Edited version of private advice

Authorisation Number: 1052385615954

Date of advice: 16 April 2025

Ruling

Subject: Income tax - deductions for employee share schemes

Question 1

Will the irretrievable cash contributions made by Company X Co (Company X Co) to the trustee of the Company X Co Employee Share Trust (Trustee) to fund the acquisition of, or subscription for, ordinary shares in Company X Co (Shares) be deductible to Company X Co under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

Where irretrievable cash contributions are made by Company X Co to the Trustee to fund the acquisition of, or subscription for, Shares by the Company X Co Employee Share Trust (Trust) at a time before the participants acquire the relevant ESS interests, will the timing of any deduction for Company X Co be determined by section 83A-210 of the ITAA 1997?

Answer 2

Yes.

This ruling applies for the following periods:

Income tax years ended 30 June 20XX to 30 June 20XX

The scheme commenced on:

In a particular income year

Relevant facts and circumstances

While the facts and circumstances may identify participants broadly, this private ruling is confined to expenses paid and rights/shares provided for the benefit of participants directly employed by Company X Co or any of its subsidiaries within the income tax consolidated group who engage in activities that derive income assessable in Australia.

This ruling is based on the facts stated in the description of the scheme that is set out below including the following documents, or relevant parts of them, which are to be read with the description:

1.            Plan 1 and Plan 1 Offer Document

2.            Plan 2 and Plan 2 Offer Document

3.            Plan 3 and Plan 3 Offer Document

4.            Plan 4 and Plan 4 Offer Document

5.            Trust Deed

Company X Co (Company X Co)

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

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

As part of the overall remuneration strategy, in addition to fixed remuneration, Company X Co offers certain employees and executives payments of shares upon the satisfaction of certain performance conditions. This is implemented through the following share plans (collectively the 'Plans'):

a.            Plan 1

b.            Plan 2

c.             Plan 3; and

d.            Plan 4.

The purpose of the Plans is to assist in the reward, retention and motivation of Eligible Participants, link the reward of Eligible Participants to Shareholder value creation and align the interests of Eligible Participants with Shareholders.

Company X Co has confirmed that all options or performance rights will be granted for nil consideration under the Plans.

Plan 1

Plan 1 was approved on a certain date. The terms and conditions of Plan 1 are set out in the Plan 1 Rules.

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

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

Plan 2

Plan 2 was approved on a certain date. The terms and conditions of Plan 2 are set out in the Plan 2 Rules.

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

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

Plan 3

Plan 3 was approved on a certain date. The terms and conditions of Plan 3 are set out in the Plan 3 Rules.

The terms on which Participants are invited to participate in Plan 3 are set out in the Plan 3 Offer Letter.

Broadly under Plan 3, the Board may issue an invitation to Employees granting to Employees a number of Shares (for nil consideration) subject to the board determining that any relevant conditions have been satisfied.

Plan 4

Plan 4 was approved on a certain date. The terms and conditions of Plan 4 are set out in the Plan 4 Rules.

The terms on which Participants are invited to participate in Plan 4 are set out in the Plan 4 Offer Letter.

Broadly under Plan 4, the Board may issue an invitation to Employees granting to Employees a number of Shares (for nil consideration) subject to the board determining that any relevant conditions have been satisfied.

Company X Co Employee Share Trust (Trust)

The Trust was established by means of the Company X Co Employee Share Trust Deed (Trust Deed).

Company Y Co is the trustee of the Trust (Trustee). It is a wholly owned company of Company X Co. The board of directors of the Trustee will include common directors with Company X Co, however board meetings will be held independently to those of Company X Co.

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.

2.            Under the Trust Deed, the Trust broadly operates as follows:

•                     Company X Co must by Notice instruct the Trustee to subscribe for, acquire and/or allocate a number of Shares specified in the Notice, to be held by the Trustee as Plan Shares in respect of an identified Participant or Participants.

•                     Company X Co must offer to the Trustee to have Company X Co or a member of the Group provide funds for the purpose of acquiring Shares, request the Trustee to apply some of the capital of the Trust for the purposes of acquiring Shares; or effect a combination of these acts.

•                     Company X Co covenants with the Trustee that it will indemnify and keep the Trustee indemnified from its funds, in respect of all Liabilities, costs and reasonable expenses incurred by the Trustee in the execution of the Trust.

•                     Any funds provided to the Trustee will constitute accretions to the corpus of the Trust and cannot be repaid to Company X Co or a member of the Group.

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

•                     Upon direction of Company X Co, the Trustee must allocate Shares as Plan Shares to the account established for a Participant provided:

­                             the Trustee receives sufficient payment from Company X Co or a member of the Group or having sufficient capital to subscribe for or acquire the relevant Shares;

­                             the Trustee holds sufficient Shares on an unallocated basis; or

­                             any combination of (a) and (b) above applies, as directed by Company X Co.

•                     Plan Shares must be held on the terms of the Trust Deed by the Trustee on behalf of the relevant Participant who is the beneficial owner of the Plan Shares until such time as the Plan Shares are transferred or disposed of or forfeited by the Participant.

•                     The Trustee must transfer or dispose of Plan Securities in accordance with the Plan Rules and any Terms of Participation.

•                     Company X Co may by Notice instruct the Trustee to subscribe for, or acquire, a number of Shares as specified in a Notice, to be held by the Trustee on an unallocated basis on trust for Participants generally.

•                     On forfeiture of Plan Shares by a Participant, Plan Shares will cease to be Plan Shares, and those forfeited Shares will be held by the Trustee on an unallocated basis as general Trust Property. The Board may direct the Trustee to:

­                             reallocate any of those forfeited Shares for the benefit of one or more Participants; or

­                             hold the proceeds of sale of any such forfeited Shares, provided that such disposal and holding of proceeds is in accordance with the Deed.

•                     Nothing in the Trust Deed confers on any Group Company any Security Interest, proprietary right, proprietary interest or beneficial interest in the Plan Securities or Trust Property. Group Company is defined as Company X Co and any of its subsidiaries.

•                     Nothing in the Trust Deed confers on Company X Co or any Group Company any charge, lien, or any other proprietary right, proprietary interest or beneficial interest in the Shares.

•                     At any time after expiry of the Restriction Period (if any), the Trustee must transfer the relevant number of Shares or Plan Securities into the name of the relevant Participant or any third party nominated by the Participant upon a Withdrawal Notice being given to Company X Co

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

•                     The Trustee is not entitled to receive from the Trust any remuneration in respect of its performance of its obligations as trustee of the Trust. However, Company X Co may pay the Trustee such remuneration and reimburse the Trustee any expenses incurred by the Trustee as Company X Co and the Trustee agree in writing, from Company X Co 's own resources.

•                     In the event that the Trust is terminated, the Trustee must not pay any of the remaining Trust Property to any Group Company.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-210

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

Income Tax Assessment Act 1997 section 701-1

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Summary

Yes, Company X Co can deduct under section 8-1 the irretrievable cash contributions it makes to the Trustee to fund the acquisition of, or subscription for, Shares by the Trust pursuant to the Plans.

Detailed reasoning

You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income; or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income (subsection 8-1(1)).

However, you cannot deduct a loss or outgoing under section 8-1 to the extent that:

•                     it is a loss or outgoing of capital or of a capital nature (paragraph 8-1(2)(a))

•                     it is a loss or outgoing of a private or domestic nature (paragraph 8-1(2)(b))

•                     it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income (paragraph 8-1(2)(c)); or

•                     a provision of the Act prevents you from deducting it (paragraph 8-1(2)(d)).

Contributions made to the Trustee are an outgoing incurred by Company X Co

To deduct an amount under section 8-1, you need to incur a loss or outgoing in gaining or producing your assessable income.

Section 8-1 has been interpreted to cover outgoings to which the taxpayer is definitely committed in the year of income although there may not have been any actual disbursement.[1] This means that an outgoing may be incurred even though no money has actually been paid out, provided that there is a liability to pay money as an outgoing.[2] However, there should be a presently existing liability[3] that is 'more than impending, threatened or expected'[4] and you have to be 'completely subjected'[5]to the outgoing.[6]

Whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise.[7] Where there is no presently existing liability, an amount is incurred when it is paid (that is, where the money ceases to be the taxpayer's funds).[8]

Under the Trust Deed:

•                     Company X Co covenants with the Trustee that it will indemnify and keep the Trustee indemnified from its funds, in respect of all Liabilities, costs and reasonable expenses incurred by the Trustee in the execution of the Trust; and

•                     where Company X Co instructs the Trustee to subscribe for, acquire and/or allocate a number of Shares, Company X Co must offer to the Trustee to have Company X Co or a member of the Group provided funds for the purpose of acquiring Shares.

Under the rules of the Plans, the grant of shares, options or rights is in the Board's absolute discretion.

Based on the terms of the Trust Deed and the rules of the Plans, Company X Co does not have a presently existing liability to pay an amount to the Trustee for the following reasons:

•                     the only undertaking provided by Company X Co is to keep the Trustee in funds necessary to do any act required to administer the Trust (which includes directions given to it by the Board to acquire Shares to satisfy ESS entitlements)

•                     the grant of shares, options or rights under the Plans are subject to the Board's absolute discretion; and

•                     there is no binding obligation on Company X Co to provide the funds as, the Trustee will not be obliged under the Trust Deed to subscribe for or purchase shares if Company X Co does not provide it with the required funds.

Instead, Company X Co will make, contributions to the Trustee, to fund the subscription or acquisition of Shares, by making cash payments.

However, for the cash contributions made by Company X Co to the Trustee to be deductible under section 8-1, the contribution must be a permanent loss or outgoing and there should be no circumstance in which Company X Co can retrieve any of the contributions.[9]

Under the Trust Deed:

•                     Nothing in the deed confers on any Group Company any Security Interest, proprietary right, proprietary interest or beneficial interest in the Plan Securities or Trust Property.

•                     Any funds provided to the Trustee will constitute accretions to the corpus of the Trust and cannot be repaid to Company X Co or a member of the Group.

•                     In the event that the Trust is terminated, the Trustee must not pay any of the remaining Trust Property to any Group Company.

Therefore, these contributions are irretrievable and non-refundable to Company X Co and Company X Co is taken to have incurred an outgoing for the purposes of subsection 8-1(1) when the cash contributions are paid to the Trustee.[10]

Contributions are incurred by Company X Co in gaining or producing its assessable income, and in carrying on a business for the purpose of gaining or producing its assessable income

For an outgoing to be deductible under section 8-1, it must be incidental and relevant in the course of gaining or producing your assessable income (paragraph 8-1(1)(a)). Alternatively, a nexus must exist between the outgoing and a business carried on for the purpose of gaining or producing assessable income (paragraph 8-1(1)(b)).[11]

This looks to the scope of the operations or activities and the relevance to that of the expenditure.[12] In addition, the essential character of the outgoing must be that of an income producing or business expense.[13]

Company X Co owns and operates a number of businesses. Company X Co therefore carries on a business for the purpose of gaining or producing assessable income.

The Plans are employee remuneration plans offered to the group's employees as part of Company X Co's remuneration framework.

The purpose of the Plans is to assist in the reward, retention and motivation of Eligible Participants, link the reward of Eligible Participants to Shareholder value creation and align the interests of Eligible Participants with Shareholders.

The Trust was established to facilitate the acquisition, holding of, and allocation of Shares in accordance with employee remuneration plans that Company X Co has implemented. The cash contributions that Company X Co will make to the Trustee are to enable the Trustee to acquire the necessary Shares to hold on trust for participating employees of the Plans. Under the terms of the Trust Deed:

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

•                     Company X Co must by Notice instruct the Trustee to subscribe for, acquire and/or allocate a number of Shares specified in the Notice, to be held by the Trustee as Plan Shares in respect of an identified Participant or Participants or to be held by the Trustee on an unallocated basis on trust for Participants generally.

•                     Upon direction of Company X Co, the Trustee must allocate Shares as Plan Shares to the account established for a Participant provided:

­                             the Trustee receives sufficient payment from Company X Co or a member of the Group or having sufficient capital to subscribe for or acquire the relevant Shares;

­                             the Trustee holds sufficient Shares on an unallocated basis; or

­                             any combination of (a) and (b) above applies, as directed by Company X Co.

•                     Company X Co covenants with the Trustee that it will indemnify and keep the Trustee indemnified from its funds, in respect of all Liabilities, costs and reasonable expenses incurred by the Trustee in the execution of the Trust; and

•                     The Trustee must transfer or dispose of Plan Securities in accordance with the Plan Rules and any Terms of Participation.

The Shares are later transferred to Participants after the expiry of any Restriction Period (if any) or Holding Lock.

Based on the facts provided, it is evident that the character of the cash contributions to the Trustee is that of expenses incurred in remunerating the group's employees and, therefore:

•                     the contributions are incidental and relevant in the course of gaining or producing Company X Co's assessable income

•                     the contributions have the essential character of a business expense; and

•                     there is sufficient nexus between the contributions and the business carried on by Company X Co for the purpose of producing Company X Co's assessable income.

Accordingly, subsection 8-1(1) is satisfied.

Contributions are not an outgoing of capital or of a capital nature

A loss or outgoing is not deductible if it is a loss or outgoing of capital or of a capital nature (paragraph 8-1(2)(a)).

The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit and loss.[14]

Further, when considering whether an outlay is revenue or capital in nature, the following matters are relevant:

•                     the character of the advantage sought

•                     the manner in which it is to be used, relied upon or enjoyed; and

•                     the means adopted to obtain it.[15]

What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view.[16] The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid.[17]

In determining this, it is helpful to consider what the money is really paid for and is what is really paid for, in truth and in substance, a capital asset.[18]

When an outgoing is made, not only once and for all, but with a view to bringing into existence an asset or an advantage of an enduring benefit, it is more likely to be considered as capital in nature.[19] Conversely, an outgoing that is recurrent and subject to continuous demand[20] is more likely to be considered as revenue in nature.[21]

Further, where an outgoing involves periodic payments made over the life of the benefit it is more likely to be considered as revenue in nature, whereas an advanced payment to secure the future use or enjoyment may point towards capital.

Based on the facts provided, it is evident that the advantage sought by Company X Co through its contributions to the Trustee is to align the interests of its employees with those of its shareholders and to attract, motivate and retain its employees. The shares awarded to participants of the Plans is expected to result in the betterment of the Company X Co's business.

The advantage is not considered to have a lasting quality as the contributions which form the Trust's funds is permanently and entirely dissipated within a relatively short period of the contributions being made.

Further, the contributions made by Company X Co is expected to be recurrent and subject to continuous demand, so long as the Plans are in operation.

Therefore, it is considered that the contributions paid by Company X Co are on revenue account - that is, they are not an outgoing of capital or of a capital nature. Accordingly, paragraph 8-1(2)(a) does not apply.

Contributions are not private or domestic in nature, incurred in gaining or producing exempt income or non-assessable non-exempt income, nor disallowed by a provision of the Act

A loss or outgoing is not deductible if it is a loss or outgoing of a private or domestic nature (paragraph 8-1(2)(b)); incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income (paragraph 8-1(2)(c)); or a provision of 'this Act' prevents you from deducting it (paragraph 8-1(2)(d)).

The contributions to the Trustee are not private or domestic in nature and are not incurred in gaining or producing exempt income or non-assessable non-exempt income as those contributions are incurred by Company X Co in gaining or producing its assessable income and has the essential character of a business expense. Accordingly, paragraphs 8-1(2)(b) and (c) do not apply.

In respect of paragraph 8-1(2)(d), a loss or outgoing is not deductible if a provision of 'this Act' prevents you from deducting it. Subsection 995-1(1) defines 'this Act' to include the Income Tax Assessment Act 1936.

It is considered that the contributions to the Trustee would not fall within any of the provisions which operate to limit deductions. Accordingly, paragraph 8-1(2)(d) does not apply.

Question 2

Summary

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

Detailed reasoning

Section 83A-210 of the ITAA 1997 provides that if:

(a)           at a particular time, you provide another entity with money or other property:

(i)            under an arrangement; and

(ii)           for the purposes of enabling an individual (the 'ultimate beneficiary') to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and

(b)           that particular time occurs before the time (the 'acquisition time') the ultimate beneficiary acquires the ESS interest;

then, for the purposes of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time.

An 'arrangement' means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings (subsection 995-1(1)).

Subsection 83A-10(2) defines an 'employee share scheme' as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospect employees) of the company or subsidiaries of the company in relation to the employee's employment.

Subsection 83A-10(1) defines an 'ESS interest', in a company, as a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company.

Based on the available facts, the Plans are considered to be schemes under which rights to acquire a beneficial interest in the Shares (which are 'ESS interests' under subsection 83A-10(1)) are provided to the employees of Company X Co in relation to their employment. Accordingly, the Plans are an 'employee share scheme' as defined under subsection 83A-10(2).

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

[1] Commissioner of Taxation (Cth) v James Flood Pty Ltd [1953] HCA 65.

[2] Latham CJ in W Nevill and Company Limited v Federal Commissioner of Taxation [1937] HCA 9.

[3] Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation (Cth) [1981] HCA 6.

[4] New Zealand Flax Investments Limited v Federal Commissioner of Taxation [1938] HCA 60.

[5] Commissioner of Taxation (Cth) v James Flood Pty Ltd [1953] HCA 65.

[6] See also paragraphs 16 to 18 of Taxation Ruling TR 97/7 Income Tax: section 8-1 - meaning of 'incurred' - timing of deductions.

[7] Paragraph 6(d) of TR 97/7.

[8] Paragraph 6(e) of TR 97/7.

[9] Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339 and Spotlight Stores Pty Ltd v Commissioner of Taxation [2004] FCA 650.

[10] As Company X Co is the head of the Company X Co TCG, any contributions its subsidiaries make to the Trustee are taken to have been made by Company X Co due to the 'single entity rule' under section 701-1.

[11] Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15.

[12] Amalgamated Zinc (De Bavay's) Limited v Federal Commissioner of Taxation [1935] HCA 81.

[13] Lunney v Commissioner of Taxation [1958] HCA 5, Commissioner of Taxation v Payne [1999] FCA 320.

[14] Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73.

[15] Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73.

[16] Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34.

[17] GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) [1990] HCA 25.

Commissioner of Taxation v Citylink Melbourne Limited [2006] HCA 35.

[18] Colonial Mutual Life Assurance Society Ltd v Commissioner of Taxation (Cth) [1953] HCA 68.

[19] British Insulated and Helsby Cables v. Atherton [1926] AC 205.

[20] Ounsworth (Surveyor of Taxes) v Vickers Ltd [1915] 6 TC 671.

[21] Vallambrosa Rubber Co Ltd v Farmer (Surveyor of Taxes) (1910) 5 TC 529.