Private ruling: Employee share plan
Published: January 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Are irretrievable contributions by the Company to the EST 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: Is the deduction for the Company in respect of the irretrievable contributions to the EST allowed in the same year of income when the contribution is made to the EST provided it is in respect of Options to acquire shares that have previously been granted to employees? | 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 EST to fund the acquisition of Company shares? | A3: No.

Relevant facts and circumstances: The scheme the subject of this Ruling has been ascertained from the following documents: § Application for Private Ruling § The SEOP Rules § The Trust Deed of the EST

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-210 of the Income Tax Assessment Act 1997 | Part IVA of the Income Tax Assessment Act 1936

Reasons for decision: Summary: 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: (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. 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: (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 your non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. The Company has established the SEOP 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 EST to fund the subscription for or acquisition of Company shares by the EST are irretrievable and non-refundable. 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 SEOP 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. As discussed in question 1, the provision of money to the trustee of the EST by the employer for the purpose of remunerating its employees under an ESS is an outgoing in carrying on the employer'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. With effect from 1 July 2009, 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 SEOP, 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 SEOP an option 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 EST to satisfy such an option is granted under the ESS to an employee, in relation to the employee's employment. The granting of the beneficial interests in the options, the provision of the money to the Trustee of the EST under the arrangement, the acquisition and holding of the shares by the Trustee of the EST and the allocation of shares to the participating employees are all interrelated components of the SEOP. 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 EST necessarily allows the scheme to proceed. Consequently, the provision of money to the Trustee of the EST to acquire Company shares is considered to be for the purpose of enabling the participating employees, indirectly as part of the SEOP, to acquire the options. If that money is provided before the 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 options 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 EST, under section 8-1 of the ITAA 1997. However, if any amount of money is used by the Trustee of the EST to purchase excess shares intended to meet a future obligation arising from a future grant of options, the excess payment occurs before the employees acquire the relevant options (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 options are subsequently granted to the employees. 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 EST to fund the acquisition of Employer shares in accordance with the scheme as outlined above.

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