustee (which consent must not be unreasonably withheld or delayed).

Trust Assets

25.  The Trustee must hold the following on trust for, and on behalf of, a Participant under the terms of the Deed, the relevant Plan Rules and the Participant's relevant Terms of Participation:

(i)          the Participant's Allocated Shares

(ii)          prior to their distribution, the proceeds arising from any sales by the Trustee of rights under a Rights Issue relating to the Participant's Allocated Shares, and

(iii)          all other benefits and privileges related to, or arising from, the Participant's Allocated Shares.

26.  Each Participant will be the beneficial owner of and absolutely entitled to their Allocated Shares and all benefits and privileges attached to, or resulting from holding, those Allocated Shares.

27.  The Trustee must hold all Trust Assets (including without limitation, any Unallocated Shares) on trust for, and on behalf of, the following general beneficiaries from time to time and under the terms of the Deed:

(a)          the Participants who have one or more Trust Shares credited to their Trust Share Account from time to time, and

(b)          the Employees.

28.  Nothing in the Deed confers or is intended to confer on the Company any charge, lien or any other proprietary right or beneficial interest in the Trust Assets.

Administration of the Trust

29.  The Trustee is not entitled to be paid from the Trust Assets or any Participant any fees or charges for administering the Trust, other than reasonable disbursements charged against the Trust Assets.

30.  Company X and the Trustee agree that 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.

Acquisition of Trust Shares

31.  The Board may by notice in writing (Dealing Notice) instruct the Trustee from time to time to:

(i)          subscribe for, purchase or allocate a number of Shares specified in the Dealing Notice to be held by the Trustee as Allocated Shares in respect of an identified Participant or Participants

(ii)          subscribe for, purchase or allocate a number of Shares specified in the Dealing Notice to be held by the Trustee as Unallocated Shares

(iii)          participate in any Rights Issue in respect of an Unallocated Share, or

(iv)          dispose of any rights issued under any Rights Issue in respect of an Unallocated Share.

32.  If the Trustee has received a Dealing Notice, subject to the Trustee receiving sufficient funds or having sufficient capital as required by that Dealing Notice, the Trustee must promptly following receipt of the Dealing Notice:

(a)          purchase the requisite number (or a proportion of that number determined by the Board) of Shares on behalf of the relevant Participant(s) or beneficiaries of the Trust generally (as the case may be)

(b)          subscribe for the requisite number (or a proportion of that number determined by the Board) of Shares on behalf of the relevant Participant(s) or beneficiaries of the Trust generally (as the case may be)

(c)          allocate any Unallocated Shares to one or more Participants

(d)          participate in any Rights Issue in respect of an Unallocated Share

(e)          dispose of any rights issued under any Rights Issue in respect of an Unallocated Share, or

but subject at all times to the relevant Plan Rules, the relevant Terms of Participation and to any Applicable Law which may prevent a dealing in respect of Shares during any particular period.

33.  The Company must provide the Trustee or cause the provision to the Trustee, of any funds required by the Trustee.

34.  All funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee, other than as consideration for the subscription for Shares provided such Shares are held under the terms of the Deed.

Unallocated Shares

35.  The Trustee must deal with each Unallocated Share (including any bonus shares or other Accretions in respect of such Unallocated Share) in the manner set out in a Dealing Notice.

36.  In respect of each Unallocated Share held by the Trustee under the Deed, the Trustee:

(i)          if instructed by the Board by way of physical or electronic notice (including by way of Dealing Notice):

(A)         must dispose of that Unallocated Share (including pursuant to a buy-back being conducted by the Company)

(B)         must participate in any Rights Issues in respect of that Unallocated Share, or

(C)         must dispose of any rights issued under any Rights Issue in respect of that Unallocated Share

(ii)          must not exercise any voting rights in relation to the Unallocated Share

(iii)          must hold any bonus shares issued in respect of that Unallocated Share on trust for the purposes of this Deed, and

(iv)          may apply any capital receipts, dividends or other distributions received in respect of that Unallocated Share or a right issued pursuant to a Rights Issue in respect of that Unallocated Share to purchase further Shares to be held on trust for the purposes of the Trust.

37.  Disposal is only allowed if the Unallocated Share is a Forfeited Share.

Transfer of Allocated Shares

38.  The Trustee and each Participant must not assign, transfer, sell, or grant an encumbrance over, or otherwise deal with, an interest in that Allocated Share of that Participant during any applicable Restriction Period.

39.  After the expiry of the Restriction Period and subject to any administrative guidelines established by the Board (including any securities trading policy), the relevant Plan Rules and the relevant Terms of Participation, a Participant may give to the Trustee a Withdrawal Notice requiring the Trustee to transfer legal title in some or all of the Participant's Allocated Shares to the Participant or to any third party nominated by the Participant.

40.  The Trustee must do all things required by it to transfer some or all of a Participant's Allocated Shares to the relevant recipient and pay to the Participant any other monies held on the account for the Participant:

(a)          on receipt of a valid Withdrawal Notice, and subject to the Board approving that Withdrawal Notice;

(b)          where required to do so by the relevant Plan Rules and the relevant Terms of Participation;

(c)          if the Trust is terminated; or

(d)          otherwise, if the Trustee so determines, following a written instruction from the Board.

Termination

41.  The Trust will terminate and be wound up as provided by law or upon the first to occur of the following events:

(a)          an order being made or an effective resolution being passed for the winding up of the Company (other than for the purpose of amalgamation or reconstruction)

(b)          a person compulsorily acquiring all the Shares;

(c)          the Board determining that the Trust is to be wound up; and

(d)          the day 29 days before the 80th anniversary of the establishment of the Trust.

42.  The Trustee must not pay any of the Surplus Assets to any Group Company.

Contributions to the Trust

43.  The Trustee received Dealing Notices from Company X on how many shares should be acquired, with Company X transferring to the Trust the funds equivalent to the cost of the Shares plus any brokerage fees. The Shares acquired were allocated to Participants.

44.  Company X does not and will not pay cash contributions to the Trust prior to the issue of Rights under the Plan.

45.  Company X may make contributions to the Trust prior to the grant of Deferred Shares.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

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 Paragraph 8-1(1)(b)

Income Tax Assessment Act 1997 Paragraph 8-1(2)(a)

Income Tax Assessment Act 1997 Section 20-30

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-B

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

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

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Subsection 83A-105(1)

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 83A-340

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Division 104

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

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

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

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

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

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

Fringe Benefits Tax Assessment Act 1986 Section 67

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

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

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

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

Single Entity Rule

Questions 1 to 6

The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule in section 701-1, the subsidiary members of an income tax consolidated group are taken to be parts of the head company. As a consequence, the subsidiary members cease to be recognised as separate entities during the period that they are members of the income tax consolidated group with the head company of the group being the only entity recognised for income tax purposes.

The meaning and application of the single entity rule is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997.

As a consequence of the single entity rule, the actions and transactions of the subsidiary members of the XXXX Group are treated, for income tax purposes, as having been undertaken by XXXX as the head company of the XXXX Group.

Questions 7 to 9

The single entity rule in section 701-1 has, however, no application to the FBTAA 1986. The Commissioner has therefore provided a ruling to each employing member of the XXXX Group in relation to questions 7 to 9.

Reasons for decision

Question 1

Summary

Company X will be entitled to deduct an amount under section 8-1 in respect of irretrievable cash contributions made by it to the Trustee to fund the subscription for or acquisition on-market of Shares to satisfy the issue of Shares pursuant to the Plan.

Detailed reasoning

Subsection 8-1(1) allows you to deduct for 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.

Sufficient Nexus

For a deduction to be allowable under paragraph 8-1(1)(b), a sufficient nexus must exist between the outgoing and a business carried on for the purpose of gaining or producing assessable income (Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15).

In Magna Alloys & Research Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [1980] FCA 180, the Full Federal Court stated that an outgoing is necessarily incurred in carrying on a business where, viewed objectively, it is reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business being carried on for the purpose of earning assessable income.

Company X carries on a business for the purposes of gaining or producing assessable income.

As part of this business, Company X operates the Plan as part of its remuneration strategy to attract, retain and motivate staff to facilitate continued growth of Company X over the short, medium and long-term.

Under the Plan:

(a)          The Board (the board of directors of Company X) may invite an Eligible Employee to apply for, or accept, a grant of Awards upon the terms of the Plan as determined by the Board.

(b)          An award may be made in the form of a Right (being an entitlement to be allocated a Share or a Deferred Share (or receive a Cash Equivalent value), which may be subject to service and/or performance-based Conditions) and/or a Deferred Share (being the award of a Share that is subject to a Trading Restriction, and which may also be subject to service and/or performance-based Conditions).

(c)          The Board administers the Plan and in exercising any power or discretion concerning the Plan may establish, implement and operate a Trust for the purposes of acquiring, holding and allocating Shares on behalf of Participants.

Under the terms of each Trust Deed, Company X must provide the Trustee with any funds required by the Trustee in order to acquire and allocate Shares under the Plan.

For completeness, the Trust is not involved in the process of satisfying any cash settled Awards under the Plan or any future equity Plan. The Trust will only be used to acquire Shares for the purposes of satisfying equity settled Awards. Any cash settled Awards will be settled outside the Trust directly by Company X.

Therefore, there is sufficient nexus between the cash contributions made by Company X to the Trustee and Company X's remuneration arrangement with its employee, which directly relate to the business caried on by Company X for the purpose of producing Company X's assessable income.

Incurred

For the cash contributions made by Company X to the Trustee to be deductible under section 8-1, the contribution must be a permanent loss or outgoing to which Company X has definitely committed itself and there should be no circumstance in which Company X can retrieve any of the contributions (Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339 and Spotlight Stores Pty Ltd v Commissioner of Taxation [2004] TCA 650 (Spotlight)).

The cash contributions made by Company X to the Trustee are irretrievable and non-refundable to Company X because:

a)            All funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee to Company X.

b)            Nothing in the Trust Deeds confer or is intended to confer on Company X any charge, lien or any other proprietary right or proprietary or beneficial interest in the Trust Assets.

c)            The Trustee must not pay any of the Surplus Assets to any Group Company.

d)            The Trustee must do all things required by it to transfer some or all of a Participant's Allocated Shares to the relevant recipient and pay to the Participant any other monies held on the account for the Participant if the Trust is terminated.

Therefore, the cash contributions made to the Trustee are necessarily incurred by Company X in carrying on its business.

Capital or capital in nature

In Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73, Dixon J noted the following 3 matters to be considered on the distinction between a capital outgoing and a revenue ongoing:

(a)          the character of the advantage sought (lasting qualities may play a part)

(b)          the manner in which it is to be used, relied on or enjoyed (recurrence may play a part), and

(c)          the means adopted to obtain the advantage (i.e. periodic outlays covering commensurate periods).

The advantage provided by each payment to the Trustee does not have a lasting quality because it forms part of the overall remuneration of Company X's employees. As stated by the Federal Court in Spotlight at paragraph 71:

... the advantage to be obtained was giving staff an incentive to greater effort from year to year and was thereby related to the profitability of the taxpayer from year to year.

Furthermore, the contributions are a recurring outlay (rather than a once-off payment). Therefore, it can be concluded that the payments are not capital, or of a capital nature.

Based on the above analysis, Company X will be entitled to a deduction under section 8-1 in respect of the irretrievable cash contributions made by it to the Trustee to fund the subscription for, or acquisition on-market of, Shares to satisfy the issue of Shares to the Participants pursuant to the Plan.

Question 2

Summary

Company X will be entitled to deduct an amount under section 8-1 for costs incurred by it in relation to the on-going administration of the Trust.

Detailed reasoning

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

As explained above, Company X carries on a business and operates the Plan as part of its remuneration framework.

Company X incurs various costs in the on-going administration of the Trust, including but not limited to:

•                     employee plan record keeping

•                     production and dispatch of holding statements to employees

•                     costs incurred in the acquisition of Shares on market, such as brokerage costs and the allocation of such Shares to Participants, and

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

Company X's ongoing administrative costs of the Trust are necessarily incurred in carrying on its business for the purposes 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 X 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 3

Summary

Yes, Company X will obtain a deduction under section 40-880 in respect of costs incurred by Company X in relation to the establishment of the Trust.

Detailed reasoning

As explained in paragraph 46 of Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36, section 40-880 covers deductions that are allowed for business-related expenses, its purpose being to target:

46. ... "blackhole expenditure", namely business expenses incurred by taxpayers that fall outside the scope of deduction provisions of income tax law. Thus, as s 30-880(1) provides, a deduction under s 40-880 is "only allowed to the extent that the expenditure is not taken into account in some way elsewhere in the income tax".

The Commissioner's current view in relation to the deductibility of costs incurred in relation to the establishment of an employee share trust (EST) is contained in TD 2022/8.

Paragraph 4 of TD 2022/8 states that establishment expenses are not deductible to the employer company under section 8-1 because they are capital in nature.

Paragraph 5 of TD 2022/8 provides that establishment expenses are deductible to the employer company in equal proportions over five years under section 40-880 to the extent that the business is carried on for a taxable purpose. The purpose of producing assessable income is a taxable purpose (paragraph 40-25(7)(a)).

Paragraph 6 of TD 2022/8 provides that establishment expenses are outgoings associated with the creation of an employee share scheme (ESS) and include:

•                     legal fees incurred in establishing the EST and ESS plan rules

•                     start-up costs; for example, trustee company commencement charges, and

•                     registration fees with various authorities; for example, stamp duty and Australian Securities & Investments Commission fees.

As established above, Company X carries out its business for a taxable purpose and accordingly the establishment expenses incurred by Company X in relation to establishing the Trust is deductible under section 40-880 in equal proportions over five years.

Question 4

Summary

The irretrievable cash contributions made by Company X to the Trustee to fund the subscription for, or acquisition on-market of, Shares to satisfy Company X's obligation with respect to the issue of Shares to Participants pursuant to the Plans, will be deductible to Company X at a time determined by section 83A-210, if those contributions are made before the acquisition of the Awards by Participants under the Plan.

Detailed reasoning

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

The effect of section 83A-210 is to deem the timing an employer incurred the outgoing to be the time when the ESS interest is acquired by the ultimate beneficiary, rather than the time when the employer makes the contribution to the trust (ATO Interpretative Decision ATOID 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 a company. An 'employee share scheme' is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees of the company, or a subsidiary of the company, in relation to the employee's employment.

Awards in the form of Deferred Shares

The Deferred Shares issued under the Plan are ESS interests for the purposes of subsection 83A-10(1) at the time they are granted because they are beneficial interests in a share in Company X.

The Plan is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests (i.e. Deferred Shares) are provided to employees (i.e. Participants) in relation to their employment with Company X or its subsidiaries.

Therefore, section 83A-210 will apply to modify the timing of any deduction claimed by Company X to the time the Deferred Shares are acquired by the employee if the contributions are made by Company X to the Trustee before the employee acquires the Deferred Shares under the Plan.

Company X may make contributions to the Trust prior to the grant of Deferred Shares. Therefore, where the irretrievable cash contributions are made by Company X to the Trustee before the employee acquires the Deferred Shares under the Plan, section 83A-210 will apply to modify the timing of the deduction claimed by Company X to the income year when the relevant ESS interest is acquired by the Participants under the Plan.

Awards in the form of Rights

Rights granted under the Plan are indeterminate rights at the time they are granted for the purposes of section 83A-340. That is because the Rights can be settled by either Shares or by making a payment of a cash equivalent amount. Therefore, the Rights are not rights to acquire a beneficial interest in Shares unless and until the time when it is determined by the Board that they will be satisfied by the provision of Shares.

Once it is determined that they will be satisfied by the provision of Shares, section 83A-340 operates to treat these Rights as though they had always been rights to acquire beneficial interests in Shares (therefore, an ESS interest) for the purposes of section 83A-10.

Company X does not and will not pay cash contributions to the Trust prior to the issue of Rights under the Plan. In circumstances where contributions are made by an employer at a time other than before the employee acquires the ESS interest, the general rule under section 8-1 applies to determine the income year in which the amount is deductible. Therefore, any irretrievable cash contributions made by Company X to the Trustee after the employee acquires the Rights under the Plan are deductible in the income year in which the contributions are made by Company X (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).

For completeness, Rights that are ultimately settled by a cash payment are not ESS interests and Company X has confirmed that any cash payments will be made by Company X directly to the Participant and not involve the Trust. If cash payments did flow through the Trust, the Trust would not satisfy paragraph 130-85(4)(c).

Question 5

Summary

If the Trustee satisfies its obligations under the Plan by subscribing for new Shares, the subscription proceeds will not be included in the assessable income of Company X under section 6-5 or 20-20 or trigger a CGT event under Division 104.

Detailed reasoning

Section 6-5

Section 6-5 provides that a taxpayer's assessable income includes 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] HCA 25, 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 contribution of share capital received by Company X from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, Company X is issuing the Trustee with new shares in itself. The character of the newly issued shares is one of capital. Therefore, the receipt of the subscription proceeds takes the character of share capital, and accordingly, is of a capital nature (ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee).

Accordingly, when Company X receives subscription proceeds from the Trustee where the Trustee has subscribed for new Shares to satisfy obligations to Participants, that subscription proceeds received by Company X is a capital receipt and will not be ordinary income assessable in the hands of Company X under section 6-5.

Section 20-20

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

Company X will receive an amount for the subscription of Shares by the Trustee. There is no insurance contract in this case, so the amount is not received by way of insurance.

Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation.

Subsection 20-20(3) establishes that an amount received as 'recoupment' of a loss or outgoing is an 'assessable recoupment' if it can be deducted as a loss or outgoing for an earlier income year under a provision listed in section 20-30. None of the provisions listed in section 20-30 are relevant to the current circumstances.

Therefore, the subscription proceeds will not be an assessable recoupment under 20-20.

CGT - Division 104

Section 102-20 states that you make a capital gain or loss if and only if a CGT event happens.

The relevant CGT events that may be applicable when the subscription proceeds are received by Company X are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset).

However, paragraphs 104-35(5)(c) and 104-155(5)(c) respectively state that CGT event D1 and CGT event H2 do not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, Company X is issuing shares, being equity interests as defined in section 974-75, to the Trustee. Therefore, neither CGT event D1 nor CGT event H2 will occur.

Since no CGT event occurs, there is no amount that will be assessable as a capital gain to Company X under Division 104.

Question 6

Summary

The Commissioner will not make a determination under section 177F that Part IVA applies 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 on-market of Shares for the purposes of the Plan.

Detailed reasoning

All legislative references are to the ITAA 1936 unless otherwise specified.

Part IVA is the general anti-avoidance provision which allows the Commissioner the discretion 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 deduction may be available where an employer provides money or other property to an employee share trust (EST) where the conditions of Division 83A are met.

In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the EST arrangement.

Therefore, having regard to the eight factors set out in subsection 177D(2), 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 7

Summary

No, the provision of Awards by Company X to employees of the Company X Group under the Plan will not constitute a fringe benefit within the meaning of subsection 136(1).

Detailed reasoning

All legislative references are to the FBTAA unless otherwise specified.

A 'fringe benefit' is defined in subsection 136(1) 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 fringe benefits under paragraphs 136(1)(f) to (s) of the definition of fringe benefit.

Paragraph 136(1)(h) of the definition of fringe benefit provides that a fringe benefit does not include:

... 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 ...

As discussed above, the Plan constitutes an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which ESS interests (i.e. Awards that are settled with Shares) are provided to the employees of the Company X Group in relation to their employment with the Company X Group.

As the Awards are granted under the Plan for nil consideration, they are acquired by the Participants at a discount and therefore are ESS interests to which Subdivision 83A-B of the ITAA 1997 applies, unless the conditions in subsection 83A-105(1) of the ITAA 1997 are satisfied, in which case Subdivision 83A-C of the ITAA 1997 applies.

Accordingly, the provision of Awards under the Plan will not constitute a 'fringe benefit' within the meaning of subsection 136(1) by virtue of the exclusion in paragraph 136(1)(h).

When a Right under the Plan is exercised, the Share received by the employee would be 'in respect of' the exercise of that Right and not 'in respect of' employment as required by the definition of 'fringe benefit' in subsection 136(1) (ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme). Therefore, the benefit that arises to an employee upon the exercise of a Right under the Plan (i.e. the beneficial interest in a Share) will not constitute a fringe benefit as defined in subsection 136(1).

Question 8

Summary

The irretrievable cash contributions made by Company X to the Trustee, to fund the subscription for, or acquisition on-market of, Shares will not constitute a 'fringe benefit' within the meaning of subsection 136(1).

Detailed reasoning

All legislative references are to the FBTAA unless otherwise specified.

Paragraph 136(1)(ha) of the definition of fringe benefit provides that a benefit constituted by the acquisition of money or property by an EST (within the meaning of the ITAA 1997) does not constitute a fringe benefit.

Subsection 130-85(4) of the ITAA 1997 provides that an EST 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 Company X's case, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because the Trust:

(a)          acquires shares in a company, namely Company X, and

(b)          ensures that ESS interests (being the Awards that are settled with Shares) are provided under an ESS (that is, the scheme established by the Plan) by allocating Shares to Participants in accordance with the governing documents of the scheme.

Paragraph 130-85(4)(c) of the ITAA 1997 provides that a trustee can engage in activities that are merely incidental to those described in paragraph 130-85(4)(a) and (b) of the ITAA 1997. The Commissioner's view on the type of activities that are and are not merely incidental is set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'?

Company X has confirmed that where vested Rights are to be cash settled, any cash payments will be made by Company X directly to the Participant and will not flow through the Trust.

The Commissioner is satisfied that the Trust Deed contains only powers and/or duties that are merely incidental, as required by subsection 130-85(4)(c) of the ITAA 1997. Therefore, the Trust established by the Trust Deed also satisfies the definition of an EST in subsection 130-85(4) of the ITAA 1997.

Accordingly, the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for, or acquisition on-market of, Shares will not constitute a 'fringe benefit' within the meaning of subsection 136(1) on the basis of the application of paragraph 136(1)(ha).

Question 9

Summary

The Commissioner will not make a determination that section 67 applies to increase the fringe benefits taxable amount to Company X by the amount of tax benefit gained from irretrievable cash contributions made by Company to the Trustee to fund the subscription for, or acquisition on-market of, Shares.

Detailed reasoning

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

As determined above, the irretrievable cash contributions made by Company X to the Trustee do not constitute fringe benefits within the meaning of subsection 136(1), nor would the grant of ESS interests (or cash payments) to Participants under the Plan if an EST was not used. Therefore, the fringe benefits liability is not any less than if would have been but for the existence of the arrangement (i.e. the EST).

Therefore, the Commissioner will not make a determination that section 67 applies to increase the fringe benefits taxable amount to Company X 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, Shares.