Private ruling: Employee Share Trust Plan
Published: November 2012

Ruling: Q1: Will the contributions of monies by employer to the trustee pursuant the trust deed in respect of arm's length employees of employer constitute an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will the loans of monies by employer to the trustee pursuant to the trust deed constitute an income tax deduction under section 8-1 of the ITAA 1997? | A2: No | Q3: Will the contributions of monies made by the employer to the trustee pursuant to the trust deed for the benefit of a general class of employees constitute a 'fringe benefit' provided by employer to the employee as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A3: No | Q4: Will the loans of monies made by employer to the trustee pursuant to the trust deed for the benefit of a general class of employees constitute a 'fringe benefit' provided by employer to the employee as defined in subsection 136(1) of the FBTAA? | A4: No | Q5: Will the acquisition of shares by the trustee constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? | A5: No | Q6: Will the acquisition of share units by the employee at market value, to which trust assets will be allocated by the trustee, constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? | A6: No | Q7: Will the loan provided by the trustee to the employee for the purpose of acquiring the share units constitute a 'loan fringe benefit' provided by the trustee to the employee under section 16 of the FBTAA? | A7: Yes | Q8: Where the employee pays or accrues interest at least equivalent to the relevant notional or statutory interest rate in respect of the loan provided by the trustee, will the taxable value of the loan fringe benefit which could arise under section 18 of the FBTAA be nil? | A8: This question is not applicable to the scheme to which this ruling refers. | Q9: 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? | A9: Yes | Q10: Where the share units are redeemed by the employee for cash, will that redemption constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? | A10: No | Q11: Where the value of the asset(s) allocated to the share unit falls below the issue price and the share unit is surrendered to the trustee in full satisfaction of the employee loan obligation, will the surrender of the share unit constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? | A11: No | Q12: Will a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA, arise where assets are transferred to the unallocated assets account of the trust? | A12: No | Q13: Will the operating costs associated with the administration of the plan incurred by employer be deductible under section 8-1 of the ITAA 1997? | A13: Yes | Q14: Will the meeting of operating costs associated with the administration of the share plan by employer constitute a 'fringe benefit' provided by employer to the employee as defined in subsection 136(1) of the FBTAA? | A14: No | Q15: Will the payment of administration fees by employer to the administrator under the plan administration agreement for the provision of administration services to the trustee be deductible under section 8-1 of the ITAA 1997? | A15: Yes | Q16: Will the payment of administration fees by employer to the administrator under the plan administration agreement for the provision of administration services to the trustee constitute a 'fringe benefit' provided by employer to the employee as defined in subsection 136(1) of the FBTAA? | A16: No | Q17: Will the general anti-avoidance provisions under section 67 of the FBTAA apply to the scheme described? | A17: No

Relevant facts and circumstances: The employer entity intends to implement a long-term equity plan for the purpose of providing a long-term equity incentive structure to deliver equity based benefits to employees selected by the board of the employer entity.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Subsection 8-1(1) | Income Tax Assessment Act 1997 Subsection 8-1(2) | Income Tax Assessment Act 1997 Subsection 83A-10(1) | Fringe Benefits Tax Assessment Act 1986 Section 16 | Fringe Benefits Tax Assessment Act 1986 Subsection 16(1) | Fringe Benefits Tax Assessment Act 1986 Section 18 | Fringe Benefits Tax Assessment Act 1986 Subsection 19(1) | Fringe Benefits Tax Assessment Act 1986 Section 40 | Fringe Benefits Tax Assessment Act 1986 Section 67 | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) ATO view documents | ATO Interpretative Decision 2003/316 | ATO Interpretative Decision 2002/961 | Other references (non ATO view, such as court cases) | Commissioner of Taxation v. Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16 | J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 provides that: 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. Ongoing contributions of monies will be made to the trustee by employer pursuant to the trust deed to deliver equity based benefits to the employee. The advantage sought is to provide the employee with a wealth creation mechanism linked to their ongoing work and performance with employer. The outgoings are incurred as part of the remuneration of the employer's employees. It is therefore considered that the contributions are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. The contributions will be made regularly as an operating expense and not to obtain a lasting advantage. It is therefore considered that they are not outgoings of capital or of a capital nature. The contributions have no private or domestic nature, are not incurred in relation to producing exempt or non-assessable non-exempt income and no other provision of the Act prevents employer from deducting them. As all of the required conditions are satisfied, the contributions of monies by employer to the trustee pursuant to the trust deed will be deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 2: Will the loans of monies by employer to the trustee pursuant to the trust deed constitute an income tax deduction under section 8-1 of the ITAA 1997? No | Detailed Reasoning - Detailed reasoning: A loan is not a loss or outgoing for the purposes of section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 3: Will the contributions of monies made by employer to the trustee pursuant to the trust deed for the benefit of a general class of employees constitute a 'fringe benefit' provided by employer to the employee as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? No | 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 Commissioner of Taxation v. Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16 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. It is not possible to identify any particular employee in respect of whose employment a contribution for the benefit of a general class of employees is provided. Therefore, the contributions of monies provided by employer to the trustee, where made for the benefit of a general class of employees, is not a 'fringe benefit' provided by employer to the employee in respect of his employment at the time the contribution is provided to the trustee. | Detailed Reasoning - Question 4: Will the loans of monies made by employer to the trustee pursuant to the trust deed for the benefit of a general class of employees constitute a 'fringe benefit' provided by employer to the employee as defined in subsection 136(1) of the FBTAA? No | 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 Commissioner of Taxation v. Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16 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. It is not possible to identify any particular employee in respect of whose employment a contribution for the benefit of a general class of employees is provided. Therefore, the loans of monies provided by employer to the trustee, where made for the benefit of a general class of employees, is not a 'fringe benefit' provided by employer to the employee in respect of his employment at the time the loan is provided to the trustee. | Detailed Reasoning - Question 5: Will the acquisition of shares by the trustee constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? No | 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 acquisition of investments by the trustee is not a 'benefit' provided to the employee any associate of the employee so no fringe benefit will be provided by the trustee to the employee upon the acquisition of investments by the trustee for market value consideration. | Detailed Reasoning - Question 6: Will the acquisition of share units by the employee at market value, to which trust assets will be allocated by the trustee, constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? No | 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 the employee upon the acquisition of share units at market value to which trust assets will be allocated by the trustee. | Detailed Reasoning - Question 7: Will the loan provided by the trustee to the employee for the purpose of acquiring the share units constitute a 'loan fringe benefit' provided by the trustee to the employee under section 16 of the FBTAA? Yes | Detailed Reasoning - Detailed reasoning: 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 employee is under an obligation to repay the whole or any part of the loan in accordance with the trust deed. The loan provided by the trustee to the employee forms part of the scheme implemented by employer to confer benefits on the employee 'in respect of' his employment of employer. 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 employee has a sufficient or material connection with employer's employment of the employee. The loan benefit therefore constitutes a fringe benefit under subsection 136(1) of the FBTAA. | Detailed Reasoning - Question 8: Where the employee pays or accrues interest at least equivalent to the relevant notional or statutory interest rate in respect of the loan provided by the trustee, will the taxable value of the loan fringe benefit which could arise under section 18 of the FBTAA be nil? This question is not applicable to the scheme to which this ruling refers. | Detailed Reasoning - Detailed reasoning: The loans provided to the eligible employees under this arrangement will not bear interest. | Detailed Reasoning - Question 9: 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? Yes | Detailed Reasoning - Detailed reasoning: The employee will be entitled to deduct interest expenses incurred in acquiring share units in the trust under section 8-1 of the ITAA 1997 if holding the share units will result in the employee gaining assessable income. The loan is made to the employee for the purpose of acquiring share units in the trust so interest on the loan would be incurred in acquiring those share units. The share units held by the employee entitle the employee to receive distributions of a share of the net income of the trust fund. These distributions will be included in the employee's assessable income under section 97 of the ITAA 1936. Subsection 19(1) of the FBTAA provides that the taxable value of a loan fringe benefit is reduced to the extent a deduction could be claimed on interest if paid by the employee. In this case, the whole of the interest on a loan to acquire share units would be deductible under section 8-1 of the ITAA 1997. Accordingly, subsection 19(1) of the FBTAA will apply to reduce the taxable value of the loan fringe benefit to nil. | Detailed Reasoning - Question 10: Where the share units are redeemed by the employee for cash, will that redemption constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? No | 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 redemption of the share units by the employee for cash is a 'benefit' provided to the employee by the trustee. However, the benefit arises to the employee in respect of their ownership of the share units and not in respect of their employment. Accordingly, the redemption of their share units for cash does not constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA. | Detailed Reasoning - Question 11: Where the value of the asset(s) allocated to the share unit falls below the issue price and the share unit is surrendered to the trustee in full satisfaction of the employee loan obligation, will the surrender of the share unit constitute a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA? No | 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 employee surrenders their share units to the trustee in full satisfaction of the loan, and the value of the asset(s) allocated to the share units is less than the balance of the outstanding loan, a benefit is considered to arise to the employee. However, the benefit that arises upon discharge of the loan is not considered to be provided 'in respect of the employment' of the employee, but as a result of the employee exercising rights under the terms of the trust deed. Under the terms of the trust deed the employee obtains the right to cancel the unit and have the amounts payable to the employee set off as full and final satisfaction of the debt outstanding on the loan. If this right is subsequently exercised, any benefit would be in respect of the exercise of this right, and not in respect of employment (ATO Interpretative Decision 2003/316). Thus, the benefit that arises to the employee upon surrender of the share unit does not give rise to a fringe benefit as the benefit is not provided to the employee 'in respect of' the employment relationship. | Detailed Reasoning - Question 12: Will a 'fringe benefit' provided by the trustee to the employee as defined in subsection 136(1) of the FBTAA, arise where assets are transferred to the unallocated assets account of the trust? No | 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, and 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 transfer of assets to the unallocated assets account of the trustee is not a 'benefit' provided to the employee any associate of the employee so no fringe benefit will be provided by the trustee to the employee where assets are transferred to the unallocated assets account of the trust. | Detailed Reasoning - Question 13: Will the operating costs associated with the administration of the plan incurred by employer be deductible under section 8-1 of the ITAA 1997? Yes | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. The operating costs associated with the administration of the share plan fall within the ambit of the ordinary employee remuneration costs of employer. As employee remuneration costs are losses or outgoings necessarily incurred in carrying on employer's business, they are deductible under section 8-1 of the ITAA 1997 in the year that they are incurred (ATO Interpretative Decision 2002/961). | Detailed Reasoning - Question 14: Will the meeting of operating costs associated with the administration of the share plan by employer constitute a 'fringe benefit' provided by employer to the employee as defined in subsection 136(1) of the FBTAA? No | 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, and 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 employer meeting the operating costs associated with administering the share plan is not a 'benefit' provided to the employee any associate of the employee so no fringe benefit will be provided by the trustee to the employee by employer meeting the operating costs associated with administering the share plan. | Detailed Reasoning - Question 15: Will the payment of administration fees by employer to the administrator under the plan administration agreement for the provision of administration services to the trustee be deductible under section 8-1 of the ITAA 1997? Yes | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. The administration fees payable by employer under the plan administration agreement for the provision of administration services fall within the ambit of the ordinary employee remuneration costs incurred by employer. As employee remuneration costs are losses or outgoings necessarily incurred in carrying on employer's business, they are deductible under section 8-1 of the ITAA 1997 in the year that they are incurred. | Detailed Reasoning - Question 16: Will the payment of administration fees by employer to the administrator under the plan administration agreement for the provision of administration services to the trustee constitute a 'fringe benefit' provided by employer to the employee as defined in subsection 136(1) of the FBTAA? No | 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, and 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 employer paying the administration fees to the administrator under the plan administration agreement is not a 'benefit' provided to the employee any associate of the employee so no fringe benefit will be provided by the trustee to the employee by the employer paying the administration fees to the administrator under the plan administration agreement. | Detailed Reasoning - Question 17: Will the general anti-avoidance provisions under section 67 of the FBTAA apply to the scheme described? No

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. | Reasons for decision: These reasons for decision accompany the Notice of private ruling for EMPLOYER PTY LTD. | While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Will the contributions of monies by employer to the trustee pursuant to the trust deed in respect of arm's length employees of employer constitute an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?