Private ruling: Employee share plan
Published: November 2011
Ruling period: Income Tax: | Year ended 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | 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 ended 30 June 2011

Ruling: Q1: Will the Company obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) a. In respect of the irretrievable cash contributions made to the Trustee of the Trust to fund the Plan? b. In respect of the costs incurred in relation to the implementation and on-going administration of the Trust? | A1: a. Yes. b. Yes. | Q2: Will the irretrievable cash contributions made by the Company to the Trustee, be treated as a 'fringe benefit' within the meaning of section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A2: No. | Q3: Will the acquisition of Shares by the Trustee on behalf of employees constitute a 'fringe benefit' provided by the Employer to the employees as defined in subsection 136(1) of the FBTAA? | A3: No. | Q4: Will the acquisition of a fixed interest in the Trust by employees at market value, represented by Shares in the holding company held by the Trustee, 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 loan provided by the Trustee to each employee for the purpose of acquiring a fixed interest in the Trust: a. Constitute a 'loan fringe benefit' provided by the Employer to the Employee under section 16 of the FBTAA 1986; and b. If so, will the taxable value of the loan fringe benefit be reduced to nil due to the application of the 'otherwise deductible rule' under the subsection 19(1) of the FBTAA 1986? | A5: a. Yes. b. Yes. | Q6: On vesting, where the Shares are exchanged by the employees for cash, will that exchange constitute a 'fringe benefit' provided by the Employer to the Employee as defined in subsection 136(1) of the FBTAA? | A6: No. | Q7: Where the value of the Shares falls below the market value of the Shares at the time of subscription and the Shares are surrendered to the Trustee in full satisfaction of the Employee's loan obligation, will the surrender of the Shares constitute a 'fringe benefit' provided by the Employer to the Employee as defined in subsection 136(1) of the FBTAA? | A7: No. | Q8: Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount of the Company by the amount of tax benefit gained from irretrievable cash contributions made by AIA to the Trustee of the Trust to fund the subscription for Shares? | A8: No. | Q9: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for new Shares or acquisition of Shares from other shareholders by the Trust? | A9: 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 · Offer documents · The Loan Agreement

Relevant legislative provisions: Section 8-1 of the Income Tax Assessment Act 1997 | Part IVA of the Income Tax Assessment Act 1936 | Section 16 of the Fringe Benefits Tax Assessment Act 1986 | Subsection 19(1) of the Fringe Benefits Tax Assessment Act 1986 | Section 67 of the Fringe Benefits Tax Assessment Act 1986 | Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision: Summary: Irretrievable cash contributions Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. It provides: 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; or · it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Subsection 8-1(2) of the ITAA 1997 then provides: However, you cannot deduct a loss or outgoing under this section to the extent that: · it is a loss or outgoing of capital, or of a capital nature; or · it is a loss or outgoing of a private or domestic nature; or · it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or · a provision of this Act prevents you from deducting it. The Company has established the Plan 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 of head company shares by the Trust are irretrievable and non-refundable under the Trust Deed. In Pridecraft Pty Ltd v. FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; FC of T v. Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745, 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. Therefore, the irretrievable cash contributions the Company makes to the Trustee under the Plan are directed to enhancing the profitability of its business and producing assessable income. Nothing in the facts suggests that the irretrievable cash contributions are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997. Accordingly, the irretrievable cash contributions made to the Trustee to acquire Shares are allowable deductions. | Detailed Reasoning - Implementation and on-going administration: As provided in respect to the irretrievable contributions above, you can deduct an amount under section 8-1 of the ITAA 1997 if the expense is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. The Company will incur various costs in relation to the implementation and on-going administration of the Trust. These expenses form part of the ordinary employee remuneration costs. The costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. Accordingly the costs are deductible under section 8-1 of the ITAA 1997 in the year they are incurred. | Detailed Reasoning - Question 2: 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 Federal Commissioner of Taxation v. Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16; 2007 ATC 4236; 65 ATR 369 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 irretrievable cash contributions are made before the Board determines which employees are eligible to participate in the Plan and therefore the contributions are provided for the benefit of a general class of employees. It is considered that the irretrievable cash contributions provided by the Company to the Trustee for the benefit of a general class of employees are not 'fringe benefits' provided to particular employees in respect of their employment at the time the irretrievable cash contributions are provided to the Trustee. | Detailed Reasoning - Question 3: 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. There is no 'benefit' that arises to an employee upon the acquisition of Shares by the Trustee as the Shares will be acquired for market value consideration. | Detailed Reasoning - Question 4: 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. There is no 'benefit' that arises to an employee upon the acquisition of a fixed interest in the Trust as the employees will acquire the interest at market value. | Detailed Reasoning - Loan fringe benefit: A loan fringe benefit means a fringe benefit that is a loan benefit. Subsection 16(1) of the FBTAA provides that a 'loan benefit' arises where a person (the 'provider') makes a loan to another person (the 'recipient') and the recipient is under an obligation to repay the whole or any part of the loan. It is therefore considered that the loan provided by the Trustee to the employee constitutes a benefit under subsection 16(1) of the FBTAA, as the employees are under an obligation to repay the whole or any part of the loan under the Loan Agreement. The loan provided by the Trustee to the Employee forms part of the scheme implemented by the Company to confer benefits on employees 'in respect of' their employment.. The expression 'in respect of' is defined in subsection 136(1) 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; 2000 ATC 4151; (2000) 44 ATR 22 it was noted 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…' It is considered that the loan provided by the Trustee to each employee has a sufficient or material connection with their employment. The loan benefit therefore constitutes a fringe benefit under subsection 136(1) of the FBTAA. | Detailed Reasoning - The otherwise deductible rule: As a beneficiary of the Trust, the Employee will be entitled to deduct interest expenses incurred in acquiring a beneficial interests in the shares held in the Trust under section 8-1 of the ITAA 1997 if they are presently entitled to any part of the Trust. The loan is made to the Employee for the purpose of acquiring beneficial interest in the shares held in the Trust. The interests held by each employee entitle them to receive distributions of the dividends on the shares held in the trust. Accordingly, subsection 19(1) of the FBTAA will apply to reduce the taxable value of the loan fringe benefit to nil. | Detailed Reasoning - Question 6: 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. There is no 'benefit' that arises to an employee upon the exchange of their Shares for cash. | Detailed Reasoning - Question 7: 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. When the relevant Employee surrenders their Shares to the Trustee in full satisfaction of a limited recourse loan, and the value of the Shares allocated is less than the balance of the outstanding loan, a benefit is considered to arise to the Participant. However, the benefit that arises upon discharge of the loan is not considered to be provided 'in respect of the employment' of the Participant, but as a result of exercising rights under the terms of the Plan. | Detailed Reasoning - Question 8: The Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 under the heading "Appendix, Question 18" where, on the application of section 67, the Commissioner states: …As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement... Benefits provided to the Trustee or to Participants are considered either not to be fringe benefits as that term is defined in the FBTAA or the taxable values are reduced to nil by the operation of the otherwise deductible rule for the reasons given in the questions above. Therefore the FBT liability is not any less than it would have been but for the arrangement. | Detailed Reasoning - Question 9: 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 and its subsidiaries to the Trust to fund the acquisition of Employer shares in accordance with the scheme.

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