Edited version of private advice

Authorisation Number: 5010062865209

Date of advice: 30 April 2020

Ruling

Subject: Employee Share Scheme

Question 1

Will Company A obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by Company A to the Trustee for the Trust to fund the subscription for, or acquisition on-market of Company A shares by the Trustee to satisfy the Rights issued under the Plan?

Answer

Yes.

Question 2

Will the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of the Company's shares by the Trust be deductible under section 8-1 of the ITAA 1997 at a time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes.

Question 3

Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company A in respect of the:

(a)             irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of Company A shares by the Trustee to satisfy the Rights, or

(b)             b) costs incurred by Company A in relation to the ongoing administration of the Trust?

Answer

No.

Question 4

Is the provision of Rights and/or Shares in Company A in satisfaction of those awards to employees under the Plan a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

Will the irretrievable cash contribution of funds by Company A to the Trustee in order to:

(a)             subscribe for, or acquire on-market Company A shares, and/or

(b)             fund the ongoing administration of the Trust

be a fringe benefit within the meaning of that term in subsection 136(1) of the FBTAA?

Answer

No.

Question 6

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount to Company A by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A shares?

Answer

No.

The rulings for questions 1 to 3 applies for the following periods:

Income tax year ended 30 June 2020

Income tax year ended 30 June 2021

Income tax year ended 30 June 2022

Income tax year ended 30 June 2023

Income tax year ended 30 June 2024

The rulings for questions 4 to 6 applies for the following periods:

Fringe benefits tax year ended 31 March 2021

Fringe benefits tax year ended 31 March 2022

Fringe benefits tax year ended 31 March 2023

Fringe benefits tax year ended 31 March 2024

Fringe benefits tax year ended 31 March 2025

Relevant facts and circumstances

Company A rewards staff performance by enabling staff to participate in the growth and profitability of the company, through a long term incentive structure. Eligible directors and employees (Participants) receive Performance Rights through the Plan.

The Plan

The Plan was approved by shareholders.

The Board may grant Rights subject to the length of service with the Group, potential contribution to the Group, and any other matters the Board considers relevant.

The Plan will be administered by the Board and Trustee in accordance with the Plan and the Trust Deed.

Grant of Rights

An offer of Rights is made to an Eligible Person and will specify the following:

(a)             the date of the offer

(b)             the number of Rights the subject of the offer

(c)             the Offer Closing Date

(d)             the Performance Criteria and Performance Period

(e)             the time at which the applicable Performance Criteria will be tested in respect of the Performance Period

(f)              the Exercise Period

(g)             the manner of exercise of Vested Rights

(h)             the Exercise Price

(i)               applicable Exercise Restrictions and Restriction Period, and

(j)               other terms and conditions relating to the offer of the Rights as the Board may determine.

To accept an offer, Participants must submit an acceptance form on or prior to the Offer Closing Date. The form must include a notification they accept the offer and the terms and conditions of the offer, confirmation they agree to be bound by the terms of the Plan and the Trust Deed, and agree to the placing of a Holding Lock on any Shares provided on the exercise of the Rights.

Each Right is a right to be issued with, or transferred a Company A Share. A Participant is not entitled to participate in or receive any dividends or other Shareholder benefits until the Right has Vested and been exercised and a Share has been allocated or transferred to the Participant as a result of the Vesting and exercise of the Right.

Restrictions on grant of Rights

Generally Rights that are offered under the Plan can only be issued for a maximum three year period from the date that Shareholders approve the issue of Rights.

Vesting and exercise of Rights

Rights will only Vest once the Board, in its discretion, determines that any relevant Performance Criteria have been satisfied.

The Plan provides details of when a Right will lapse, broadly they are as follows:

(i)               failure to satisfy the Performance Criteria by the end of the Performance Period

(ii)             expiry of the Exercise Period

(iii)            cessation of the Participants employment

(iv)            transfer or purported transfer of the Right without the Board's prior written consent

(v)             a determination by the Board that the Participant has acted fraudulently, dishonestly or in breach of the Participants obligations

(vi)            the 15th anniversary of the date of grant of the Rights, and

(vii)          the participant notifying they wish the Right to lapse and the Board agreeing to that request.

A Vested Right may be exercised by a Participant lodging a notice and payment of the applicable Exercise Price (if any); or be automatically exercised at a specific time or event, in accordance with the terms of the Offer.

Shares provided on exercise

Each Right entitles the Participant to be allocated a Company A Share on Vesting. Shares provided to a Participant following the exercise of Vested Rights will be registered in the name of the Trustee and are to be held by the Trustee on behalf of the Participant on the terms of the Plan and the Trust Deed.

Restrictions on dealing in Shares

Shares will be held on trust for the Participant by the Trustee for the duration of the Restriction Period in accordance with the Plan and the Trust Deed. A Participant may deal with a Share following the end of the Restriction Period.

The Board may prescribe such other mechanisms as it considers necessary to give effect to the restrictions, including the placing of a Holding Lock on Shares provided on the exercise of Vested Rights.

Forfeiture of Shares

A Share will be forfeited where a Participant perpetrates fraud, acts dishonestly or commits a breach of the Participant's obligations to Company A or any other member of the group which would justify the Participants termination as an Eligible Persons without notice.

Withdrawal Notice

Shares are held in the Trust on behalf of the Participant until such time as the Participant submits a Withdrawal Notice to Company A in respect of some or all of the Shares credited to the Account of the Participant under the Plan.

The Trust

The Trust has not and will not be used to administer Rights to non-employees, including contractors.

Company A incurs on-going administration costs of the Trust for which it claims a deduction pursuant to section 8-1 of the ITAA 1997.

The sole activities of the Trustee will be acquiring Company A Shares for the purpose of providing them to Participants at a discount and the administration of the Trust. The Trustee will acquire Company A Shares at market value and will have the discretion to acquire them on market or by subscription for new shares. The Trust is managed and administered so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997.

The Trust was established for the purpose of subscribing for or purchasing, allocating and holding Shares under the Performance Rights Plan for the benefit of Participants.

Declaration of trusts

For each Participant, Shares will be held by the Trustee on behalf of that Participant, the proceeds of sale arising from the sale by the Trustee of rights under a Rights Issue and all Trust Assets related to or arising from Shares on the terms of the Deed and subject to the Plan and any applicable Terms of Participation.

Each Participant is beneficially entitled to those Shares held by the Trustee on his or her behalf, all Trust Assets in respect of those Shares, and all other benefits and privileges attached to, resulting from holding, those Shares. The Trustee will only deal with Shares and any Trust Assets in respect of Shares in accordance with a valid direction of the relevant Participant, the terms of the Plan and any applicable Terms of Participation.

Unallocated Shares will be held on trust until they are allocated to a Participant in accordance with the Trust Deed.

Trustee

The Trustee has the power to administer, maintain and preserve the Trust in the performance of its obligations under the Trust Deed. These powers include entering into and executing all contracts, deeds and documents and do all acts or things necessary for the purpose of giving effect to and carrying out the trusts, powers and discretions conferred on the Trustee by the Trust Deed.

The Trustee is not entitled to receive from the Trust any fees, commission or other remuneration in respect of its office, but Company A may pay to the Trustee from Company A's own resources such fees as Company A and the Trustee agree from time to time.

Rights attaching to Shares

Participants are entitled to receive all Cash Dividends paid on Shares held by the Trustee on behalf of a Participant, subject to the terms of the Trust Deed.

Participants are entitled to any Bonus Shares which accrue to Shares held by the Trustee on behalf of Participants. Bonus Shares must be registered in the name of the Trustee and held in Trust for the Participant who is the beneficial owner.

Participants are entitled to Rights which accrue on Shares held by the Trustee on their behalf. Where the Trustee sells the Rights, the Trustee must distribute the proceeds of sale (after costs) to the Participant.

Where the Trustee acquires Shares pursuant a Rights issue, the Trustee must transfer those Shares to the Participant (after costs).

A Participant may give the Trustee written notice directing the Trustee how to vote in respect of Shares held by the Trustee on their behalf. If no written notice is received the Trustee cannot exercise the voting rights attached to Shares.

Method of acquisition of Shares under the Plan

Company A may provide funds to the Trustee for the purpose of acquiring the Company A Shares, by purchase or subscription. The Trustee may apply some of the capital of the Trust for the purpose of acquiring Company A, by purchase or subscription. The Trustee may apply Unallocated Shares or Forfeited Shares to a Participant. All funds are irretrievable contributions and will constitute an increase to corpus of the Trust and are not repayable to Company A. No Participant is entitled to receive funds from the Trust.

Shares must be registered in the name of the Trustee on issue or purchase, and must be held on the terms of the Trust Deed and the Plan and any applicable Terms of Participation by the Trustee on behalf of the Participant who is the beneficial owner of the Shares.

Trustee's action following Withdrawal Notice

Where a Withdrawal Notice has been given (or deemed to be) by a Participant, Company A will notify the Trustee that they may deal with the Shares by transferring the Shares to the Participant, or by selling those Shares and paying the proceeds (after deducting costs of sale) to the Participant.

Transfer or sale of Shares

Where the Plan or Terms of Participation permit, the Trustee must, at the direction of the Participant, sell the Shares to which the Participant is entitled and pay the proceeds to the Participant.

Where the Plan or Terms of Participation require, or if the Trust is Terminated, or the Board exercises its discretion, the Trustee must do all things necessary to transfer legal title in any Shares that the Participant is entitled to the Participant.

Income and capital distributions

Subject to any applicable Terms of Participation, a Participant is presently entitled to so much of the Net Income of the Trust for a Year of Income which is attributable to the Shares held by the Trustee on behalf of the Participant.

The balance of any Net Income of the Trust for a year of income to which no Participant is presently entitled, may be accumulated by the Trustee as an addition to the Trust.

Termination of the Trust

The Trust will terminate and be wound up when an order being made, or resolution passed for the winding up of Company A, the Board determines the Trust be wound up, or the day before the 80^th anniversary of the Trust Deed.

If the Trust is terminated, the Trustee must transfer to the Participant Shares standing to the credit of the Account of the Participant. The balance of the capital or income of the Trust to which no Participant is entitled may be applied by the Trustee to another employee equity plan or trust established and maintained for the benefit Employees or Directors or a charity.

Reasons for Decision

All legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.

Question 1

Detailed reasoning

Subsection 8-1(1) will allow you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, pursuant to subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature.

Company A carries on a business which produces assessable income and it operates an employee share scheme (ESS) as part of its remuneration strategy.

Under the Plan, Company A grants Rights to employees (Participants) and makes irretrievable cash contributions to the Trust (in accordance with the Plan and the Trust Deed) which the Trustee will use to acquire shares (either on-market or by subscription) for allocation to Participants.

Incurred in carrying on a business

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

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

·                 Company A may not acquire any interest in the capital (or corpus) of the Trust or be entitled to any Income of the Trust, and

·                 On termination of the Trust, Company A does not have any entitlement to any part of the Trust capital or income, including any shares that form part of the Trust.

Company A has granted (and will in the future grant) Rights under the Plan and will continue to do so as part of its remuneration program. The costs incurred by Company A for the acquisition of shares to satisfy Rights arise as part of these remuneration arrangements, and contributions to the Trust are part of an ongoing series of payments in the nature of remuneration of its employees.

Not capital or of a capital nature

The costs will be an outgoing incurred for periodic funding of a ESS for employees of Company A. Costs incurred are likely to be in relation to more than one grant of Rights (rather than being one-off), and Company A intends to continue satisfying outstanding Rights using shares acquired by the Trust. This indicates that the irretrievable contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure of Company A.

While the contributions may secure an enduring or lasting benefit for the employer that is independent of the year to year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be sufficiently small. Therefore, the payments are not capital, or of a capital nature.

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

Question 2

Detailed reasoning

Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to the Trust to purchase shares in excess of the number required in the year of income, under an ESS. Further information is available in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

The Plan is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests (i.e. a beneficial interest in a share or a beneficial interest in a right to acquire a beneficial interest in a share) are provided to employees (i.e., Participants) in relation to their employment with Company A.

The Plan contains a number of interrelated components which includes the provision of irretrievable cash contributions by Company A to the Trustee of the Trust. These irretrievable cash contributions enable the Trustee to acquire shares in Company A for allocation to Participants, who have a beneficial interest in a share or a beneficial interest in a right to acquire a beneficial interest in a share.

The provision of irretrievable cash contributions by Company A to the Trustee of the Trust is for the purpose of enabling the Participants (each an 'ultimate beneficiary', as defined in paragraph 83A-210(a)), to acquire, directly or indirectly, an ESS interest under an employee share scheme (the Plan) in relation to the ultimate beneficiaries' employment.

The deduction for the irretrievable cash contribution can only be deducted from the assessable income of Company A in the income year when the relevant beneficial interest in a share in Company A, or beneficial interest in a Right to a beneficial interest in a share in Company A, is acquired by a Participant under the Plan.

Question 3

Detailed reasoning

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) by a taxpayer in connection with a scheme to which Part IVA applies.

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

In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the employee share trust (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 A to obtain a tax benefit.

Question 4

Detailed reasoning

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA, which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax.

In general terms, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

In particular, paragraph (h) of subsection 136(1) of the FBTAA 1986 excludes the following from being a 'fringe benefit':

(h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83A-B or 83A-C of that Act applies;

The Commissioner accepts that the Plan is an ESS, the Rights provided under the Plan are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of Rights for Company A shares under the Plan will not be subject to FBT on the basis that they are acquired by Participants under an ESS (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

In addition, when a Right is later exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the Right and not in respect of employment (refer 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).

Question 5

Detailed reasoning

One benefit excluded from being a 'fringe benefit', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an EST within the meaning of the Income Tax Assessment Act 1997.

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 EST, a trustee's activities must be limited to those described in paragraphs 130-85(4)(a), (b) and (c).

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

·                 the Trust acquires shares in a company, namely Company A, and

·                 the Trust ensures that ESS interests as defined in subsection 83A-10(1) (being Rights in Company A) are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust and the Plan.

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'.

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'?

Activities that 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.

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 EST under section 130-85(4) including paragraph 130-85(4)(c) as the other activities undertaken by the Trustee are merely incidental to managing the Plan.

Therefore, the irretrievable cash contribution made by Company A to fund the subscription for or acquisition on-market of Company A Shares, or the ongoing administration of the Trust will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Question 6

Detailed reasoning

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

The Commissioner 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.

The benefits provided to the Trustee by the way of irretrievable contributions to the Trust and to Participants as Rights under the Plan (including Company A shares received by Participants on their Vesting) are excluded from the definition of a fringe benefit for the reasons provided in questions 4 and 5 above. As these benefits have been excluded from the definition of a fringe benefit, the FBT liability is not any less than it would have been but for the arrangement.

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