Private ruling: Deductions - salary and wages
Date of advice: 5 November 2021
Published: January 2022
Ruling period: Years ended 30 June 20XX | Years ended 30 June 20XX | Years ended 30 June 20XX
Date scheme commenced: 1 July 2021

Ruling: Q1: Can the Company claim a deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for payments made in exchange for the cancellation of options held by its employees under the Employee Share Option Plan (ESOP)? | A1: Yes.

Relevant facts and circumstances: The Company is private company incorporated in Australia. The Company is a start-up company for the purposes of section 83A-33 of the ITAA 1997. The Company established an Employee Share Option Plan (ESOP) for its employees. Under the ESOP, no amount is payable by an employee to the Company for the grant of an option. Options have a minimum three year holding period before they can be disposed of, unless the employee ceases employment, at which point they are able to dispose of the interest. As allowed for in the ESOP, the Board is proposing to cancel vested options granted under the ESOP in exchange for consideration, being the fair market value of the options.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 83A-33

Reasons for decision: Summary: The payments are deductible under section 8-1 of the ITAA 1997 as they are necessarily incurred in carrying on the business of the Company and there is nothing to indicate that the contributions are otherwise excluded by subsection 8-1(2) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The Options provided to the participants under the Plan are indeterminate rights as they entitle the participants to acquire either Company shares or cash, determined at a future time at the discretion of the Board. If the Board resolves that the participants are to receive cash, then the Company redeems the Options and pays participants cash equal to the market value of an ordinary share in the Company less the Option's exercise price. ATO ID 2010/142 provides as follows: Where an employee's indeterminate rights are ultimately satisfied with cash instead of shares, the granting of the rights: • will be viewed as one of a series of steps in the payment of salary or wages; and • will not be viewed as a separate benefit to the payment of salary or wages. Therefore, the payments by the Company to participants to redeem the Options will be viewed as a payment of salary and wages. Subsection 8-1(1) of the ITAA 1997 provides that a taxpayer can deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing their assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing their assessable income. However, subsection 8-1(2) denies a deduction to the extent that the expenditure is capital, or of a capital nature. In this case the payments have been incurred by the Company as part of carrying on their business to produce the assessable income of the business. There is nothing to indicate that the payments are otherwise excluded by subsection 8-1(2) of the ITAA 1997. As such the payments are deductible to the Company under section 8-1 of the ITAA 1997.