Private ruling: Employee share scheme
Date of advice: 31 July 2020
Published: September 2020
Ruling period: Income tax year ended 30 June 20xx | Income tax year ended 30 June 20xx | Income tax year ended 30 June 20xx | Income tax year ended 30 June 20xx | Income tax year ended 30 June 20xx | Issue 2 | Fringe Benefits Tax | Question 4 | Will the provision of ESS interests to employees of Company A (or its subsidiaries) under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (Cth) ("FBTAA")? | Answer | No | Question 5 | Will the irretrievable cash contributions made by Company A (or a subsidiary member of the Group), to the Trustee of the Share Trust, to fund the subscription for, or acquisition on-market of, Shares pursuant to the Plan, constitute a fringe benefit within the meaning of 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 of Company A (or any subsidiary member of the Group), by the amount of tax benefit gained from irretrievable cash contributions made by Company A or its subsidiary members to the Trustee, to fund the subscription for, or acquisition on-market of, Shares? | Answer | No | The rulings for questions 4-6 inclusive each apply for the following periods: | Fringe benefits tax year ended 31 March 20xx | Fringe benefits tax year ended 31 March 20xx | Fringe benefits tax year ended 31 March 20xx | Fringe benefits tax year ended 31 March 20xx | Fringe benefits tax year ended 31 March 20xx

Ruling: Q1: Will Company A as the head entity of a group of wholly-owned Australian companies consolidated for Australian tax purposes (the "Group") be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (Cth) ("ITAA 1997") for irretrievable cash contributions made by Company A (or a subsidiary member of the Group), to the Trustee of the Company A Employee Share Trust (the "Share Trust") to fund the subscription for, or acquisition on-market of, ordinary shares in Company A ("Shares") to satisfy Employee Share Scheme ("ESS") interests issued pursuant to the Performance Rights Plan ("Plan") to Participants? | A3: Yes | Q2: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936") applies to deny, in part or in full, any deduction claimed by Company A for the irretrievable cash contributions made to the Share Trust to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plan? | A4: No

Relevant facts and circumstances: General · Company A (the "Company") is the head entity of a group of wholly owned Australian companies consolidated for tax purposes (the "Group"). · The Company established a Performance Rights Plan (the "Plan") to retain key talent and promote the long-term success of the Group. The Performance Rights Plan Rules (the "Plan Rules") received shareholder approval. · The board of directors has approved the establishment of an employee share trust under the terms of the Company A Employee Share Trust ("the Share Trust") Trust Deed (the "Trust Deed"), using an unrelated third party as the trustee of the Share Trust. The Trust Deed has been executed. · The Plan allows the Company to offer Performance Rights to Eligible Persons (as defined in the Plan Rules) to acquire Shares for nil consideration subject to the achievement of service and/or performance-based vesting conditions (as determined by the Board). · On acceptance of the offer by Eligible Persons ("Participants"), Participants can elect for a 'trading restriction' to apply to Shares allocated on eventual exercise of the Performance Rights (generally for a period of up to 5 years that commences from the date the Performance Rights vest to Participants). · Performance Rights that vest must be exercised by Participants within a set period of the date on which a Participant is notified by the Company that Performance Rights have vested. No exercise price is payable on the exercise of Performance Rights. · The Plan Rules allow for the Performance Rights to be satisfied by the Share Trust. There are no restrictions on the sourcing of Shares used to satisfy exercised Performance Rights. Shares may be acquired on-market, or via a subscription of new Shares. · The Trust Deed allows the Trustee to acquire, hold and allocate Shares to employees participating in the Plan as well as employee share plans operated by the Company A from time to time. The Share Trust is established to provide for the delivery of Shares to employees with the sole activities of the Share Trust being obtaining Shares and providing those Shares to the employees. The Trustee may also conduct other activities that are 'merely incidental' to those stated above (such as the holding of cash and other assets as the Trustee considers necessary to carry out the objects of the Share Trust), consistent with the definition of 'employee share trust' in subsection 130-85(4) of ITAA 1997. · Performance Rights have been granted under the Plan since the Plan was established. Grants of Performance Rights under the Plan · The Plan allows the Company to offer Performance Rights to Eligible Persons (as defined in the Plan Rules). A Performance Right constitutes a right to acquire a fully paid ordinary share in the Company subject to the satisfaction of vesting conditions (which may include performance related conditions and / or minimum service conditions) that apply to the Performance Rights, as determined by the Board. · Performance Rights granted do not carry dividend or voting performance rights. · An Eligible Person becomes a Participant by accepting the offer to participate (by completing and delivering an Acceptance Form to the Company). · Performance Rights may not be transferred by a Participant unless the prior consent of the Board is obtained or the transfer occurs by force of law or upon bankruptcy of the Participant. Lapse of Performance Rights · Unless the Board determines otherwise, all Performance Rights (whether vested or unvested) lapse if: · A Participant ceases to be an employee and/or director (as applicable) of the Group for any reason; or · A Participant ceases to satisfy any other relevant conditions imposed by the Board at the time of grant of the Performance Rights. Settlement of vested Performance Rights · When Performance Rights are exercised, the Board must either (at its absolute discretion): · Issue Shares to Participants, or · Pay cash amount equal to the number of Performance Shares that the Participant is entitled from their exercise. · Participants are entitled to dispose of their Shares, once any trading restrictions as elected by the Participant have expired. · Participants are residents of Australia for income tax purposes. Employee Share Trust · The Company has established the Share Trust to facilitate the acquisition, holding of, and allocation of Shares to Participants in accordance with employee equity plans that the Company operates (including the Plan). · The Company or any other company in the Group cannot be a beneficiary of the Share Trust · The general powers of the Trustee provided in the Trust Deed are in line with the objects of the Share Trust to acquire and hold Shares for the purpose of providing them to Participants of the Plan on exercise of the Performance Rights. Allocating Shares to the Share Trust · Under the terms of the Trust Deed, the Trustee must comply with any reasonable written direction of the Board to subscribe for, purchase, allocate or accept Shares on behalf of a Participant in accordance with the Plan Rules and must apply any amount paid to it by a company in the Group pursuant to the Plan Rules in accordance with any such directions of the Board. · The Trustee will, in accordance with instructions received from the Board, acquire, deliver and allocate Shares to Participants provided that the Trustee receives sufficient payment from the Company to subscribe for or purchase Shares and/or has sufficient unallocated Shares available in the Share Trust. · Shares will not be allocated to Participants and no interest will arise until vesting conditions are met and Performance Rights have been exercised. Contributions to the Share Trust · Funds will not be returned or repayable to the Company except where they are used for subscribing for Shares in the Company. · The Group must not acquire any interest in the capital (or corpus) or be entitled to, or become entitled to, any income of the Share Trust. · If there is trust income at the end of any financial year, the income will be accumulated. · The Trustee may apply capital of the Share Trust to pay dividend equivalent amounts to Participant under Plan Rules where: · the amount paid is equal to or less than the amount of dividends paid to the trustee (net of tax paid by the trustee on the dividends), in relation to the number of shares being received by the participating employee, during the accumulation period; and · the payment is made at or around the time, and because, the shares vest or are transferred to the participating employee (as required by the ESS).


Reasons for decision: Summary: All legislative references are to provisions of the Income Tax Assessment Act 1997 unless otherwise indicated. Questions 1 to 3 - application of the single entity rule in section 701-1 The consolidation provisions of the Income Tax Assessment Act 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 Company A as the head company of the Group. Questions 4 to 6 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 Company A and each company which is a subsidiary member of the Group in relation to questions 4 to 6. | Detailed Reasoning - Issue 1: Income Tax | Detailed Reasoning - Detailed reasoning: For present purposes, 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. Company A operates an employee share scheme ("the Plan") as part of its remuneration strategy. Company A grants Performance Rights to eligible employees and makes irretrievable contributions to the Share Trust (in accordance with the Plan Rules and the Trust Deed) which the Trustee will use to acquire Shares (either on-market or by subscription) for allocation to Participants to satisfy their Performance Rights. Incurred in carrying on a business Company A 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, those Shares. The contributions made by Company A are irretrievable and non-refundable to Company A in accordance with the Trust Deed as: · Under the Trust Deed, Company A and subsidiary members of the Group cannot have any beneficial interest in any Company A Shares subscribed or acquired by the Trustee; and · On termination of the Share Trust, Company A and subsidiary members of the Group do not have any entitlement to any part of the capital of the Share Trust. Company A has granted (and will in the future grant) Performance Rights under the Plan as part of its remuneration and reward program for Participants. The costs incurred by Company A for the acquisition of Shares to satisfy the Performance Rights of the Plan arises as part of these remuneration arrangements, and contributions to the Share Trust are part of an on-going 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 bona fide employee share scheme for employees of Company A and the Group. Costs incurred are likely to be in relation to more than one period of remuneration (rather than being one-off), and Company A intends to continue satisfying the outstanding Performance Rights of the Plan using Shares acquired by the Share Trust. This indicates that the irretrievable contributions to the Share 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. | Detailed Reasoning - Detailed reasoning: Section 83A-210 applies to determine the timing of the deduction, in respect of the contribution provided to the trust to purchase shares in excess of the number required to grant the relevant Performance Rights to the employees arising in the year of income from the grant of Performance Rights, 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 Plan is an employee share schemes 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 (or subsidiary members of the Group). The Plan contains a number of interrelated components which include the provision of irretrievable cash contributions by Company A to the Trustee of the Share Trust. These contributions enable the Trustee to acquire Shares for the purpose of enabling each Participant, indirectly as part of the Plan, to acquire ESS interests. 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 Right to a beneficial interest in a Share in Company A, is acquired by a Participant under the Plan. | Detailed Reasoning - Indeterminate rights under the Performance Rights Plan: Performance Rights provided under the Plan are indeterminate rights for the purposes of section 83A-340. That is because, on exercise, the Board has the discretion to make cash payment instead of allocating Company A Shares. In this regard, such Performance Rights are not rights to acquire beneficial interests in Company A Share unless and until the Board determines the Performance Rights will be satisfied by the provision of Company A Shares. Once this is determined, section 83A-340 operates to treat such a Performance Right as though it had always been a right to acquire a beneficial interest in the Company A Share. If an irretrievable contribution is provided to the Trustee before such Performance Rights are acquired (and the Rights subsequently do become ESS interests), section 83A-340 operates to deem the Performance 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 Company A in the income year in which the relevant Participant acquires the right to a Share. Where an indeterminate right does not become an ESS interest because it is ultimately satisfied in cash, the outgoing should not flow through the Share Trust. This is because the Share Trust would not satisfy the sole activities test for the purposes of subsection 130-85(4) in those circumstances. | Detailed Reasoning - Detailed reasoning: Where the contributions made by Company A are made after the acquisition of the relevant ESS interests by the ultimate beneficiaries, section 83A-210 will not apply. The detailed reasoning in response to Question 3 above provides a summary of the operation of section 83A-210. Where Company A makes contributions to the Trustee of the Share Trust after the acquisition of the relevant ESS interests by the ultimate beneficiaries, the deduction will be allowable under section 8-1 in the income year in which the irretrievable contributions are made where Performance Rights are ultimately satisfied with Shares. | Detailed Reasoning - Detailed reasoning: Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) 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 of the ITAA 1936, be obtained, 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 arrangement. Having regard to the eight factors set out in subsection 177D(2) of the ITAA 1936, 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. | Detailed Reasoning - Issue 2: Fringe Benefits Tax | Detailed Reasoning - Detailed reasoning: An employer's liability to fringe benefits tax ("FBT") arises under section 66 of the Frings Benefits Tax Assessment Act 1986 ("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 employee share scheme, the Performance 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 Performance Rights for Shares under the Plan will not be subject to FBT on the basis that they are acquired by Participants under an employee share scheme (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 an option 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 option 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: 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 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 employee share trust, 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 Share Trust acquires shares in a company, namely Company A; and · The Share Trust ensures that ESS interests as defined in subsection 83A-10(1) (being Performance Rights in the Plan) are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those Company A Shares to the employees in accordance with the Trust Deed 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 Share Trust are for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under subsection 130-85(4) (clause 1.4 of the Trust Deed) including paragraph 130-85(4)(c) as the other activities undertaken by the Trustee are merely incidental to managing the Plan. Therefore, the cash contribution made by Company A and subsidiaries members of the Group to fund the subscription for or acquisition on-market of Company A Shares by the Share Trust will not be a fringe benefit. | Detailed Reasoning - Detailed Reasoning: PS LA 2005/24 Application of General Anti-Avoidance Rules explains the application of Part IVA of the ITAA 1936 or other general anti-avoidance rules to an arrangement, including the operation of section 67 of the FBTAA 1986 (refer to paragraphs 185-191). 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: 191. 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. In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the Share Trust under the Plan are excluded from the definition of a fringe benefit for the reasons given above in question 5. As the benefits have been excluded from the definition of a fringe benefit, the fringe benefits tax liability is not any less than it would have been but for the existence of 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 or any subsidiary member of the Group by the amount of the tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee of the Share Trust to fund the subscription for, or acquisition on-market of, Shares in Company A.

Question 2a: Will the irretrievable cash contributions made by Company A (or a subsidiary member of the Group), to the Trustee of the Share Trust, to fund the subscription for, or acquisition on-market of, Shares by the Trustee to satisfy ESS interests issued pursuant to the Plan, be deductible to Company A under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997, if the contributions are made before the acquisition of the relevant ESS interests by the ultimate beneficiaries? | Question 2b: Will the irretrievable contributions made by Company A (or a subsidiary member of the Group), to the Trustee of the Share Trust, to fund the subscription for, or acquisition on-market of, Shares by the Trustee to satisfy ESS interests issued pursuant to the Plan, be deductible to Company A under section 8-1 of the ITAA 1997 in the income year when the contributions are made, if the contributions are made after the acquisition of the relevant ESS interests by the ultimate beneficiaries?