Private ruling: Employee share plan
Published: June 2012
Ruling period: Income Tax: | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Fringe Benefits Tax: | Year ending 31 March 2012 | Year ending 31 March 2013 | Year ending 31 March 2014 | Year ending 31 March 2015 | Year ending 31 March 2016
Date scheme commenced: Year ending 30 June 2012.

Ruling: Q1: Are irretrievable contributions by the Company to the Trust to fund the subscription for, or acquisition on-market of, shares in the Company an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Are irretrievable contributions by the Company to the Trust to fund the subscription for, or acquisition on-market of, shares in the Company to satisfy grants under the Plan (in accordance with the Trust Deed) deductible by the Company at a time determined by section 83A-210 of the ITAA 1997? | A2: Yes. | Q3: Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the arrangement where irretrievable contributions are made to the Trust to fund the acquisition of the Company's shares? | A3: No. | Q4: Is the provision of Rights and shares to employees pursuant to the Plan arrangements subject to fringe benefits tax? | A4: No. | Q5: Are irretrievable contributions of money to the Trustee of the Trust to fund the acquisition of shares in the Company subject to fringe benefits tax? | A5: No.

Relevant facts and circumstances: The scheme the subject of this Ruling has been ascertained from the following documents: Application for Private Ruling. Plan Rules The Trust Deed of the Trust Annual Report of the Company

Relevant legislative provisions: Section 8-1 of the Income Tax Assessment Act 1997 | Section 83A-10 of the Income Tax Assessment Act 1997 | Section 83A-25 of the Income Tax Assessment Act 1997 | Section 83A-35 of the Income Tax Assessment Act 1997 | Section 83A-205 of the Income Tax Assessment Act 1997 | Section 83A-210 of the Income Tax Assessment Act 1997 | Subsection 130-85(4) of the Income Tax Assessment Act 1997 | Section 995-1 of the Income Tax Assessment Act 1997 | Section 177A of the Income Tax Assessment Act 1936 | Section 177C of the Income Tax Assessment Act 1936 | Section 177D of the Income Tax Assessment Act 1936 | Section 177F of the Income Tax Assessment Act 1936 | Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision: Summary: The Company can claim an income tax deduction pursuant to 8-1 of the 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 the Company shares by the Trust. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997, insofar as it is relevant, states: | Detailed Reasoning - 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. | Detailed Reasoning - 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; The Company has established its employee share plans as part of its remuneration policy with the intention of attracting and retaining suitable employees in its business. The cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition on-market of the Company shares by the Trust are irretrievable and non-refundable under the Trust Deed. The purpose of the Company in establishing and funding its employee share plan is to encourage Employees to share in the ownership of the Company and to promote the long term success of the Company as part of the Company's strategy to retain and attract high quality staff. Therefore, the irretrievable cash contributions it makes to the Trustee under the rules of the plans are directed to enhancing the profitability of its business and producing assessable income. In Pridecraft Pty Ltd v. FC of T [2004] FCAFC 339; 2005 ATC 4001; FC of T v. Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55ATR 745, the Court held that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature. This is consistent with the opinion expressed in ATO Interpretative Decision ATO ID 2002/1074 that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for non-refundable cash contributions made to the trustee of its employee share scheme. Accordingly, the conditions of paragraph 8-1(1)(b) of the ITAA 1997 are satisfied. The Company has advised that the Company will make contributions to the Trust to provide benefits to eligible employees in the form of shares. The amount of the contributions will be based on known or estimated number of shares to satisfy the rights outstanding. The Trust will then allocate shares to the relevant participants, having subscribed for or acquired on-market sufficient shares to fulfil the obligations as necessary. Accordingly the Company will not be pre-funding the Trust with a lump sum payment but will be making contributions on a regular basis as required. The irretrievable cash contributions are an on-going expense of conducting its business to which the Company has committed itself by establishing the share plan and entering into the Trust Deed with the Trustee. Therefore, they are not capital in nature and paragraph 8-1(2)(a) of the ITAA 1997 is satisfied. Accordingly, the irretrievable cash contributions the Company makes to the Trustee to enable it to acquire shares, whether by on-market purchase or subscription, are allowable deductions. | Summary: The provision of money to the Trustee of the Trust to acquire shares in the Company is considered to be for the purpose of enabling the participating employees, indirectly as part of the Plan, to acquire the rights. If that money is provided before the rights or options are acquired then section 83A-210 of the ITAA 1997 will apply. However, section 83A-210 of the ITAA 1997 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from rights already granted, and that deduction is accordingly allowable to the Company in the year in which the money was paid to the Trustee of the Trust, under section 8-1 of the ITAA 1997. However, if any amount of money is used by the Trustee of the Trust to purchase excess shares intended to meet a future obligation arising from a future grant of rights, the excess payment occurs before the employees acquire the relevant rights (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the Company in the year of income when the relevant rights are subsequently granted to the employees. | Detailed Reasoning - Detailed reasoning: As discussed in question 1, the provision of money to the trustee of the Trust by the Company for the purpose of remunerating its employees under an ESS is an outgoing in carrying on the Company's business and is deductible under section 8-1 of the ITAA 1997. The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997. Section 83A-210 of the ITAA 1997 determines the timing of a deduction for contributions, as follows: 83A-210 If: (a) at a particular time, you provide another entity with money or other property: (i) under an arrangement; and (ii) for the purposes of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and (b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest; then, for the purposes of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time. Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by the Company under the Plan, in relation to the employee's employment. An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Under the Plan a right granted to an employee will be an ESS interest as it is a right to acquire a beneficial interest in a share in the Company. This ESS interest is granted under an ESS in relation to the employee's employment. The share acquired by the Trustee of the Trust to satisfy such a right is granted under the ESS to an employee, in relation to the employee's employment. The granting of the beneficial interests in the rights, the provision of the money to the Trustee of the Trust under the arrangement, the acquisition and holding of the shares by the Trustee of the Trust and the allocation of shares to the participating employees are all interrelated components of the Plan. All the components of the scheme must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee of the Trust necessarily allows the scheme to proceed. Consequently, the provision of money to the Trustee of the Trust to acquire the Company shares is considered to be for the purpose of enabling the participating employees, indirectly as part of the Plan, to acquire the rights. If that money is provided before the rights are acquired then section 83A-210 of the ITAA 1997 will apply. However, section 83A-210 of the ITAA 1997 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from rights already granted, and that deduction is accordingly allowable to the Company in the year in which the money was paid to the Trustee of the Trust, under section 8-1 of the ITAA 1997. However, if any amount of money is used by the Trustee of the Trust to purchase excess shares intended to meet a future obligation arising from a future grant of rights, the excess payment occurs before the employees acquire the relevant rights (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the Company in the year of income when the relevant rights are subsequently granted to the employees. | Detailed Reasoning - Question 3: A consideration of all the factors referred to in paragraph 177D(b) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the Company's employees who participate in the scheme in a form that promotes the company's business objectives, rather than to obtain a tax benefit. Accordingly, 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 in relation to irretrievable contributions made by the Company to the Trust to fund the acquisition of Employer shares in accordance with the scheme. | Summary: The provision of rights and shares to employees under the Plan are not fringe benefits within the meaning of subsection 136(1) of the FBTAA 1986. | Detailed Reasoning - Detailed reasoning: A fringe benefit is defined in subsection 136(1) of the FBTAA as follows: · "fringe benefit", in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit: · provided at any time during the year of tax; or · provided in respect of the year of tax; · being a benefit provided to the employee or to an associate of the employee by: · the employer; or · an associate of the employer; or · a person (in this paragraph referred to as the "arranger") other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between: · the employer or an associate of the employer; and · the arranger or another person; or · a person other than the employer or an associate of the employer, of the employer or an associate of the employer: · participates in or facilitates the provision or receipt of the benefit; or · participates in, facilitates or promotes a scheme or plan involving the provision of the benefit; · and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so; · in respect of the employment of the employee, but does not include:… Paragraphs (f) to (r) of the definition of fringe benefit contain a number of exclusions from this definition. Paragraph (h) of the definition of a fringe benefit contained in subsection 136(1) of the FBTAA specifically excludes from the definition of a fringe benefit: 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; An ESS interest in a company is a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company (subsection 83A-10(1) of the ITAA 1997). An employee share scheme is a scheme under which ESS interests in the company are provided to employees (or associates of employees) of the company or subsidiaries of the company, in relation to the employee's employment. (Subsection 83A-10(2) of the ITAA 1997) The Company's employees will receive beneficial interests in rights to acquire beneficial interests in shares in respect of their employment, upon acceptance of participation in the Plan. The Commissioner accepts that the scheme described in the facts is an employee share scheme under which relevant ESS interests (being beneficial interests in rights to acquire beneficial interests in shares) are acquired by employees (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to the employment of those employees. Therefore, the provision of those rights will not be subject to fringe benefits tax because they are specifically excluded from the definition of fringe benefit. The shares acquired by the Trustee under the Plan to satisfy the rights are also provided to employees under that same employee share scheme. However shares granted to employees under the Plan to satisfy the rights acquired on acceptance of participation in the Plan are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 apply (see subsection 83A-20(2) of the ITAA 1997 and paragraph 83A-105(1)(a) of the ITAA 1997). Therefore the providing of these shares will not be specifically excluded from the definition of fringe benefits under paragraph (h) of the definition in subsection 136(1) of the FBTAA. As stated above, a fringe benefit will only arise under subsection 136(1) of the FBTAA where the benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee. Under the relevant Plan, the benefit (beneficial interest in shares) that arises upon the end of the vesting period is considered to be provided as a result of the employee exercising rights (previously obtained upon acceptance to participate in the relevant Plan). The situation mentioned above is considered to be analogous to that stated in ATO Interpretative Decision ATO ID 2010/219 which refers to the case of FC of T v. McArdle 89 ATC 4051;(1988) 19 ATR 1901. In that case, an employee 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. In the present circumstances, when an employee accepts to participate in the Plan, he or she obtains a right to acquire a beneficial interest in a share in the Company and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received, that is, beneficial interest in shares, would be in respect of the exercise of the right, and not in respect of employment. Therefore, the benefit that arises to an employee after the vesting period under the Plan, being the beneficial interest in a share, does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of' the employment relationship. | Summary: The Trust is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the Trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the Trust from being a fringe benefit. Accordingly, the Employer will not be required to pay fringe benefits tax in respect of the irretrievable cash contributions it makes to the Trustee of the Trust to fund the acquisition of shares in the Company. | Detailed Reasoning - Detailed reasoning: Subsection 136(1) of the FBTAA defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, and paragraph (ha) of that definition excludes: · 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 ); · an 'employee share trust' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides: Meaning of employee share trust 130-85(4) an employee share trust, for an employee share scheme, is a trust whose sole activities are: obtaining shares or rights in a company; and ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of: (i) the company; or (ii) a subsidiary of the company; and other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). The right to acquire a beneficial interest in an Employer Share is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997. An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. The scheme is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which rights to acquire beneficial interests in shares in the Company are provided to employees in relation to the employee's employment. Under the Plan, the Company has also established the Trust to acquire shares in the Company and to allocate those shares to employees. Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because: · the Trust acquires shares in the Company; and · the Trust ensures that the ESS interests are provided under an employee share scheme, to the employees in accordance with the Trust Deed and relevant the Plan. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require that the Trustee undertake incidental activities that are a function of administering the Trust. The incidental activities are covered by paragraph 130-85(4)(c) of ITAA 1997. The Trust is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the Trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the Trust from being a fringe benefit. Accordingly, the Employer will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the Trust to fund the acquisition of the Company shares in accordance with the Trust Deed.

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