Edited version of private advice

Authorisation Number: 1052372160657

Date of advice: 25 March 2025

Ruling

Subject: Employee share schemes

Question 1

Will the Company as head entity of the income tax consolidated group (the Group) 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 the Company of any subsidiary member of the Group to the Trustee of the Employee Share Trust (Trustee) to fund the subscription for or acquisition from other shareholders of Company shares by the Employee Share Trust (Trust)?

Answer

Yes.

Question 2A

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

Answer

Yes.

Question 2B

Will the Company as head entity of the Group obtain an income tax deduction under section 40-880 of the ITAA 1997 in relation to costs incurred by the Company of any subsidiary member of the Group in relation to tax advisor fees on implementation of the Trust?

Answer

Yes.

Question 3

Will irretrievable cash contributions made by the Company of any subsidiary member of the Group to the Trustee, to fund the subscription for or acquisition from other shareholders of Company shares by the Trust, be deductible under section 8-1 of the ITAA 1997 to the Company where the contribution is made after the Participant has acquired the ESS interest?

Answer

Yes.

Question 4

If the Trust satisfies its obligation under the Plan by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company 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 ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company or any subsidiary member of the Group to the Trustee to fund the subscription for or acquisition from other shareholders of Company shares by the Trust?

Answer

No.

Question 6

Will the provision of the following be a Fringe Benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act (FBTAA 1986):

a)            provision of Awards under the Plans?

b)            provision of Shares in satisfaction of the exercise of the Awards?

Answer

No.

Question 7

Will the irretrievable cash contributions made by the Company or any subsidiary of the Group to the Trustee, to fund the subscription for or acquisition from other shareholders of Compamn shares, be treated as a fringe benefit within the meaning of section 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 Company by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition from other shareholders of Company shares?

Answer

No.

This ruling applies for the following periods:

Income Tax (Questions 1 - 5)

Income tax year ended 30 June 20YY

Income tax year ended 30 June 20YY

Income tax year ended 30 June 20YY

Income tax year ended 30 June 20YY

Income tax year ended 30 June 20YY

Fringe Benefits Tax (Questions 6 - 8)

Fringe benefits tax year ended 31 March 20YY

Fringe benefits tax year ended 31 March 20YY

Fringe benefits tax year ended 31 March 20YY

Fringe benefits tax year ended 31 March 20YY

Fringe benefits tax year ended 31 March 20YY

The scheme commenced on:

26 June 20YY

Relevant facts and circumstances

All legislative references are to the Income Tax Assessment Act 1997, unless stated otherwise.

a.            Request for private ruling dated lodged in 20YY

b.            Employee Option Plan (EOP) and associated Grant Agreement provided to the Commissioner

c.            Incentive Option Plan (IOP) and associated Invitation provided to the Commissioner

d.            Employee Share Option Plan and associated Invitation (ESOP) provided to the Commissioner

e.            Employee Share Trust Deed (Deed) provided to the Commissioner

Background

1.  The Company is an unlisted Australian company.

2.  At the time of and for the duration of the ruling application, the Company is a private company on the basis it is an unlisted company and is not a public company pursuant to section 103A of Income Tax Assessment Act 1936 (ITAA 1936).

3.  The Company is the head entity of a tax consolidated group consisting of itself and all wholly-owned Australian subsidiaries.

4.  The Company has provided various offers of equity to its Australian employees (Participants) under the following incentive plans:

•                     Employee Option Plan (EOP), implemented and offers sent out in 20YY;

•                     Incentive Option Plan (IOP), implemented and offers sent out in 20YY; and

•                     Employee Share Option Plan (ESOP), implemented in 20YY

collectively, the Plans.

5.  The Plan is part of the Company's remuneration strategy and aims to ensure the long-term creation of value in the Company by:

•                     Rewarding eligible participants (Participants) with options granted by the Company (Awards).

•                     Each Award represents a right to be issued a share in the capital of the Company, subject to the general terms of the Plans as well as the terms and conditions on which the Participants are specifically invited to participate (Invitation).

•                     Assisting with the retention of key talent personnel.

6.  The Shares are considered ordinary shares for purposes of Division 83A on the basis that the rights of the shares do not include any preferences to ordinary shares.

Awards

7.  Broadly, the Plans operate as follows in relation to the Awards granted under each of the Plans:

•                     It is at the absolute discretion of the Board to extend an invitation to grant Awards to eligible employees.

•                     Eligible employees are provided with the opportunity to apply for Awards being rights to acquire Shares in the Company upon meeting certain conditions.

•                     The Awards may be subject to vesting conditions as specified in the relevant Invitation.

•                     A Participant may not sell, assign, transfer or otherwise deal with their Awards, unless the Board so approves in their absolute discretion.

•                     Each Award may be converted into one Share in the Company following exercise by the Participant as specified in the Invitation.

•                     The Share may be held by the Trust on the Participant's behalf (note the EOP was specifically amended in 2024 to allow use of the Trust to facilitate the allocation of Shares to Participants).

•                     All Awards are subject to taxation under Division 83A in the hands of the Participant.

•                     An Award and Shares are subject to disposal restrictions as specified in the Invitation and the Plans.

The Plans

Employee Option Plan (EOP)

8.  Broadly, the key terms and rules of the EOP are:

•                     Clause 3 - the persons eligible to receive Options under the plan are Employees, Directors, Consultants and other persons approved by the Board (each, an Eligible Participant)

•                     Clause 4 - the Company may from time to time offer Options to an Eligible Participant, via a Grant Agreement. The Eligible Participant may accept an offer of Options via signing and returning a copy of the Grant Agreement

•                     Clause 5 - under the terms of the grant - each Option is exercisable for 1 Ordinary Share. The exercise price will be as set out in the Grant Agreement and will be at least the market value of the Option on the Issue Date. Each Option shall vest as such time or times specified by the Grant Agreement, and

•                     Clause 22 - the Board may, in its discretion, use an employee share trust or other mechanism for the purposes of holding Ordinary Shares before or after the exercise of an Option or delivering any Ordinary Shares arising from exercise of an Option under this Plan on such terms and conditions as determined by the Board. The Board may do all things necessary for the establishment, administration, operation and funding of an employee share trust.

9.  The Grant Agreement outlines that the Options are provided for no consideration to the Participants.

10.  The Company considers that Options issued under the EOP will qualify to access the 'start-up' tax concessions.

Incentive Option Plan (IOP)

11.  Broadly, the key terms and rules of the IOP are:

•                     Clause 2.1 - the purposes of the IOP is to assist in the reward, retention and motivation of Eligible Participants, and align the interest of the Eligible Participants with shareholder of the Group.

•                     Clause 3 - outlines eligibility and application of options under the Plan as well as certain restrictions

•                     Clause 4 - outlines the rules on the Grant of Options

•                     Clause 6 - outlines that an Option will vest when a Vesting Notice is given or deemed to be given to the Participant. The Vesting Condition for an Option may be waived by the Board by written notice

•                     Clause 7 - outlines the rules on the exercise of Options. Options may only be exercised when all Vesting Conditions and Exercise Conditions applicable to the Option are satisfied or waived by the Company and Confirmation Notice provided to the Participant. The Exercise Conditions can be waived by the Board by written notice

•                     Clause 19 - deals with the Cancellation of Options - A Participant and the Company (acting by the Board) can agree in writing that some or all of the Options granted to the Participant are to be cancelled, and

•                     Clause 15 - the Board may, in its discretion, use an employee share trust or other mechanism for the purposes of holding Shares before or after the exercise of an Option or delivering any Resulting Shares under these Rules. For the avoidance of doubt, the Board may do all things necessary for the establishment, administration, operation and funding of an employee share trust.

12.  The Invitation to participate in the IOP outlines that the Options are provided for no consideration to the Participants.

Employee Share Option Plan (ESOP)

13.  Broadly, the key terms and rules of the IOP are:

•                     Clause 2.1 - the purposes of the plan is to assist in the reward, retention and motivation of Eligible Participants, and align the interest of the Eligible Participants with shareholder of the Group.

•                     Clause 3 - outlines eligibility and application of options under the Plan as well as certain restrictions.

•                     Clause 4 - outlines the rules on the Grant of Options.

•                     Clause 6 - outlines that an Option will vest when a Vesting Notice is given or deemed to be give to the Participant. The Vesting Condition for an Option may be waived by the Board by written notice.

•                     Clause 7 - outlines the rules on the exercise of Options. Options may only be exercised when all Vesting Conditions and Exercise Conditions applicable to the Option are satisfied or waived by the Company and Confirmation Notice provided to the Participant. The Exercise Conditions can be waived by the Board by written notice.

•                     Clause 19 - deals with the Cancellation of Options - A Participant and the Company (acting by the Board) can agree in writing that some or all of the Options granted to the Participant are to be cancelled, and

•                     Clause 15 - the Board may, in its discretion, use an employee share trust or other mechanism for the purposes of holding Shares before or after the exercise of an Option or delivering any Resulting Shares under these Rules. For the avoidance of doubt, the Board may do all things necessary for the establishment, administration, operation and funding of an employee share trust.

14.  The Invitation to participate in the ESOP outlines that the Options are provided for no consideration to the Participants.

Employee Share Trust

15.  The Employee Share Trust (Trust) has been established to facilitate opportunities to align the interests of employees with the future growth and profitability of the Company and to administer the current and any future employee incentive plans by the Company for the benefit of Participants of the Plans.

16.  The Trust will be used to facilitate the acquisition of Shares acquired by Participants as referred to in the background. The Trust will have the additional role of acquiring other Shares following vesting/exercise of the Awards.

17.  Trustee is the trustee of the Trust and is an independent third party to the Company and its subsidiaries.

18.  The Trust will not be involved in the process of satisfying or disposing of any of the Awards under the plans with cash or other than by allocation of Shares.

General Operation of the trust

19.  The Trust broadly operates as follows:

•                     The Trust will be funded by cash contributions from the Company or a subsidiary member of the income tax consolidated group (the Group) (refer Clause 5.3 of the Trust Deed).

•                     Contributions are made once the Board resolves to provide a particular Participant a Share upon exercise of an Award.

•                     Participants exercise their Award by paying the cash exercise price to the Company or the Company advances the exercise price to the Participants as a loan and Participants will repay this advance to the Company following the sale of Shares allocated to it in the Trust.

•                     At the time of each contribution, the Board will provide the Trustee a notice listing the Company's employees, for whom the contribution is being made, i.e. the portion of the contribution and the applicable number of shares to be acquired in respect of each employee. That is, the contribution is made to the Trust in respect of a particular Company employee.

•                     These funds will be used by the Trustee to acquire Shares in the Company either from an existing shareholder or via a subscription for new Shares in the Company, based on instructions from the Company (refer Clause 5.2 of the Trust Deed).

•                     Shares acquired by the Trustee will be allocated to the relevant employees following instructions from the Company (refer Clause 5.1 of the Trust Deed).

•                     The Trust will only be used to acquire Shares and allocate them to Participants who are residents of Australia for tax purposes.

Timing of contributions

20.  The Company will not provide cash contributions to the Trust prior to the grant of Awards. More typically, the Company will wait until receipt of 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. As noted above, this is in order to specify the particular employee that the contribution is made in respect of a particular Company employee.

Use of the Trust to facilitate the Plan

21.  It is intended that the Trust will be used to hold Shares for employees of the Company pursuant to the Plan. The Trust provides capital management flexibility for the Company, in that it has the ability under the Trust Deed to use the contributions made by the Company either to acquire Shares in the Company from other shareholders or subscribe for new shares in the Company.

22.  Some of the commercial benefits of using the Trust include:

•                     Provides capital management assistance and flexibility for the Company.

•                     Gives effect to disposal restrictions on the Shares allowing key shareholders to keep control over the Company ownership by preventing the disposal of shares to third parties.

•                     Greater flexibility for the Company to accommodate the long-term incentive arrangements both now and into the future for different employee and executive groups as the Company continues to expand operations and therefore employee numbers.

•                     Providing an external vehicle through which Shares in the Company can be acquired and possibly held on behalf of the relevant Participant. This assists the Company to satisfy corporate law requirements relating to a company dealing in their own shares.

•                     Assist with maintaining anonymity of shareholders/Participants.

•                     Ensure the number of shareholders does not exceed the maximum number of shareholders for a proprietary company.

•                     Enables the implementation of the Plan in line with the Group's policies on employee share plans.

Summary of the Trust Deed

23.  The key operating terms of the draft Trust Deed are outlined below:

•                     The Trust was established for the sole purpose of subscribing for, acquiring, holding and transferring Shares in connection with equity incentive plans established by the Company for the benefit of participants in those plans (Background section of the Trust Deed).

•                     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 (Clause 4.8).

•                     The Trustee may only carry out activities that constitute the management of the Plans or the administration and management of the Trust. (Clause 4.2).

•                     The Company must not establish any new plan which is to be operated by the Trust without consulting with and obtaining written consent of the Trustee (Clause 2.5)

•                     The Trustee must hold a Participant's Allocated Shares on trust under the terms of the Deed, the relevant Plan Rules and the Participant's Terms of Participation. Each Participant will be the beneficial owner of and be absolutely entitled to their allocated shares (Clause 3.1).

•                     The Trustee must hold all other assets on trust for the Participants who have one or more trust shares credited to their Trust Share Account from time to time and the Employees (Clause 3.2).

•                     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. The rights of the Company under the Deed are purely contractual (Clause 3.3).

•                     The Trustee must, following receipt of a Dealing Notice, either purchase or subscribe for the requisite number (or a proportion of that number determined by the Board) of Shares on behalf of the relevant Participant, subject to the relevant Plan Rules and the relevant Terms of Participants (Clause 5.2).

•                     The Company must provide the Trustee any funds required by the Trustee to comply with Clause 5.2, and all funds provided to the Trustee for this purpose will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee and may be paid to the Company as consideration for the subscription of Shares provided such Shares are held under the terms of the Deed (Clause 5.3).

•                     The Trustee must, if directed by the Board in a Dealing Notice, reallocate any Forfeited Shares to one or more Participants to be held under the Deed as Allocated Shares. Absent a direction, the Trustee must hold these shares as part of other trust asset in accordance with clause 3.2 of the Deed (Clause 11).

•                     The Trustee and each Participant must not assign, transfer, sell or grant encumbrances over or otherwise deal with an interest in the allocated share of the participant during any applicable restriction period (Clause 9.1).

•                     After the restriction period expires, a participant may give the Trustee a withdrawal notice to require the Trustee transfer legal title in some or all of the participant's allocated shares to the participant (Clause 9.2).

•                     A Participant is presently entitled to so much of the net income of the Trust attributable to that participant's allocated shares (Clause 12).

•                     If an accretion arises in respect of a Participant's Allocated Share other than by way of dividends, distributions, bonus share or rights issue, the Trustee will transfer or provide the benefits of the accretion to that Participant (Clause 7.6).

•                     Upon sale of any Allocated Shares, the Trustee shall apply the proceeds of sale firstly in payment of tax liability incurred and secondly in payment of brokerage and other expenses of the sale that the participant has agreed to be deducted from the distribution and thirdly the balance (if any) in payment to the relevant participant (Clause 10).

•                     No amount of Surplus Assets will be repaid to the Company or any Group member (Clause 15.3).

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)

Income Tax Assessment Act 1997 section 701-1

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Legislative references in the following are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997), unless otherwise indicated.

Questions 1 to 5 - application of the single entity rule in section 701-1

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 (SER) 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 SER 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 SER, the actions and transactions of the subsidiary members of the Group are treated, for income tax purposes, as having been undertaken by the Company as the head company of the income tax consolidated group.

Questions 6 to 8

The SER in section 701-1 has no application to the Fringe Benefits Tax Assessment Act 1986. The Commissioner has therefore provided a ruling to the Company only, as the employing entity in the Group.

Issue 1: Income Tax

Question 1

Will the Company as head entity of the income tax consolidated group (the Group) obtain an income tax deduction, pursuant to section 8-1, in respect of the irretrievable cash contributions made by the Company of any subsidiary member of the Group to the Trustee of the Employee Share Trust (Trustee) to fund the subscription for or acquisition from other shareholders of Company shares by the Employee Share Trust (Trust)?

Summary

1. & The Company can deduct an amount under section 8-1 in respect of irretrievable cash contributions that it or any member of the Group makes to the trustee of the Trust to fund the subscription for, or on-market acquisition of shares in the Company in respect of employees of the Company, who are Australian resident, under the below listed plans:

•                     The Employee Option Plan (EOP)

•                     The Incentive Option Plan (IOP)

•                     The Employee Share Option Plan (ESOP)

Detailed reasoning

2.  Subsection 8-1(1) allows you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, 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.

3.  The Company carries on a business operating a cryptocurrency exchange, providing access to more than 350 digital currencies to over 700,000 customers across Australia and XXXX. The Company provides an employee share scheme (ESS) as part of its remuneration strategy.

4.  Thus, the cash contributions made by the Company to the Trustee to fund the subscription or acquisition of Company shares must be irretrievable and non-refundable.

5.  Based on the following, The Commissioner considers the contributions to the Trust are irretrievable and non-refundable:

•                     all funds provided to the Trustee will constitute accretions to the corpus of the Trust and are not repayable by the Trustee (Clause 5.3 of the Trust Deed);

•                     the Company is not a beneficiary of the Trust and does not have entitlement to any Shares, trust property forming part of the trust fund, or any returns of contributions made to the Trust (Clause 3 of the Trust Deed); and

•                     nothing in the Trust Deed confers or is intended to confer onto the Company any encumbrance, proprietary right or interest in the Shares acquired by the Trustee (Clause 3.3 of the Trust Deed).

6.  Therefore, the contributions to the Trust will be a loss or outgoing that is incurred at the time it is made in accordance with the trust deed and the rules of the Plans.

Incurred in gaining or producing assessable income or in carrying on a business

7.  For a loss or outgoing to be deductible under subsection 8-1(1), it must be either incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing that assessable income.

8.  A relevant connection exists between a loss or outgoing and the derivation of income where there is a sufficient nexus; (see, Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56).

9.  The Background section of the Trust Deed states the Company wishes to establish an employee share trust, for the sole purpose of subscribing for, acquiring, holding and transferring Shares in connection with equity incentive plans established by the Company for the benefit of participants in those plans.

10.  In this case, the contributions are made by the Company or any other member of the Group to the Trust to enable the Company to meet its obligations arising from the grant of rights, options and awards under the Plans.

11.  The Commissioner accepts that granting rights, options and awards under the Plans is to incentivise, remunerate and retain employees of the Company and in turn, is likely to result in the gaining or production of the assessable income of the Company as a result of the employee's increased performance and productivity.

12.  The Commissioner accepts there is sufficient nexus between:

a)            the irretrievable cash contributions made by the Company or the Group to the Trustee to satisfy the granting of rights, options and awards under the Plans to the Participants, and

b)            the Company's own income earning activities.

13.  Therefore, subsection 8-1(1) is satisfied.

Not capital or of a capital nature

14.  Paragraph 8-1(2)(a) states that a loss or outgoing is not deductible if it is a loss or outgoing of capital, or of a capital nature.

15.  The Company (and the Group) will be making regular, irretrievable contributions, to the Trustee to satisfy right, options and awards granted under the Plans (in accordance with the trust deed and the rules of the Plans). These contributions are costs incurred by the Company to fund the acquisition of Shares for the purpose of the Plans.

16.  Therefore, the costs will be an outgoing incurred for periodic funding of a bona fide employee share scheme for the Participants. Costs incurred are likely to be in relation to more than one grant of rights, options and awards (rather than being one-off), and the Company intends to continue satisfying outstanding rights, options and awards using shares acquired by the Trust. This indicates that the irretrievable cash contributions made by the Company or the Group to the Trustee are ongoing in nature, recurrent employment expenses, and are part of the broader remuneration expenditure of the Company.

17.  This is supported by the decisions in Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) FCAFC 339 (Pridecraft) and Federal Commissioner of Taxation v Spotlight Stores Pty Ltd (2004 FCA 650 (Spotlight), which held that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital, or of a capital nature.

The loss or outgoing cannot be incurred in gaining or producing exempt income or non-assessable non-exempt income

18.  Nothing in the facts suggest that the irretrievable cash contributions made to the Trustee are private or domestic in nature, or are incurred in gaining or producing exempt, non-assessable non-exempt income, or are otherwise prevented from being deductible under a specific provision of either the ITAA 1936 or ITAA 1997.

19. ; Accordingly, subject to the operation of section 83A-210, the Company will be entitled to deduct an amount under section 8-1 for irretrievable cash contributions it or any member of the Group makes to the Trustee to acquire Shares in accordance with the Plans.

Question 2A

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

Summary

20.      The Company can deduct an amount under section 8-1 for costs incurred by itself or any member of the Group, in relation to the on-going administration of the Trust to the extent these costs relate to the Participants.

Detailed reasoning

21.  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, 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.

22.  The Company will incur on-going administration costs in operating the Trust and has appointed the Trustee to administer the Trust. In this respect the Company will incur costs associated with the services provided by the Trustee include,

•                     employee plan record keeping

•                     production and dispatch of holding statements to employees

•                     costs incurred in the acquisition of shares on market (e.g. brokerage costs and the allocation of such shares to Employees), and

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

23.  These are costs necessarily incurred by the Company in administering the ESS while carrying on its business for the purpose of gaining or producing its assessable income. That is there is a sufficient nexus.

24.  Given the loss or outgoing are regular, recurrent and part of the ordinary employee remuneration costs of the Company, they are not treated as capital or of a capital nature (Taxation Determination TD 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an 'employee share scheme').

25.  Accordingly, the Company will be entitled to deduct an amount under section 8-1 in respect of the costs incurred in relation to the on-going administration of the Trust to the extent those costs relate to the Participants.

Question 2B

Will the Company as head entity of the Group obtain an income tax deduction under section 40-880 in relation to costs incurred by the Company of any subsidiary member of the Group in relation to tax advisor fees on implementation of the Trust?

Summary

26.  The Company can deduct an amount under section 40-880 for costs incurred by itself or any member of the Group, in relation to tax advisor fees on implementation of the Trust.

Detailed reasoning

27.  As outlined in TD 2022/8, establishment/implementation expenses are one-off in nature and used in setting up the ESS as part of the employer company's remuneration structure. The character of the advantage sought is the enduring benefit of having the ESS in its business structure to deliver ESS interests. Therefore, the establishment expenses for the Employee Share Trust are capital in nature including:

•                     legal advice obtained in respect of the implications which may arise for both the Company and the Participants of the PRP in respect of the Employee Share Trust structure and the PRP

•                     legal documents required in respect of the Employee Share Trust and the PRP, and

•                     professional fees associated with the establishment of the Employee Share Trust including such costs associated with the creating and registration of the Employee Share Trust with various authorities.

28.  As also outlined in TD 2022/8, section 40-880 allows a deduction for certain business-related capital expenditure such as the implementation costs. Limitations and exceptions are in subsections 40-880(3) to (9). Relevantly, the business needs to be carried on for a taxable purpose and as stated above the Company carries on a business providing services to produce assessable income.

29.  Therefore, as per paragraphs 4 to 9 of TD 2022/8, these costs are deductible to the Company under section 40-880.

Question 3

Will irretrievable cash contributions made by the Company of any subsidiary member of the Group to the Trustee, to fund the subscription for or acquisition from other shareholders of Company shares by the Trust, be deductible under section 8-1 to the Company where the contribution is made after the Participant has acquired the ESS interest?

Summary

30.  The irretrievable cash contributions will be deductible to the Company at a time determined by section 8-1.

31.  As the irretrievable cash contributions made by the Company or any member of the Group, directly to the Trustee, to fund the subscription for, or acquisition on-market of Shares by the Trust under the Plans, in respect of the Participants, are intended to be made after the acquisition time of the rights / options / awards, section 83A-210 will not apply.

Detailed reasoning

32.  A deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which the Company incurred the outgoing. Under certain circumstances, the timing of the deduction is determined under section 83A-210.

33.  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, where the contribution is made before the ultimate beneficiary receives the ESS interest.

34.  The implementation of the Plans (as set out in the rules of the Plans), the establishment of the Trust and the provision of irretrievable cash contributions by the Company or any member of the Group to the Trustee of the Trust, constitute an arrangement for the purpose of subparagraph 83A-210(a)(i).

35.  The term ESS interest, in a company is defined in subsection 83A-10(1) as being 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.

36.  Under the Plans, an invitation is made to a Participant (under the relevant rules of the Plans) to apply for beneficial interest in a right to acquire a beneficial interest in a Share in the Company.

37.  The Plans meet the requirement of an ESS for the purpose of subsection 83A-10(2) as they are schemes under which ESS interests are provided to Participants in relation to their employment or engagement with the Company. This ruling applies only to the extent contributions are made in respect of an employee (or employees) who are eligible employees that meet the requirements of:

•                     83A-325 and Division 83A generally

•                     employee as defined in subsection 136 of the FBTAA, and

•                     persons meeting the exclusion contained in 109ZB(3) of the ITAA 1936.

38.  The ESS contains a number of interrelated components which include the provision of irretrievable cash contributions by the Company or any member of the Group to the Trustee. These irretrievable cash contributions enable the Trustee to acquire Shares for the purpose of enabling each Participant, indirectly as part of the Plans, to acquire ESS interests.

39.  The deduction for the irretrievable cash contributions, to the extent they relate to the Participants, can only be deducted from the assessable income of the Company in the income year when the relevant beneficial interest in a Share, or beneficial interest in a right / option / award to a beneficial interest in a Share, is acquired by the Participant under the Plans.

40.  This is consistent with the ATO view expressed in ATO Interpretive Decision ATO ID 2010/103 Income Tax - Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

41.  As the Company will not provide irretrievable contributions to the Trust until after the Awards have been granted to Participants and more specifically in the income year in which the Awards are exercised, section 83A-210 will not apply.

42.  Therefore, a deduction can be claimed under section 8-1, for irretrievable contributions the Company or any member of the Group makes to the Trustee.

43.  Where the Participant is granted the rights / options / awards in the same income year in which the contributions are made, the deduction is available in the income year in which the contributions are made.

Question 4

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

Summary

44.  If the Trustee of the Trust satisfies its obligations under the Plans by subscribing for new shares in the Company, the subscription proceeds are not included in the assessable income of the Company under section 6-5 or section 20-20 or trigger a CGT event under Division 104.

Detailed reasoning

Section 6-5

45.  Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. Receipts of a capital nature do not constitute income according to ordinary concepts, whether incurred in carrying on a business or not.

46.  In an ESS, where the trustee subscribes to the company for an issue of shares and pays the full subscription price for the shares, the company receives a contribution of share capital from the trustee.

47.  The character of the subscription proceeds received by the Company from the Trustee of the Trust can be determined by the character of the right or thing disposed of in exchange for the receipt. Where the Company 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 is of a capital nature. This view is supported by the reasoning in 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.

48.  When the Company receives subscription proceeds from the Trustee where the Trustee has subscribed for new shares in the Company to satisfy its obligations to Participants in the Plans, those subscription proceeds received are a capital receipt and will not be treated as ordinary income under section 6-5.

Section 20-20

49.  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.

50.  The Company 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. 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. Therefore, the receipt of the subscription proceeds does not constitute an assessable recoupment under subsection 20-20(2).

51.  Subsection 20-20(3) provides that an amount received by you as a 'recoupment' of a loss or outgoing, except by way of insurance or indemnity, is an 'assessable recoupment' if you can deduct the loss or outgoing because of a provision listed in the table in section 20-30.

52.  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).

Division 104

53.  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).

54.  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 CGT event H2 (Receipt for event relating to a CGT asset) or both.

55.  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 interest or non-equity shares in the company.

56.  As the Shares constitute an "equity interest" (see subsection 974-75(1)), neither CGT event D1 nor CGT event H2 will occur.

57.  Since no CGT event occurs, the subscription proceeds will not be assessable as a capital gain to the Company.

Question 5

Will the Commissioner seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company or any subsidiary member of the Group to the Trustee to fund the subscription for or acquisition from other shareholders of Company shares by the Trust?

Summary

58.  The Commissioner will not make a determination that Part IVA of the ITAA 1936 apply to deny, in part or in full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company or any member of the Group to the Trustee to fund the subscription for or acquisition on-market of Shares by the Trust under the Plans.

Detailed reasoning

59.  Part IVA 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.

60.  The Commissioner generally accepts that a deduction may be available where an employer provides money or other property to an EST where the conditions of Division 83A are met.

61.  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.

62.  Therefore, having regard to the eight factors set out in paragraph 177D(2), the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling the Company to obtain a tax benefit.

Issue 2: Fringe Benefits Tax

Question 6

Will the provision of the following be a Fringe Benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act (FBTAA 1986):

a)        provision of Awards under the Plans?

b)        provision of Shares in satisfaction of the exercise of the Awards?

Summary

63.  The provision of rights, options and awards by the Company to the Participants under the Plans is not a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

64.  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.

65.  No amount will be subject to FBT unless a 'fringe benefit' is provided.

66.  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.

67.  In particular, paragraph (h) of the 'fringe benefit' definition excludes a benefit constituted by the acquisition of an ESS interest under an ESS (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C applies.

68.  The Commissioner accepts that the Plans meet the requirement of an ESS, and rights, options and awards granted under the Plans are an ESS interest under paragraph 83-10(1)(b), being a beneficial interest in a right to acquire a share in a company.

69.  Specifically, the Commissioner accepts that the Awards provided under the Plans are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests as they are provided for no consideration and therefore at a discount.

70.  Where the rights, awards and vested options are ultimately satisfied with Shares, section 83A-340 will operate to treat them to have always been ESS interests within the meaning of subsection 83A-10(1).

71.  Accordingly, the provision of Awards under the Plans will not be subject to FBT on the basis that they are acquired by Participants under an employee share scheme by virtue of paragraph (h) of the definition of a fringe benefit in subsection 136(1) of the FBTAA.

Question 7

Will the irretrievable cash contributions made by the Company or any subsidiary of the Group to the Trustee, to fund the subscription for or acquisition from other shareholders of Company shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA 1986?

Summary

72.  The irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition from other shareholders of Company shares, are not a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986.

Detailed reasoning

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

74.  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),

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

•                     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)), and

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

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

•                     the Trust acquires shares in the Company

•                     the Commissioner accepts that the Plans meet the requirements of 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 Shares to Participants in accordance with the trust deed and the rules of the Plans.

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

78.  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'?

79.  Activities that involve 'investing in assets other than shares or rights to shares in the employer company' or result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental.

80.  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 section 130-85(4), including paragraph 130-85(4)(c). The other activities undertaken by the Trustee under the trust deed are merely incidental to managing the Plans.

81.  Therefore, paragraph 136(1)(ha) of the FBTAA applies to exclude the irretrievable cash contributions made by the Company or any member of the Group to the Trustee to fund the subscription for, or acquisition of, Shares by the Trust from being a fringe benefit.

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 Company by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition from other shareholders of Company shares?

Summary

82.  The Commissioner will not make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to the Company, by the amount of tax benefit gained from the irretrievable cash contributions made by the Company or any member of the Group, to fund the subscription or acquisition from other shareholders of Company shares.

Detailed Reasoning

83.  PS LA 2005/24 Application of General Anti-Avoidance Rules explains the application of Part IVA or other general anti-avoidance rules to an arrangement, including the operation of section 67 of the FBTAA (refer to paragraphs 185-191).

84.  The Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. Paragraph 191 of PS LA 2005/24 states:

85.  The approach outlined in this practice statement (refer to paragraphs 75 to 150) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant (except that amendments corresponding to the 2013 amendments of Part IVA have not been made to section 67) and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

86.  Irretrievable cash contributions made by the Company to the Trust will not be a fringe benefit defined in subsection 136(1) of the FBTAA as explained in the reasons for question 7. As a result, the FBT liability of the Company is not any less than it would have been but for the existence of the arrangement.

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