Private ruling: Employee Share Scheme
Published: June 2013

Ruling: Q1: Will the contributions of money by the employer to the trustee as trustee for the trust pursuant the trust deed in respect of the employer's arm's length employees/contractors constitute an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will the loan of money from the employer to the trustee pursuant to the trust deed constitute an income tax deduction under section 8-1 of the ITAA 1997? | A2: No | Q3: Will the contributions of money made by the employer to the trustee pursuant to the trust deed for the benefit of a general class of employees/contractors constitute a 'fringe benefit' provided by the employer to the employee as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A3: No | Q4: Will the loans of money made by the employer to the trustee pursuant to the trust deed for the benefit of a general class of employees constitute a 'fringe benefit' provided by the employer to the employee as defined in subsection 136(1) of the FBTAA? | A4: No | Q5: Will the acquisition of shares by the trustee constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? | A5: No | Q6: Will the acquisition of share units by the employee at market value, to which trust assets will be allocated by the trustee, constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? | A6: No | Q7: Will the loan provided by the trustee to the employee for the purpose of acquiring the share units constitute a 'loan fringe benefit' provided by the trustee to the employee under section 16 of the FBTAA? | A7: Yes | Q8: Where the employee pays or accrues interest at least equivalent to the relevant notional or statutory interest rate in respect of the loan provided by the trustee, will the taxable value of the loan fringe benefit which could arise under section 18 of the FBTAA be nil? | A8: This question is not applicable to the scheme upon which this ruling is based. | Q9: Will the taxable value of the loan fringe benefit be reduced to nil due to the application of the 'otherwise deductible rule' under subsection 19(1) of the FBTAA? | A9: Yes | Q10: Where the share units are redeemed by the employee for cash, will that redemption constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? | A10: No | Q11: Where the value of the shares allocated to the share unit falls below the issue price and the share unit is surrendered to the trustee in full satisfaction of the employee's loan obligation, will the surrender of the share unit constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? | A11: No | Q12: Will a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA, arise where assets are transferred to the unallocated assets account of the trust? | A12: No | Q13: Will the operating costs associated with the administration of the share plan incurred by the employer be deductible under section 8-1 of the ITAA 1997? | A13: Yes | Q14: Will the meeting of operating costs associated with the administration of the share plan by the employer constitute a 'fringe benefit' provided by the employer to the employee as defined in subsection 136(1) of the FBTAA? | A14: No | Q15: Will the payment of administration fees by the employer to the administrator under the plan administration agreement for the provision of administration services to the trustee be deductible under section 8-1 of the ITAA 1997? | A15: Yes | Q16: Will the payment of administration fees by the employer to the administrator under the plan administration agreement for the provision of administration services to the trustee constitute a 'fringe benefit' provided by the employer to the employee as defined in subsection 136(1) of the FBTAA? | A16: No | Q17: Will the general anti-avoidance provisions under section 67 of the FBTAA apply to the scheme described? | A17: No | Q18: Will the general anti-avoidance provisions under Part IVA of the Income Tax Assessment Act 193 6 (ITAA 1936) apply to the scheme described? | A18: No

Relevant facts and circumstances: The employer entity intends to implement a long-term equity plan for the purpose of providing a long-term equity incentive structure to deliver equity based benefits to employees selected by the board of the employer entity.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 16 | Fringe Benefits Tax Assessment Act 1986 Subsection 16(1) | Fringe Benefits Tax Assessment Act 1986 Section 18 | Fringe Benefits Tax Assessment Act 1986 Subsection 19(1) | Fringe Benefits Tax Assessment Act 1986 Section 67 | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Subsection 8-1(1) | Income Tax Assessment Act 1997 Subsection 8-1(2) ATO view documents | ATO Interpretative Decision 2003/316 | ATO Interpretative Decision 2002/961 | Other references (non ATO view, such as court cases) | Commissioner of Taxation v. Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16; 2007 ATC 4236; 65 ATR 369 | J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22

Reasons for decision: Summary: 1. Will the contributions of money by the employer to the trustee pursuant to the trust deed in respect of the employer's arm's length employees/contractors constitute an income tax deduction under section 8-1 of the ITAA 1997? Section 8-1 of the ITAA 1997 provides that: 8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that: a) it is incurred in gaining or producing your assessable income; or b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. 8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that: a) it is a loss or outgoing of capital, or of a capital nature; or b) it is a loss or outgoing of a private or domestic nature; or c) it is incurred in relation to gaining or producing your exempt income or the your non-assessable non-exempt income; or d) a provision of this Act prevents you from deducting it. Ongoing and regular contributions of money to the trustee by the employer will be made as part of providing a long term equity incentive structure to deliver equity based benefits to the employer's arms-length employees. The advantage sought is to provide a wealth creation mechanism linked to the employee's ongoing work and performance with the employer. It is therefore considered that the contributions are incurred in gaining or producing assessable income and deductible under section 8-1 of the ITAA 1997. 2. Will the loans of money by the employer to the trustee pursuant to the trust deed constitute an income tax deduction under section 8-1 of the ITAA 1997 ? Paragraph 8-1(1)(b) of the ITAA 1997 provides that ' you can 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. ' Lending money does not constitute a loss or outgoing, and as such a deduction is not available under paragraph 8-1(b) of the ITAA 1997. 3. Will the contributions of money made by the employer to the trustee pursuant to the trust deed for the benefit of a general class of employees/contractors constitute a 'fringe benefit' provided by the employer to the employee as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? - A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features: - be a 'benefit' provided during a year of tax; - to an employee or an associate of an employee; - by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies; - in respect of the employment of the employee; and - where none of the exclusions listed in the definition apply. The Full Federal Court in Commissioner of Taxation v. Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16 ( Indooroopilly ) held that, for the purposes of determining whether there was a 'fringe benefit', it was necessary to identify, at the time a benefit was provided, a particular employee in respect of whose employment the benefit was provided. In the this case, the contributions of money made by the employer to the trustee are for the benefit of a general class of employees, and not for the benefit of any particular employee. Therefore, it is considered that the contributions of money provided by the employer to the trustee for the benefit of a general class of employees is not a 'fringe benefit' provided by the employer to the employee in respect of his/her employment at the time the contribution is provided to the trustee. 4. Will the loans of money made by the employer to the trustee pursuant to the trust deed for the benefit of a general class of employees constitute a 'fringe benefit' provided by the employer to the employee as defined in subsection 136(1) of the FBTAA? As stated above, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as effectively being a benefit provided to an employee by an employer, in respect of the employment of the employee. The Full Federal Court in Indooroopilly held that, for the purposes of determining whether there was a 'fringe benefit', it was necessary to identify, at the time a benefit was provided, a particular employee in respect of whose employment the benefit was provided. As further stated above, the loans made by the employer to the trustee are for the benefit of a general class of employees, and not for the benefit of any particular employee. Therefore, it is considered that the loans provided by the employer to the trustee for the benefit of a general class of employees is not a 'fringe benefit' provided by the employer to the employee in respect of his employment at the time the loan money is provided to the trustee. 5. Will the acquisition of shares by the trustee constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? As stated above, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as effectively being a benefit provided to an employee by an employer, associate, arranger or other person under paragraph (ea) of the definition of 'fringe benefit', in respect of the employment of the employee. There is no 'benefit' that arises to the employee upon the acquisition of shares by the trustee for market value consideration. As such, it is our view that the acquisition of shares by the trustee do not constitute a fringe benefit provided by the trustee to the employee. 6. Will the acquisition of share units by the employee at market value, to which trust assets will be allocated by the trustee, constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? As stated above, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as effectively being a benefit provided to an employee by an employer, in respect of the employment of the employee. Subsection 136(1) of the FBTAA further defines a 'benefit' as including any right, including a right in relation to personal property. Further, subsection 136(1) of the FBTAA defines the term 'provide' in relation to a benefit as including to ' allow, confer, give, grant or perform ' that benefit. While not exhaustive, all of these terms indicate a unilateral or one-sided provision of a benefit, rather than an acquisition of a benefit for market value and on equal terms. The share units are not provided to the employee in respect of his employment, but rather will be acquired by him/her at market value. This is the case irrespective of the fact that share units will only be offered to eligible employees nominated by the employer. As such, it is our view that the acquisition of share units by the employee does not constitute a fringe benefit provided by the trustee to the employee. 7. Will the loan provided by the trustee to the employee for the purpose of acquiring the share units constitute a 'loan fringe benefit' provided by the trustee to the employee under section 16 of the FBTAA? As stated above, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as effectively being a benefit provided to an employee by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee. A 'loan benefit' is defined in subsection 136(1) of the FBTAA as a benefit referred to in subsection 16(1), and a 'loan fringe benefit' is defined as a fringe benefit that is also a loan benefit. As such, to be a loan fringe benefit, a benefit must be provided by an employer to an employee in respect of the employment, and further the benefit must constitute a loan benefit under subsection 16(1) of the FBTAA. Subsection 16(1) of the FBTAA states: Where a person (in this subsection referred to as the "provider") makes a loan to another person (in this subsection referred to as the "recipient"), the making of the loan shall be taken to constitute a benefit provided by the provider to the recipient and that benefit shall be taken to be provided in respect of each year of tax during the whole or a part of which the recipient is under an obligation to repay the whole or any part of the loan. Effectively, a loan fringe benefit arises where an employer makes a loan to an employee with respect of that employee's employment. The expression 'in respect of' is defined in subsection 136(1) of the FBTAA as including ' by reason of, by virtue of, or for or in relation directly or indirectly' . In J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402 (Knowles), the Federal Court held that the term 'in respect of employment', includes benefits where ' … there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment… ' In this case, it is a feature of the share plan that the contributions the employer make to the trustee are to be applied by the trustee at its discretion in making loans to the employee and other eligible employees. These loans will be used for the purpose of the employee making an application to the trustee for the issue of share units in the trust under the trust deed. The employee is required to repay the loan when any share unit is cancelled. As such, where the employee is granted a loan by the trustee, this loan meets the definition of a 'loan benefit' provided by the trustee to the employee under the definition in subsection 16(1) of the FBTAA. 8. Where the employee pays or accrues interest at least equivalent to the relevant notional or statutory interest rate in respect of the loan provided by the trustee, will the taxable value of the loan fringe benefit which could arise under section 18 of the FBTAA be nil? This question is not applicable to the scheme upon which this ruling is based. 9. Will the taxable value of the loan fringe benefit be reduced to nil due to the application of the 'otherwise deductible rule' under subsection 19(1) of the FBTAA? Section 18 of the FBTAA provides a mechanism for determining the taxable value of that loan fringe benefit. Effectively, under section 18, the taxable value of a loan fringe benefit is the difference between: - the interest that would have accrued during an FBT year had the statutory interest rate applied (as determined by the Reserve Bank of Australia and published in a Taxation Determination - see for example Taxation Determination TD 2012/7 as it applied from 1 April 2012), and - the interest that actually accrued on the loan in that FBT year. However, under the otherwise deductible rule in section 19 of the FBTAA, the taxable value of a loan fringe benefit may be reduced by the extent to which the interest paid on the loan fringe benefit would have been deductible to the employee had they incurred it. Paragraph 8-1(1)(a) of the ITAA 1997 states that ' you can deduct from your assessable income any loss or outgoing to the extent that… it is incurred in gaining or producing your assessable income '. The taxable value of the loan benefit for each FBT year under section 18 of the FBTAA will be the difference between the statutory interest rate and the interest that accrued on the loan in that FBT year. Given that the loan is interest free, the interest that will accrue on the loan will be nil - as such, the taxable value of the loan under section 18 of the FBTAA will be the amount of the loan made to the employee multiplied by the statutory interest rate as published in a Taxation Determination for each year. However, the employee is required to use the loan for the sole purpose of obtaining investments in the employer. It is envisaged that these investments, being share units, will be productive of assessable income in the form of trust distributions related to dividends paid by the employer to the trustee in respect of the allocated shares. As such, any interest relating to the share units would be deductible to the employee under paragraph 8-1(1)(a) of the ITAA 1997. As such, the taxable value of the loan fringe benefit will be reduced to nil as a result of the application of the otherwise deductible rule in section 19 of the FBTAA. 10. Where the units are redeemed by the employee for cash, will that redemption constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? As stated above, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as effectively being a benefit provided to an employee by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee. Benefits provided 'in respect of the employment of the employee' include benefits where ' … there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment…' (Knowles). Whilst an employee's employment may explain their participation, the cash received from the redemption of the employee's share units is as a result of the employee exercising rights (previously obtained) as a share unit holder. The situation is considered to be analogous to that in FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901. McArdle was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump-sum payment. The Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years. The redemption of the share units for cash will not constitute a fringe benefit because any benefit is not provided in respect of the employment of the employee. 11. Where the value of the asset(s) allocated to the share unit falls below the issue price and the share unit is surrendered to the trustee in full satisfaction of the employee's loan obligation, will the surrender of the share unit constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? As stated above, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as effectively being a benefit provided to an employee by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee. ATO Interpretative Decision ATO ID 2003/316 gives the Commissioner of Taxation's view on whether any benefit arising from the discharge of a limited recourse loan provided by an employer to an employee would constitute a fringe benefit under the definition in subsection 136(1) of the FBTAA. ATO ID 2003/316 relies on the court interpretation of the term 'in respect of the employment of the employee' in cases such as Knowles and McArdle , to determine that any benefit that arises under the redemption of shares to discharge a loan is not a benefit in respect of the employment of the employee, but rather a benefit that arises from the employee exercising rights previously obtained under the loan agreement. It is our view that the circumstances in the employer's case are analogous to the circumstances in ATO ID 2003/316. As such, it is our view that the surrender of the share units for cash, in satisfaction of the loan made to the employee, will not constitute a fringe benefit because the benefit is not provided in respect of the employment of the employee. 12. Will a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA, arise where assets are transferred to the unallocated assets account of the trust? As stated above, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as effectively being a benefit provided to an employee by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee. The Full Federal Court in Indooroopilly held that, for the purposes of determining whether there was a 'fringe benefit', it was necessary to identify, at the time a benefit was provided, a particular employee in respect of whose employment the benefit was provided. In this case, the shares would not be reallocated for the benefit of any particular employee, including the employee whose share units are redeemed, but rather would be reallocated to be held generally for a class of eligible employees. As such, there will be no 'fringe benefit' provided by the trustee where shares are transferred to the unallocated assets account of the trust. 13. Will the operating costs associated with the administration of the share plan incurred by the employer be deductible under section 8-1 of the ITAA 1997? As stated above, paragraph 8-1(1)(b) of the ITAA 1997 provides that ' you can deduct from the 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. ' ATO ID 2002/961 provides the Commissioner of Taxation's view as to whether costs incurred by a taxpayer company in implementing and administering an employee share scheme are deductible under paragraph 8-1(1)(b) of the ITAA 1997. It states: - The operating costs associated with the administration and implementation of the employee share plan, are part of the ordinary employee remuneration costs of the taxpayer. Accordingly they are deductible under section 8-1 of the ITAA 1997 in the year that they are incurred. A trustee is appointed to administer the share plan. The employer has advised that the employer will incur costs operating the share plan. These costs include brokerage fees, audit fees, bank charges and other ongoing administrative expenses necessarily incurred in running the share plan. It is our view that the circumstances in the employer's case are analogous to those in ATO ID 2002/961. As such, it is our view that these costs also are part of the employer's ordinary employee remuneration costs, and are deductible under section 8-1 of the ITAA 1997. 14. Will the meeting of operating costs associated with the administration of the share plan by the employer constitute a 'fringe benefit' provided by the employer to the employee as defined in subsection 136(1) of the FBTAA? As stated above, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as effectively being a benefit provided to an employee by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee. There is no 'benefit' that arises to the employee upon the employer meeting the operating costs associated with administering the share plan. As such, there will be no 'fringe benefit' provided by the employer to the employee. 15. Will the payment of administration fees by the employer to the administrator under the share plan administration agreement for the provision of administration services to the trustee be deductible under section 8-1 of the ITAA 1997? As stated above, paragraph 8-1(1)(b) of the ITAA 1997 provides that ' you can 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. ' ATO ID 2002/961 provides the Commissioner of Taxation's view as to whether costs incurred by a taxpayer company in implementing and administering an employee share scheme are deductible under paragraph 8-1(1)(b) of the ITAA 1997. It states: The operating costs associated with the administration and implementation of the employee share plan, are part of the ordinary employee remuneration costs of the taxpayer. Accordingly they are deductible under section 8-1 of the ITAA 1997 in the year that they are incurred. It is our view that the circumstances in the employer's case are analogous to those in ATO ID 2002/961. As such, the administration fees payable by the employer under the plan administration agreement for the provision of administration services are part of the ordinary employee remuneration costs of the employer. Accordingly they are deductible under section 8-1 of the ITAA 1997 in the year that they are incurred. 16. Will the payment of administration fees by the employer to the administrator under the plan administration agreement for the provision of administration services to the trustee constitute a 'fringe benefit' provided by the employer to the employee as defined in subsection 136(1) of the FBTAA? As stated above, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as effectively being a benefit provided to an employee by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee. There is no 'benefit' that arises to the employee upon the employer meeting the administration fees associated with administering employee benefit arrangement. As such, there will be no 'fringe benefit' provided by the employer to the employee. | Detailed Reasoning - 17. Will the general anti-avoidance provisions under section 67 of the FBTAA apply to the scheme described?: No | Detailed Reasoning - 18. Will the general anti-avoidance provisions under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the scheme described?: No Provided that the scheme as implemented is materially identical to the scheme described in this ruling it is considered that Part IVA of the ITAA 1936 would not apply in respect of the employer.