Private ruling: Employee share scheme
Date of advice: 19 March 2021
Published: June 2021

Ruling: Q1: Will the Company 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 to the Trustee of the Trust to fund the subscription for, or acquisition on-market of Company shares by the Trust pursuant to the Plans? | A1: Yes. | Q2: Will the Company obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by the Company in relation to the on-going administration of the Trust? | A2: Yes. | Q3: Will irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of Shares by the Trust, be deductible to the Company at a time determined by section 83A-210 of the ITAA 1997? | A3: Yes. | Q4: If the Trust satisfies its obligation under the Plans 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 capital gains tax (CGT) event under Division 104 of the ITAA 1997? | A4: No. | Q5: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (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 to the Trustee to fund the subscription for or acquisition on-market of Shares by the Trust? | A5: No. | Q6: Will the provision of Rights and/or Shares by the Company to its employees under the Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Act 1986 (FBTAA)? | A6: No. | Q7: Will the irretrievable cash contribution made by the Company to the Trustee, to fund the subscription for or acquisition on-market of Shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA? | A7: No. | Q8: Will the Commissioner seek to make a determination that section 67 of the FBTAA 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 on-market of Shares? | A8: No.

Relevant facts and circumstances: The Company is the head company of a tax consolidated group composed of itself and other wholly owned Australian resident subsidiaries. The Company has ordinary shares listed on the Australian Securities Exchange. The Company has established a remuneration strategy that supports and drives the achievement of its business strategy which is designed to attract, retain, motivate and reward employees of the business. In addition to wages and salaries, it offers its employees short term and long term incentives under a number of plans. The Plans allow the Board to offer incentives to employees in the form of grants of Rights as described in the Plan Rules and the Plan Deeds. The Company imposes conditions, including performance-related conditions, on the right of a Participant to exercise any Rights granted. The Company established a share trust as a sole purpose trust for the purpose of acquiring, delivering, allocating, and holding shares in connection with equity incentive plans established by the Company for the benefit of Participants in those plans. The Trustee of the Trust is an independent third party. The Trust is an entity that allows the Company to carry out its incentive arrangements by providing capital management flexibility and a means to acquire the Company's shares on-market or to subscribe for new shares in the Company. The Trust provides an arm's length vehicle through which Shares can be acquired and held on behalf of employees. This aspect allows the Company to satisfy Corporations Law requirements relating to companies dealing in their own shares. Broadly, the Trust operates as follows: • The Trust will be funded by contributions from the Company or a subsidiary member of the tax consolidated group (e.g., for the purchase of Shares in accordance with the plans), and • Irretrievable cash contributions are made regularly and progressively to the Trust in accordance with the rules of the Plans and the Trust Deed.


Reasons for decision: Detailed Reasoning - Detailed reasoning: 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, 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. The Company carries on a business which produces assessable income and it operates an employee share scheme (ESS) as part of its remuneration strategy. Under its Plans, the Company grants Rights to employees (Participants) and makes irretrievable cash contributions to the Trust, in accordance with the Plans and the Trust Deed. The Trustee uses the Trust to acquire Shares (either on-market or by subscription), for allocation to Participants. | Detailed Reasoning - Incurred in carrying on a business: The Company or a subsidiary member of the Group must provide the Trustee with all the funds required to enable the Trustee to subscribe for, or acquire, Shares. The contributions made by the Company are irretrievable and non-refundable, in accordance with the Trust Deed, as follows: • Neither the Company, nor any other member of the Group has any entitlement to any part of the Trust Fund, including any shares that form part of the Trust Fund, at any time • The Trustee must not repay to the Company or any Group company any amount received as funds for the purchase of Shares, and • On termination of the Trust, the Company or any other member of the Group does not have any entitlement to any part of the Trust Assets. The Company has granted (and will in the future grant) Rights to Shares under the Plans and will continue to do so as part of its remuneration and rewards program. The costs incurred by the Company for the acquisition of shares to satisfy Rights arise as part of these remuneration arrangements, and contributions to the EST are part of an on-going series of payments in the nature of remuneration of its employees. | Detailed Reasoning - Not capital or of a capital nature: The costs will be an outgoing incurred for periodic funding of an ESS for employees of the Company and the Group. Costs incurred will be in relation to more than one grant of Rights, and the Company will continue satisfying outstanding Rights using shares acquired by the EST. This indicates that the irretrievable cash contributions to the EST are ongoing in nature and are part of the broader remuneration expenditure of the Company. While the irretrievable cash 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 comparatively small. Therefore, the payments are not capital, or of a capital nature. Therefore, paragraph 8-1(2)(a) is not satisfied. Accordingly, the Company will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee of the EST to acquire shares in the Company to satisfy ESS interests issued pursuant to the Plans. | Detailed Reasoning - Detailed reasoning: 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 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. The Company carries on a business which produces assessable income and operates an ESS as part of its remuneration strategy. The Company must pay all Trust Expenses and incurs on-going administration costs in operating the ESS such as: • employee plan record keeping • production and despatch of holding statements to employees • cost incurred in the acquisition of shares on market, brokerage costs and the allocation of such shares to Participants, and • other trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust. These costs are regular and recurrent employment expenses which are deductible under section 8-1 as they are costs necessarily incurred in running the ESS while carrying on its business for the purpose of gaining or producing its assessable income. Relevantly, these costs are not capital or of a capital nature as the loss or outgoings are regular and recurrent and are part of the ordinary employee remuneration costs of the company (ATO Interpretative Decision ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible). | Detailed Reasoning - Detailed reasoning: Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to a trust to purchase shares in excess of the number required in a year of income, under an employee share scheme. 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 Plans are an ESS for the purposes of subsection 83A-10(2) as they are schemes 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 the Company. This ESS contains a number of interrelated components which include the provision of irretrievable cash contributions by the Company to the Trustee of the EST. These irretrievable cash contributions enable the Trustee to acquire shares in the Company 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 the Company 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 Plans) in relation to the ultimate beneficiaries' employment. The deduction for the irretrievable cash contribution can only be deducted from the assessable income of the Company in the income year when the relevant beneficial interest in a share in the Company, or beneficial interest in a Right to a beneficial interest in a share in the Company, is acquired by a Participant under the Plans. | Detailed Reasoning - Indeterminate rights under the Plans: Rights provided under the Plans are indeterminate rights for the purposes of section 83A-340. That is because, on exercise, the Board has the discretion to make cash payments instead of allocating Shares. In this regard, such Rights are not rights to acquire a beneficial interest in a Share unless and until the Board determines the Rights will be satisfied by the provision of Shares. Once this is determined, section 83A-340 operates to treat such a Right as though it had always been a right to acquire a beneficial interest in the Share. If an irretrievable contribution is provided to the Trustee before such Rights are acquired (and the Rights subsequently do become ESS interests), section 83A-340 operates to deem the Rights to always have been ESS interests. Where this occurs, section 83A-210 will apply to modify the timing of the deduction claimed under section 8-1. In such a case, a deduction for the contribution will only be available to the Company in the income year in which the relevant Participant acquires the Right. Where an indeterminate right does not become an ESS interest because it is ultimately satisfied in cash, the outgoing should not flow through the EST. Such an activity is regarded as being not merely incidental (paragraph 13 of Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'?) and as such would cause the EST to be regarded as no longer satisfying the sole activities test for the purposes of subsection 130-85(4). | Detailed Reasoning - Detailed reasoning: Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In an employee share scheme, 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. The character of the contribution of share capital received by the Company from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Under this arrangement, as the Company issues shares in itself to the Trustee, in exchange for the subscription proceeds, the character of the newly issued shares is one of capital, and accordingly 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. Accordingly, when the Company receives subscription proceeds from the Trustee of the Trust where the Trustee has subscribed for new Shares in the Company to satisfy obligations to Participants, that subscription price received by the Company is a capital receipt. That is, it will not be on revenue account and it will not be ordinary income under section 6-5. | Detailed Reasoning - Section 20-20: Subsection 20-20(2) provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year. The Company will receive an amount when the Trustee of the Trust subscribes for Shares. There is no insurance contract in this case, so the amount received is not received by way of insurance. Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. Subsection 20-20(3) makes assessable a recoupment of a loss or outgoing that is deductible in the current year of income or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30. Subsection 20-25(1) defines a recoupment as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing. The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing. To the extent that section 8-1 allows a deduction for bad debts or rates or taxes, section 20-30 will apply such that if there was a recoupment of that deduction, that amount would be assessable. The receipt by the Company is in return for issuing Shares to the Trustee of the Trust, not as a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes that could be subject to section 20-30. The subscription proceeds will therefore not be an assessable recoupment under section 20-20. | Detailed Reasoning - Division 104: Section 102-20 provides that you make a capital gain or loss if, and only if, a CGT event happens. Where the receipt of subscription proceeds does not relate to a CGT event, a capital gain will not arise. CGT events for which you make a gain or loss are specified in Division 104. CGT events that may have possible application when subscription proceeds are received by the Company from the Trustee are CGT event D1 (creating contractual or other rights) and CGT event H2 (receipt for event relating to a CGT asset). However, paragraph 104-35(5)(c) states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. Also, paragraph 104-155(5)(c) states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this instance, as the Company is issuing shares, being equity interests, as defined in section 974-75, to the Trustee of the Trust, CGT events D1 and H2 do not happen. As no CGT event happens, there is no amount assessable as a capital gain to Cleanaway. In conclusion, if the Trustee of the Trust satisfies its obligations under the Trust Deed by subscribing for new shares in the Company, the subscription proceeds received by the Company will not be included in its assessable income under section 6-5 or section 20-20 nor trigger a capital gains tax event under Division 104. | Detailed Reasoning - 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 EST arrangement. 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. | Detailed Reasoning - 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 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 Plans comprise an ESS, the Rights and Shares provided under the Plans are ESS interests, and that Subdivision 83A-B or 83A-C applies to those ESS interests. Accordingly, the provision of Rights and Shares under the Plans 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 ). | Detailed Reasoning - Detailed reasoning: As stated above in response to Question 6, an employer's liability to 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. 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 employee share trust within the meaning of the ITAA 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 the Company, and • the Trust 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 those shares to the employees in accordance with the Trust and the Plans. 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 employee share trust under section 130-85(4) (clause 4.2 of the Trust Deed) including paragraph 130-85(4)(c) as the other activities undertaken by the Trustee are merely incidental to managing the Plans. Therefore, the irretrievable cash contribution made by the Company to fund the subscription for or acquisition on-market of the Company's shares will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - 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 will only make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. As stated above in response to Question 7, without the provision of a 'fringe benefit', no amount will be subject to FBT. The benefits provided to the Trustee by way of irretrievable cash contributions to the Trust and to Participants by way of the provision of Rights under the Plans are excluded from the definition of a fringe benefit for the reasons provided in response to questions 6 and 7 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 the Company by the amount of tax benefit gained from the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of the Company's shares. Therefore, the Commissioner will not make a determination under section 67 of the FBTAA in relation to Contributions made to the Trustee, to fund the acquisition of Shares.

Reasons for decision: Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.