Private ruling: Employee Share Scheme
Date of advice: 16 December 2019
Published: March 2020

Ruling: Q1: Will irretrievable cash contributions made by the Company or any subsidiary of the consolidated group (the Group) to the Trustee of the Trust, to fund the subscription for or acquisition on-market of ordinary shares in the Company (Shares), for the purposes of its employee share plans (the Plans), give rise to a deduction for the Company, under section 8-1 of the Income Tax Assessment Act 1997 ( ITAA 1997)? | A1: Yes. | Q2: Are the irretrievable cash contributions made by the Company to the Trustee deductible, at a time determined by section 83A-210 of the ITAA 1997, if the irretrievable cash contributions are made before the relevant employee share scheme (ESS) interests are acquired? | A2: Yes. | Q3: Are the irretrievable cash contributions made by the Company to the Trustee deductible under section 8-1 of the ITAA 1997, in the income year the irretrievable cash contributions are made, if they are made after the relevant ESS interests are acquired? | A3: Yes. | Q4: Will the Company be entitled to a deduction pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by the Company, in relation to the ongoing administration of the Plans and the Trust? | A4: Yes. | Q5: Will the irretrievable cash contributions by the Company to the Trustee result in the Company deriving ordinary income assessable under section 6-5 of the ITAA 1997, at the time the irretrievable cash contributions are made? | A5: No. | Q6: Will the subscription for Shares, by the Trustee, 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 event under Division 104 of the ITAA 1997? | A6: No. | Q7: Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by the Company for the irretrievable cash contributions made by the Company to fund the subscription for, or acquisition on-market of, Shares by the Trust? | A7: No. | Q8: Will the irretrievable cash contributions made by the Company to the Trustee be a fringe benefit, within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)? | A8: No. | Q9: Will the Commissioner make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to the Company by the amount of tax benefit gained from irretrievable cash contributions, made by the Company to the Trustee, to fund the acquisition of Shares? | A9: No.

Relevant facts and circumstances: The Company is an Australian resident public company listed on the Australian Securities Exchange and is the head company of an income tax consolidated group (the Group). The Company's employee share plans (the Plans) are a component of the Group's compensation and benefits packages and are a retention and alignment tool (aligning employee behaviour with shareholders' interests) available to eligible employees of the Group. The Plans are comprised of a number of governance documents and include: · A general plan for Australian resident employees; a tax deferred plan award; a tax deferred salary sacrifice plan; a tax exempt salary sacrifice plan; a tax exempt plan award; an annual incentive plan award of Share Rights to senior executives as part of their annual incentive remuneration; and an award of fully-paid ordinary Shares of a value specified to the executive, partly comprised of Performance Shares and the balance of Restricted Shares. · Fully-paid ordinary shares in the Company are allocated to eligible employees · Shares are subject to various trading restrictions · Shares are held by the Trustee, and · Participants are entitled to receive dividends in relation to their allocated Shares. Acquisition of Shares by the Trustee The following applies to Share allocations: · The Company makes irretrievable contributions to the Trustee (Contributions) in order to allow the Trustee to either subscribe for Shares or acquire Shares on-market. · The Company makes Contributions on behalf of its wholly owned subsidiaries and the subsidiaries it controls (as defined in the Corporations Act 2001 ) and recovers from those other entities (via a recharge) the costs of Shares issued to or acquired for its employees. · The Company can pay the Contribution to the Trustee before or after the acquisition of the Shares. The Trustee is neither a subsidiary nor a related body corporate of the Company for the purposes of the Corporations Act 2001. The Company will indemnify the Trustee in respect of all liabilities, costs and expenses incurred by it in executing the employee share trust.


Reasons for decision: Summary: The Company will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee of the Trust to acquire shares in the Company for participants pursuant to the Trust Deed and the Plan Rules. | Detailed Reasoning - Detailed reasoning: Section 8-1 is a general deduction provision and states: 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 your *non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. Positive limbs For a deduction to be allowable under subsection 8-1(1), there must be a nexus between your loss or outgoing and the gaining or producing of assessable income, or the loss or outgoing was incurred in carrying on a business for the purpose of gaining or producing your assessable income. The expenditure must be incidental and relevant to the production of your assessable income ( Ronpibon Tin NL and Tongkah Compound NL v. FCT (1949) 78 CLR 47 at 56-7). The purpose of establishing the ESS is to assist the Company in rewarding and retaining talent, and to align performance with shareholders' interests through share ownership. The irretrievable cash contributions that the Company makes to the Trustee are employee remuneration costs. They are directly related to the production of the Company's assessable income. Therefore, subsection 8-1(1) is satisfied. In relation to contributions which are made to the Trustee for acquiring shares on behalf of non-resident employees, the Company confirmed it is reimbursed (which occurs in the same year) by the relevant non-resident employer and the reimbursement is assessable to the Company. The contribution will be incurred in gaining or producing this assessable income. Accordingly, there will be sufficient nexus for the purposes of section 8-1. Negative limbs The relevant negative limb is paragraph 8-1(2)(a) which provides that a loss or outgoing is not deductible under section 8-1, to the extent that it is a loss or outgoing of capital, or of a capital nature. The costs will be an outgoing incurred for periodic funding of a bona fide employee share scheme for employees of the Company. Costs incurred are in relation to more than one grant of Awards (rather than being one-off), and the Company intends to continue satisfying outstanding Awards using shares acquired by the Trust. This indicates that the irretrievable contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure of the Company. While the contributions may secure an enduring or lasting benefit for the employer that is independent of the year to year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be sufficiently small. Therefore, the payments are not capital, or of a capital nature. The irretrievable cash contributions that the Company makes to the Trustee, and the costs incurred in relation to the ongoing administration of the Trust, are not outgoings of capital or of a capital nature. Therefore, paragraph 8-1(2)(a) is not satisfied. Accordingly, the Company will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee of the Trust to acquire shares in the Company for Participants, pursuant to the Trust and the Plans. | Summary: If irretrievable cash contributions are provided by the Company to the Trustee before the time the Participants (the ultimate beneficiaries) acquire ESS interests, section 83A-210 will apply. The effect is that the Company must delay the deduction of the related cash contributions until the Participants acquire the ESS interests. If the contributions are made at or after the time the ultimate beneficiaries acquire the ESS interests (by being granted Awards). In these circumstances, irretrievable cash contributions are deductible by the Company under section 8-1, in the income year in which they are made to the Trustee. | Detailed Reasoning - Detailed reasoning: The deduction for the irretrievable cash contributions under section 8-1 is generally allowable in the income year in which the entity incurs the outgoing. However, under certain circumstances, the timing of the deduction is specifically governed by section 83A-210. Section 83A-210 states: 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. The establishment of the Plans, the settlement of the Trust under the Trust Deed and the provision of money by the Company to the Trustee, together constitute an 'arrangement' for the purposes of subparagraph 83A-210(a)(i). The terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10, which states: 83A-10(1) An ESS interest , in a company, is a beneficial interest in: (a) a *share in the company; or (b) a right to acquire a beneficial interest in a share in the company. 83A-10(2) An employee share scheme is a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of: (a) the company; or (b) *subsidiaries of the company; in relation to the employees' employment. Under subsection 83A-10(1), an Award is an 'ESS interest' in the Company, as it is either a Company share or a right to acquire a Company share. This ESS interest in the Company is provided to employees under the Plans in relation to their employment. Therefore, the Plans comprise an 'employee share scheme' under subsection 83A-10(2). The provision of cash contributions by the Company to the Trustee of the Trust is for the purpose of enabling the employees (each an 'ultimate beneficiary' as defined in paragraph 83A-210(a)) to acquire, directly or indirectly, an ESS interest under an employee share scheme (i.e. the Plans) in relation to the ultimate beneficiaries' employment. If the irretrievable cash contributions are provided by the Company to the Trustee before the time the ultimate beneficiaries acquire the ESS interests (by being granted Awards), section 83A-210 will apply. The effect is that the Company must delay the deduction of the cash contributions until the ultimate beneficiaries acquire the ESS interests (the Awards). However, section 83A-210 will not apply to a deduction for cash contributions provided by the Company to the Trustee, if the contributions are made at or after the time the ultimate beneficiaries acquire the ESS interests (by being granted Awards). In these circumstances, cash contributions are deductible by the Company under section 8-1, in the income year in which they are made to the Trustee. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust. | Detailed Reasoning - Indeterminate rights: Section 83A-340 provides that where you acquire a beneficial interest in a right that later becomes a right to acquire a beneficial interest in a share, Division 83A will apply as if the right had always been a right to acquire a beneficial interest in the share. In order for section 83A-340 to apply: · The right acquired must be capable of becoming a right to acquire a beneficial interest in a share, and · The right must in fact become a right to acquire a beneficial interest in a share. Performance Rights acquired under the Annual Incentive Plan are indeterminate rights for the purposes of section 83A-340. This is because the possibility exists to either deliver a Share or make a payment of a cash equivalent to satisfy the Performance Right. Cash settlement of Performance Rights can occur at the determination of the Board. In this circumstance, the Performance Right is not a right to acquire a beneficial interest in a share unless and until the time when the Board determines the Performance Rights will be satisfied by the provision of Shares. Once determined by the Board, section 83A-340 operates to treat the Performance Rights as though they had always been rights to acquire beneficial interests in shares. If irretrievable cash contributions are provided to the Trustee before these Performance Rights are acquired (and the Performance Rights do subsequently become ESS interests), then section 83A-340 operates to deem the Performance Rights to have always been ESS interests. Where this occurs, section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1. In such a case, a deduction to fund the exercise of the Performance Rights would be available to the Company in the income year in which participants acquired the Performance Rights. | Summary: The Company is entitled to an income tax deduction, pursuant to section 8-1, in respect of employer costs incurred in relation to the on-going administration of the Plans and the Trust. | Detailed Reasoning - Detailed reasoning: Section 8-1 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, incurred in producing exempt or non-assessable non-exempt income or where a provision of the tax law prevents the deduction. The Company carries on a business which produces assessable income. The Company operates an employee share scheme as part of its remuneration strategy. In accordance with the Trust Deed, the Company will indemnify the Trust in respect of costs and expenses in connection with the Plans. The Company incurs on-ongoing administration costs for operating the ESS including: · Consulting and offer management costs · Recurring annual fees, such as plan structure maintenance, plan membership fees and administration fees, and · Professional fees (but not relating to costs associated with the establishment of the Trust). These costs are regular and recurrent employment expenses which are deductible under section 8-1 as they are costs necessarily incurred in running the ESS while carrying on its business for the purpose of gaining or producing its assessable income. Relevantly, these costs are not capital or of a capital nature as the loss or outgoings are regular and recurrent and are part of the ordinary employee remuneration costs of the Company (ATO Interpretative Decision ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible). | Summary: The Company will not derive ordinary income assessable under section 6-5, at the time the irretrievable cash contributions are made. | Detailed Reasoning - Detailed reasoning: Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. The term "income according to ordinary concepts" is not defined. However, there are a number of cases that assist in determining whether a receipt should be characterised as income according to ordinary concepts. In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that: "To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business". Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not received in the course of carrying on a business. In an ESS, where the trustee subscribes to the company for an issue of shares and pays the full subscription price for the shares, the company receives a contribution to its share capital from the trustee. The character of the subscription proceeds received by the company from the trustee can be determined by the character of the right or thing disposed of in exchange. In this case, as the Company issues shares in itself, to the Trustee, in exchange for the subscription proceeds, the character of the newly issued shares is one of capital. Therefore, the receipt, being the subscription proceeds, takes the character of share capital, and, accordingly is of a capital nature. This issue is the subject of ATO Interpretative Decision ATO ID 2007/217, Income Tax Employee share scheme: whether payments by an employer company to a trustee to acquire shares to be later provided to employees result in the company deriving assessable income , which states in its conclusion: ... the employer company's payments under the pre-funding arrangement do not result in the company deriving income under section 6-5 of the ITAA 1997, either at the time the payments are made or at the time the trustee discharges the company's liability to employees by providing shares. | Summary: If the Trust satisfies its obligation under the Plan by subscribing for new shares in the Company, the subscription proceeds will not be included in Company's assessable income under section 6-5 or 20-20 or trigger a capital gains tax event under Division 104. | Detailed Reasoning - Detailed reasoning: Ordinary Income As explained in answer to Question 5, the subscription proceeds received by the Company from the Trustee, where the Trustee has subscribed for Shares to satisfy obligations to Participants under the Plans, are a capital receipt. That is, subscription proceeds will not be received on revenue account and will not be ordinary income under section 6-5. Section 20-20 Subsection 20-20(2) provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year. The Company will receive an amount when the Trustee of the Trust subscribes for Shares. There is no insurance contract in this case, so the amount received is not received by way of insurance. Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. Subsection 20-20(3) makes assessable: a recoupment of a loss or outgoing that is deductible in the current income year, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30. Recoupment is defined in subsection 20-25(1) as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing. None of the provisions listed in section 20-30 is relevant to the current circumstances and therefore, the subscription amount does not constitute an assessable recoupment under subsection 20-20(3). The subscription proceeds will therefore not be an assessable recoupment under section 20-20. Capital Gains Tax (CGT) Section 102-20 provides that you make a capital gain or loss if, and only if, a CGT event happens. Where the receipt of subscription proceeds does not relate to a CGT event, a capital gain will not arise. CGT events for which you can make a gain or loss are specified in Division 104. CGT events that may have possible application when subscription proceeds are received by the Company from the Trustee of the Trust are CGT event D1 (creating contractual or other rights) and CGT event H2 (receipt for event relating to a CGT asset). However, paragraph 104-35(5)(c) states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. Paragraph 104-155(5)(c) also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, as the Company is issuing shares, being equity interests, as defined in section 974-75, to the Trustee of the Trust, CGT events D1 and H2 do not happen. As no CGT event happens, there is no amount assessable as a capital gain to the Company. In conclusion, if the Trustee of the Trust satisfies its obligations under the Trust Deed by subscribing for new shares in the Company, then the subscription proceeds received by the Company will not be included in its assessable income under section 6-5 or section 20-20, and a CGT event, under Division 104, will not happen. | Summary: On the basis of the relevant facts and circumstances in this private binding ruling, it cannot be objectively concluded that the person or persons who entered into or carried out any part of the scheme did so for the dominant purpose of enabling the Company to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - Detailed reasoning: Part IVA is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. The Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust where the conditions of Division 83A are met. In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the EST arrangement. Therefore, having regard to the eight factors set out in subsection 177D(2), the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling the Company to obtain a tax benefit. | Summary: The provision of the irretrievable cash contributions to the Trustee, and the allotment to employees of Shares under the Plans and Share Rights under the Annual Incentive Plan are not fringe benefits as defined by subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: The liability of an employer to fringe benefits tax (FBT) arises under section 66 of the FBTAA which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. Under the FBTAA, the calculation of the fringe benefits taxable amount is made by reference to the taxable value of each fringe benefit provided. Without the provision of a 'fringe benefit', no amount will be subject to FBT. A 'fringe benefit' is defined in subsection 136(1) as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. The provision of rights Certain benefits, however, are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition in subsection 136(1). Paragraph (f) of the definition of 'fringe benefit' relevantly states that a fringe benefit does not include: (f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936 .... Paragraph (h) of the definition of 'fringe benefit' relevantly states that a fringe benefit does not include: (h) 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 83AB or 83AC of that Act applies. The Commissioner accepts that the Plans comprise an ESS, and that Shares granted under them and Share Rights granted under another plan are ESS interests (see answer to Question 2) and that Subdivision 83A-B or 83A-C applies to those ESS interests. Therefore, these benefits will not be fringe benefits within the meaning of subsection 136(1). Contribution to the Trustee The definition of 'fringe benefit' in subsection 136(1) relevantly states at paragraph (ha) that it does not include: (ha) 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).... The term 'employee share trust' is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4), which states: An employee share trust , for an *employee share scheme, is a trust whose sole activities are: (a) obtaining *shares or rights in a company; and (b) 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 (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). As determined in the answer to Question 2, the Plan administered by the Trust constitutes an 'employee share scheme' under subsection 83A-10(2). Having regard to the relevant facts and circumstances, the Trust is an 'employee share trust' under subsection 130-85(4). Therefore, the contribution of funds by the Company to the Trustee in order to: (a) subscribe for, or acquire on-market, Shares, and/or (b) fund the ongoing administration of the Trust will satisfy the exclusion in paragraph (ha) of the definition of 'fringe benefit', and will not constitute a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA. | Summary: The Commissioner will not make a determination under section 67 of the FBTAA in relation to Contributions made to the Trustee, to fund the acquisition of Shares. | Detailed Reasoning - Detailed reasoning: As discussed in the answer to Question 8, without the provision of a 'fringe benefit', no amount will be subject to FBT and furthermore the consideration of the Rights, the irretrievable cash contributions to the Trustee and the allocation of Shares to Participants did not give rise to fringe benefits. Therefore, the Commissioner will not make a determination under section 67 of the FBTAA in relation to Contributions made to the Trustee, to fund the acquisition of Shares.

Reasons for decision: Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated. | Questions 1-7 - application of the single entity rule in section 701-1 | The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 the subsidiary members of an income tax consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period that they are members of the income tax consolidated group with the head company of the group being the only entity recognised for income tax purposes. | The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997. | As a consequence of the SER the actions and transactions of the subsidiary members of the Group are treated, for income tax purposes, as having been undertaken by the Company, as the head company of the Group. | The SER in section 701-1 has no application to the Fringe Benefits Tax Assessment Act 1986 (FBTAA). The Commissioner has therefore provided a ruling to the Company and each company which is a subsidiary member of the Group in relation to questions 8 and 9.