ATO ID 2002/849: Employee Share Plan Assessability of payments received by Plan company
Date of decision: 17 May 2002
Year of income: Other/Substituted Accounting Period 2004
Business line: Private Groups and High Wealth Individuals

Issue
Are the recoupment payments made by a Plan Company and received by company A in relation to any excess of the proceeds from the sale of forfeited shares over the Plan Company's acquisition cost assessable to Company A under Section 6-5 of the Income Tax Assessment Act 1997 ('ITAA 1997').

Decision
Yes. Where the proceeds from the sale of shares forfeited by the participants exceeds the acquisition cost paid by the Plan Company, the excess is assessable to Company A under section 6-5 of the ITAA 1997.

Facts
Company A wish to establish an employee Share Plan (ESP) as part of a broad remuneration strategy. To benefit under the ESP, employees are required to satisfy certain performance criteria. Company A through its Human Resource Committee would provide selected employees with the opportunity to acquire shares in Company A. The Human Resource Committee will impose offer conditions on these shares based on performance and continued employment within Company A. A Plan Company will be engaged to administer certain aspects of the ESP in accordance with the Plan Rules. The Plan Company will be a third party for Corporations Law reasons, it will not be controlled or owned by Company A. The participating employees will fund the acquisition cost of shares by way of a loan provided by an associate of Company A. The loan provided is non-interest bearing and fully recourse in nature. In the event that the Human Resource Committee determines that a participant's shares are to be forfeited, such forfeiture will generally be effected by the Plan Company acquiring the shares for an amount being the greater of the market value of the shares or the amount of the participant's loan which ever is greater. In these circumstances, if there are insufficient funds standing to the balance of the "Plan Account ", Company A will make a payment to the Plan company to cover the shortfall between the proceeds from the Plan Company's sale of the forfeited shares and the amount the Plan Company is required to pay to acquire the forfeited shares from the participant. In the event of any excess funds, the Plan Company will remit the excess to Company A or use them for the purposes of the Plan as directed by Company A.

Reasons for decision
Summary: These payments to Company A arise in connection with remuneration related activities of Company A and in certain cases may be regarded as a recovery of expenditure in connection with the operation of the Plan. Therefore these payments come within the meaning of "income under ordinary concepts" and accordingly, would be taxable to Company A under Section 6-5 of ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 6-5
Related ATO interpretative decisions: ATO ID 2002/847 | ATO ID 2002/848
Subject references: Precedent Employee share loan benefit Income