Private ruling: Employee Share Scheme
Date of advice: 14 March 2018
Published: June 2018
Ruling period: 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020 | 1 July 2020 to 30 June 2021 | 1 July 2021 to 30 June 2022

Ruling: Q1: Will the company be entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of contributions made to the Trustee of the Employee Plan Trust to acquire shares in the company to satisfy the Performance Rights that will vest on their respective vesting dates? | A1: Yes. | Q2: If the contributions are made in the same income year or an income year after the income year in which the Participant acquired the relevant employee share scheme interest, will the contributions made by the company to the Trustee of the Employee Plan Trust to fund the acquisition of the company’s shares be deductible by the company at a time determined by section 83A-210 of the ITAA 1997? | A2: No. | Q3: Will the Commissioner seek to make a determination under section 177F that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny a deduction or part of deduction being claimed by the company in relation to the contributions made by the company to the Trustee of the Employee Plan Trust to fund the subscription for or acquisition on-market of the company’s shares by the Employee Plan Trust? | A3: No. | Q4: Will the company be entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of costs incurred by the Company in relation to the implementation and on-going administration of the Employee Plan Trust? | A4: Yes. | Q5: If the Employee Plan Trust satisfies its obligations under the Employee Plan 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 section 20-20 of the ITAA 1997 or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997? | A5: No.

Relevant facts and circumstances: The company is an Australian public company listed on the Australian Securities Exchange (ASX). Employee share plans The Company has implemented an employee share scheme (ESS), the Employee Plan (the Plan) as part of its remuneration strategy. Broadly, the Plan operates to provide employees (Participants) with the opportunity to receive rights for generally nil consideration. In order to receive shares, the participating employee must satisfy vesting conditions specified in the relevant plan’s rules (Plan Rules). Employee share trust The Trust is established for the sole purpose of obtaining Rights for the benefit of the Participants, including subscribing for or acquiring, allocating, holding and delivering rights under the Plans for the benefit of the participants. The Trust Deed does not allow the Trustee to provide any additional benefits other than those that arise from the Plan Rules. The Trust is funded by contributions from the Company, including the acquisitions of shares in the Company shares at market value either on-market, or by a subscription for new shares. Shares will be held by the Trust on trust for the benefit of the Participants and employees generally until they are allocated or transferred to an employee (on vesting and/or exercise of the Rights). The Trust cannot exercise voting rights in relation to unallocated shares. Contributions to the Trust The Company does not intend to make cash contributions to the Trust prior to the issue of the Rights to the Participants. The Company will make contributions to the Trust when the Rights vest or where it makes commercial sense to do so. For example, it may make cash contributions to the Trust prior to the vesting and/or exercise of the Rights to ensure the Trust has the cash necessary to acquire shares in the Company to satisfy the acquisition or subscription of shares related to the Rights.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 section 20-30 | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 section 83A-20 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-5 | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 section 104-55 | Income Tax Assessment Act 1997 section 104-155 | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 subsection 974-75(1) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1936 section 177A | Income Tax Assessment Act 1936 section 177B | Income Tax Assessment Act 1936 section 177C | Income Tax Assessment Act 1936 section 177CB | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 section 177F

Reasons for decision: Summary: The irretrievable cash contributions to the Trustee are employee remuneration costs, directly related to enhancing the profitability of the Company. They are not business outgoings of capital or of a capital nature. Therefore, the Company is entitled to deduct them under section 8-1. The irretrievable cash contributions made by the Company to the Trust for purpose of remunerating its employees under an employee share scheme is an allowable deduction under section 8-1 of the ITAA 1997. The deduction under section 8-1 would generally be allowable in the income year in which the Company incurred the loss or outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997. As the contributions are paid by Company to the Trustee of the Trust after the time the Participants acquired their Performance Rights, section 83A-210 of the ITAA 1997 will not apply. The Company is entitled to a deduction for the contributions it makes to the Trust under section 8-1 of the ITAA 1997 in the year of income in which a contribution is paid. Part IVA is a general anti-avoidance provision. It gives the Commissioner the discretion 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. Having regard to the relevant circumstances of the present case, it cannot be concluded that the scheme was entered into for the dominant purpose of enabling the Company to obtain a tax benefit. Therefore, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company for the irretrievable cash contributions made to the Trustee. As discussed in Question 1, the Company is entitled to a deduction under section 8-1 of the ITAA 1997 for any loss or outgoing necessarily incurred in carrying on its business for the purpose of gaining or producing it assessable income to the extent they are not capital or are capital in nature. The Company has incurred various costs in relation to implementing and administering the Trust including legal costs, consultation costs, accounting advice, tax advice and valuation (actuary) costs. These are costs necessarily incurred by the Company in carrying on its business for the purpose of gaining or producing its assessable income and therefore are deductible under section 8-1 of the ITAA 1997. The costs are revenue and not capital or capital in nature on the basis that they are regular and recurrent employment expenses. If the Trust satisfies its obligations under the Plans by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under either section 6-5 or 20-20 or trigger a CGT event under Division 104. Section 6-5 Under subsection 6-5(1) of the ITAA 1997, assessable income includes income according to ordinary concepts, which is called ordinary income. When the Company receives the subscription proceeds from the Trustee of the employee share trust where the Trust subscribes for new shares in the Company to satisfy its obligations under the Plan, the subscription proceeds received by the Company are of a capital receipt. That is, the contributions will not be on revenue account and will not be assessable income under section 6-5 of the ITAA 1997. Division 20 Division 20 deals with amounts included to reverse the effect of past deductions and section 20-20 deals with assessable recoupments. Under subsection 20-20(1) of the ITAA, an amount is not as assessable income to the extent that it is ordinary income, or it is statutory income because of a provision outside of this Subdivision. Subsections 20-20(2) and (3) refer to recoupment of a loss or outgoing, received by way of insurance, indemnity or other recoupment. The subscription proceeds received by the Company from the Trust are for shares and are integral to the arrangement, whereby the acquisition and holding of the shares by the Trustee and the allocation of shares to the Participants are all interrelated components of the Plan. The subscription proceeds are not recoupments of losses or outgoings received by way of insurance, indemnity or other outgoing. Also, the table in section 20-30, which shows the deductions for which recoupments are assessable, does not include provision for funding an employee share trust to acquire shares for employees. As established in question 1, the contributions made by the Company to the Trustee to fund the subscription of the Company shares is a loss or outgoing incurred by the Company as part of the remuneration strategy of the Company and is an integral part of the conduct of the Company’s business. The contribution will be an allowable deduction to the Company under section 8-1 of the ITAA 1997. The subscription money received by the Company from the Trustee is the receipt in exchange for the issue of the Company’s shares and is not an amount received by ways of insurance or indemnity. Accordingly, for the above reasons, the subscription proceeds received by the Company do not constitute assessable recoupment under subsection 20-20(2) or subsection 20-20(3) of the ITAA 1997. Division 104 Section 102-20 of the ITAA 1997 states a taxpayer can make a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the event. The relevant CGT events that may be applicable when the Company received the subscription proceeds in exchange for the issue of its shares under the Plan are: ● CGT event D1 (creating contractual or other rights) – section 104-35 of the ITAA 1997 ● CGT event H2 (receipt for event relating to a CGT asset) – section 104-55 of the ITAA 1997 CGT event D1 Subsection 104-35(1) of the ITAA 1997 states that CGT event D1 happens if a taxpayer creates a contractual right or other legal or equitable right in another entity. CGT event D1 would apply to the Company in circumstances where the receipt of the subscription proceeds was for the creation by the Company of a contractual, legal or other equitable right in another entity. Paragraph 104-35(5)(c) of the ITAA 1997 relevantly provides that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. ‘Equity interests in a company’ is defined in item 1 of the table in subsection 974-75(1) of the ITAA 1997 as an interest in the company as a member or stockholder of the company. In this instance D1 will not apply as the legal or other equitable right (being the right of the employee to acquire shares in the Company upon the payment of the subscription proceeds) is created at the time the relevant right was first issued. The subsequent payment of the subscription proceeds is not in connection with the creation of rights; it is consideration for the issue of shares. CGT event H2 CGT event H2 happens if an act, transaction or event occurs to a CGT asset owned by a taxpayer and the occurrence does not result in an adjustment to the cost base or reduced cost base (subsection 104-155(1) of the ITAA 1997). However, paragraph 104-155(5)(c) of the ITAA 1997 relevantly provides that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Again, consideration of the subscription proceeds received by the Company from the Trustee established that they are for shares and are integral to the arrangement whereby the acquisition, holding and the allocation of the shares by the Trustee to Participants are interrelated components of the Plan. As part of the Plan, contractual rights of employees are exercised on their behalf to acquire shares in the Company, rather than an act, transaction or event related to a CGT asset owned by the Company. Accordingly, a CGT event under Division 104 of the ITAA 1997 does not arise when the Trustee subscribes for fully paid ordinary shares in the capital of the Company. Therefore, when the Trustee satisfies its obligations under the Plan by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under section 6-5 or section 20-20, or trigger a CGT event under Division 104.