Private ruling: Employee Share Plan
Published: September 2011
Ruling period: Income Tax: | Year ending 30 September 2011 | Year ending 30 September 2012 | Year ending 30 September 2013 | Year ending 30 September 2014 | Year ending 30 September 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 ending 30 September 2011

Ruling: Q1: Will the Company as head entity of a tax consolidated group obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of: a. the irretrievable cash contributions made by the Subsidiary Members to the Trustee of the Trust to fund the subscription for shares by the Trust; and b. costs incurred in relation to the implementation and ongoing administration of the Trust? | A1: a. Yes. b. Yes. | Q2: Will the irretrievable cash contributions made by the Subsidiary Members to the Trustee of the Trust, to fund for the subscription for shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A2: No. | Q3: Will the acquisition of shares by the Trustee constitute a fringe benefit provided by the Trustee to the Participant as defined in subsection 136(1) of the FBTAA? | A3: No. | Q4: Will the acquisition by a Participant of a beneficial interest in a specific number of shares held in the Trust constitute a 'fringe benefit' under subsection 136(1) of the FBTAA? | A4: No. | Q5: Will the loan provided by the Trustee to the Participant for the purpose of acquiring a beneficial interest in a specific number of shares held in the Trust: a. constitute a loan fringe benefit under section 16 of the FBTAA?; 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 subsection 19(1) of the FBTAA? | A5: a. Yes b. Yes | Q6: Will a sale, buy-back, cancellation or forfeiture of the shares by or on behalf of the Participant constitute a fringe benefit under subsection 136(1) of the FBTAA? | A6: No. | Q7: Will a fringe benefit arise under subsection 136(1) of the FBTAA when the net proceeds from the sale, buy-back, cancellation or forfeiture of the shares by or on behalf of the participant is less than the balance of the outstanding loan? | A7: No. | Q8: Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the taxable fringe benefits amount to the employers by the amount of tax benefit gained from irretrievable cash contributions made by Subsidiary Members to the Trustee of the Trust to fund the subscription for the shares? | A8: No. | Q9: Will the Commissioner seek to make determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by Subsidiary Members to the Trustee of the Trust to fund the subscription for new shares or acquisition of shares from other shareholders by the Trust? | A9: No.


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 | 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 | Section 16 of the Fringe Benefits Tax Assessment Act 1986 | Section 19 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: (A) Yes, the irretrievable cash contributions made to the Trustee to acquire Shares are allowable deductions. (B) Yes, the costs incurred in relation to the implementation and ongoing administration of the Trust form part of the ordinary employee remuneration costs. | Detailed Reasoning - Detailed reasoning: 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 cash contributions made by Subsidiary Members to the Trustee of the Trust to fund the subscription for 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. The Company is the head company of the group of which the wholly owned Australian subsidiaries are the employers of Participants under the Plan. Under the single entity rule in section 701-1 of the ITAA 1997, the group are taken to be a single entity for the purposes of working out the Company's income tax liability. Although the irretrievable cash contributions are made by the subsidiaries, the effect of the single entity rule in section 701-1 of the ITAA 1997 is such that the cash contributions are taken to be made by the Head Company for income tax purposes. The irretrievable cash contributions are incurred to improve the group operating performance and to motivate and retain high quality staff. Therefore, the irretrievable cash contributions made to the Trustee under the Plan are directed to enhancing the profitability of the group's 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 or the Income Tax assessment Act 1936 (ITAA 1936). Accordingly, the irretrievable cash contributions made to the Trustee to acquire Shares are allowable deductions. Implementation and on-going administration Under the single entity rule in section 701-1 of the ITAA 1997, the group are taken to be a single entity for the purposes of working out the Company's income tax liability. Although the operating costs associated with the administration and implementation of the Plan are incurred by the subsidiaries, the effect of the single entity rule in section 701-1 of the ITAA 1997 is such that the operating costs are taken to be incurred by the Head Company for income tax purposes. 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 and/or the Subsidiary Members 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. | Summary: It is considered that the irretrievable cash contributions provided by Subsidiary Members 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 - Detailed reasoning: 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 it is intended 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 Subsidiary Members 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. | Summary: It is considered that the shares acquired by the Trustee are a benefit provided to a general class of employees at the time they are acquired by the trustee and as such not a fringe benefit provided to an employee in respect of employment for the purposes of subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: 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 allocation of shares to participants will not be determined until after the acquisition of the shares. It is considered that the shares acquired by the Trustee are a benefit provided to a general class of employees at the time they are acquired by the trustee and as such not a fringe benefit provided to an employee in respect of employment for the purposes of subsection 136(1) of the FBTAA. | Summary: The provisions of shares by the Company to its 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. 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. Where shares acquired below market value Where the Participant acquires the beneficial interest in the shares at a discount, or below market price, a benefit will have been provided to the Participant. However, 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 shares in respect of their employment, upon acceptance of participation in the plans in accordance with 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 shares) are acquired by employees of the Company (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 interests will not be subject to fringe benefits tax because they are specifically excluded from the definition of fringe benefit. Where shares acquired at market value Where the Participant acquires the beneficial interest in the shares at market value there is no benefit provided. Therefore there is no fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Summary: (A) Yes, it is considered that the loan provided by the Trustee to the Participants has a sufficient or material connection with their employment. The loan benefit therefore constitutes a fringe benefit under subsection 136(1) of the FBTAA. (B) Yes, subsection 19(1) of the FBTAA will apply to reduce the taxable value of the loan fringe benefit to nil. | Detailed Reasoning - 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 Participants constitutes a benefit under subsection 16(1) of the FBTAA, as the Participants are under an obligation to repay the whole or any part of the loan the Plan Rules. The loan provided by the Trustee to the Participants form part of the scheme implemented by the Company to confer benefits on those employees 'in respect of' their employment within the group. 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 the Participants has a sufficient or material connection with their employment. The loan benefit therefore constitutes a fringe benefit under subsection 136(1) of the FBTAA. The otherwise deductible rule As a beneficiary of the Trust, the Participant 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 Participants for the purpose of acquiring beneficial interest in the shares held in the Trust. The interests held by the Participants 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. | Summary: There is no 'benefit' that arises to a Participant upon the exchange of their Shares for cash. | Detailed Reasoning - Detailed reasoning: 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 a Participant upon the exchange of their Shares for cash. | Summary: 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 - Detailed reasoning: 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.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts and circumstances | The scheme the subject of this Ruling has been ascertained from the following documents: | Application for Private Ruling | The Trust Deed of the Trust