Private ruling: Employee share trust
Date of advice: 31 August 2020
Published: October 2020
Ruling period: Income year ended 30 June 2020 | Income year ended 30 June 2021 | Income year ended 30 June 2022 | Income year ended 30 June 2023 | Income year ended 30 June 2024 | The ruling applies in respect of questions 5 - 6 for the following periods: | Fringe benefits tax year ended 31 March 2020 | Fringe benefits tax year ended 31 March 2021 | Fringe benefits tax year ended 31 March 2022 | Fringe benefits tax year ended 31 March 2023 | Fringe benefits tax year ended 31 March 2024
Date scheme commenced: 1 July 2019

Ruling: Q1: Will the Company be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made to the Trustee of the Company employee share trust (the Trust) to acquire Company (Shares) to satisfy grants of employee share scheme (ESS) interests made under the ESS? | A1: Yes | Q2: Will irretrievable cash contributions made by the Company to the Trustee of the Trust, to fund the acquisition of Shares, which are made before the participant acquires the relevant ESS interest, be deductible to the Company at a time determined by section 83A-210 of the ITAA 1997? | A2: Yes | Q3: Will irretrievable cash contributions made by the Company to the Trustee of the Trust, to fund the acquisition of Shares, made on or after the participant acquires the relevant ESS interests, be deductible to the Company in the income year when the contributions are made under section 8-1 of the ITAA 1997? | A3: Yes | Q4: Will the Commissioner make a 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 for irretrievable cash contributions made by the Company to the Trustee of the Trust for the purpose of acquiring Shares to satisfy ESS interests under the ESS? | A4: No | Q5: Will irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the acquisition of Shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A5: No | Q6: Will the Commissioner make a determination that section 67 of the FBTAA to include an amount in the aggregate fringe benefits amount of the Company, by the amount of tax benefit gained from the irretrievable cash contributions made by the Company, to the Trustee of the Trust, to fund the acquisition of Shares? | A6: No

Relevant facts and circumstances: The Company is the head company of an income tax consolidated group (TCG) comprising itself and its wholly owned Australian subsidiary companies (Company Group). The Company through its employee share scheme (ESS) provides benefits (ESS interests) to its employees through share ownership in the Company that assists the Company in creating sustainable shareholder returns. The Board of the Company adopted plan rules which provide an overarching framework for making offers under the ESS. The Commissioner provided the ruling on the basis of the specific offer made pursuant to the plan rules. Generally, eligible employees who participate in the offers (Participants) may have their interests vested subject to achievement of certain performance conditions. The Company established the Company employee share trust (Trust) to administers the ESS interests under the ESS. The Trustee of the Trust is neither a subsidiary nor a related body corporate of the Company for the purposes of the Corporations Act 2001 . The Trust is an independent legal entity and is not part of Company Group. The Trustee will acquire Shares either on-market or off-market, using contributions from the Company. These Shares will be used to satisfy vested ESS interests. Broadly, the Trust property is characterised in the Trust Deed as either general trust property, which are held for the benefit of all beneficiaries, and allocated trust property, which are the assets that have been allocated to identified beneficiaries. The Trust Deed provides that a request or direction from the Board to the Trustee to acquire Shares is only effective if the Trustee has been provided with sufficient funds to acquire the relevant Shares by the Company or a Participant. Otherwise, the Trustee is not obliged to act in accordance with such request or direction. The Trust Deed sets out the powers of the Trustee in respect of the Trust and the Trust Fund that it is legally possible for a Trustee to have, including entering into and executing all contracts, sell any rights that accrue to a Share and apply the proceeds in accordance with the Trust Deed and the Plan, to open and operate any bank accounts for the Trust. The Trust Deed can be amended, however, any amendment cannot confer on the Company any right to any money or Shares already in the hands of the Trustee, or adversely affect the rights and entitlements of the Beneficiaries to allocated trust assets. Pursuant to the Trust Deed, the Company will indemnify the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in executing the Trust or any of the powers vested in the Trustee. According to the Trust Deed, each member of the Company Group is not a Beneficiary and has no entitlement to any Shares or other trust property forming part of the Trust Fund or to any return of contributions made to the Trust. The Trust Deed further provides that the rights of the Company under the Trust Deed are purely contractual and nothing in the Trust Deed confers on the Company any encumbrance, proprietary right or interest in the Shares acquired by the Trustee.


Reasons for decision: Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) allows you to 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. However, pursuant to subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature. The Company carries on a business producing assessable income. The Company operates an ESS as part of its remuneration strategy. Under the ESS the Company grants ESS interests to eligible employees (Participants) and makes irretrievable cash contributions to the Trust (in accordance with the Rules and the Trust Deed) which the Trustee will use to acquire Shares (either on-market, off-market, or by subscription) for allocation to Participants of the ESS. Incurred in carrying on a business The Company must provide the Trustee with all the funds required to enable the Trustee to subscribe for, or acquire those Company Shares. After a contribution is made by the Company to the Trust, it becomes part of the Trust Fund according to the definition of 'Trust Fund' in the Trust Deed. The contributions made by the Company are irretrievable and non-refundable to the Company as: · Neither the Company nor any member of the Company Group is a beneficiary of the Trust or has any entitlement to any Shares, trust property forming part of the Trust Fund or any returns of contributions made to the Trust, · Nothing in the Trust Deed confers or is intended to confer on the Company any encumbrance, proprietary right or interest in the Shares acquired by the Trustee, and · During the life of the Trust, the Trustee can only apply or distribute Trust Property for the benefit of the Beneficiaries pursuant to the Rules. The Company has granted (and will in the future grant) ESS interests as part of its remuneration and reward program for Participants. The costs incurred by the Company for the acquisition of shares to satisfy grants of ESS interests arise as part of these remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. Not capital or of a capital nature Upon weighing up the fact and circumstances of this case we consider the contributions by the Company to the Trustee are for the purpose of acquiring Company Shares to meet Company's commitments under the Rules. They are primarily outgoings incurred in the ordinary course of carrying on its business. The contributions will be an outgoing incurred for periodic funding of a bona fide ESS for employees of the Company. It is not expected to be made on a 'once and for all bases', but rather will be made on a recurring basis from time to time as part of the ongoing process of remunerating participants, with the Trust expected to acquire Shares regularly. 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. | Detailed Reasoning - Detailed reasoning: Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to the Trust to purchase Shares in excess of the number required to grant the relevant ESS interests to the employees arising in the year of income from the grant of ESS interests, pursuant to the Rules. Further information is available 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 . The Offer is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests (i.e. a beneficial interest in a share or a beneficial interest in a right to acquire a beneficial interest in a share) are provided to employees (i.e., Participants) in relation to their employment with the Company (or the TCG). The Rules contain a number of interrelated components which include the provision of irretrievable cash contributions by the Company to the Trustee of the Trust. These contributions enable the Trustee to acquire Company shares for the purpose of enabling each Participant, to acquire ESS interests. The deduction for the irretrievable cash contributions can only be deducted from the assessable income of the Company in the income year when the relevant beneficial interest in a share in the Company, or beneficial interest in a right to a beneficial interest in a share in the Company, is acquired by a Participant under the Rules. | Detailed Reasoning - Detailed reasoning: Consistent with the analysis in question 2 above, where the contribution is made after the acquisition of the relevant ESS interests, irretrievable contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition on-market or off-market of Shares by the Trust to satisfy the ESS interests granted to Participants will be deductible in the income year in which the contribution is made by the Company. | Detailed Reasoning - Detailed reasoning: Part IVA is a general anti-avoidance provision, it 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 employee share trust 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. | Detailed Reasoning - Detailed reasoning: One benefit excluded from being a 'fringe benefit', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA, is 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 . In examining whether the requirements of subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that is relevant. To qualify as an employee share trust, a trustee's activities must be limited to those described in paragraphs 130-85(4)(a), (b) and (c). Paragraph 130-85(4)(a) and (b) are satisfied because: · the Trust acquires shares in a company, namely the Company, and · the Trust ensures that ESS interests as defined in subsection 83A-10(1) are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust Deed and the Rules. Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'. The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13 : Income tax: what is an 'employee share trust'? Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental. In the present case, the objects of the Trust are for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under section 130-85(4) including paragraph 130-85(4)(c) as the other activities undertaken by the Trustee are merely incidental to managing the ESS. Therefore, the irretrievable cash contribution made by the Company to the Trust to fund the subscription for, acquisition on-market or off-market of Company Shares to satisfy grants of ESS interests will not be a fringe benefit. | Detailed Reasoning - Detailed reasoning: Section 67 of the FBTAA is a general anti-avoidance provision in the FBTAA. Subsection 67(1) of the FBTAA is satisfied where a person, or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer, or the eligible employer and another employer, to obtain a tax benefit. The Commissioner will only 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 benefits provided to the Trustee by way of irretrievable cash contributions to the Trust and to Participants by way of the provision of ESS interests pursuant to the Rules are excluded from the definition of a fringe benefit for the reasons provided in questions 5 above. As these benefits have been excluded from the definition of a fringe benefit, the FBT liability is not any less than it would have been but for the arrangement. The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of the Company by the amount of tax benefit gained from the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market or off-market of Company Shares to satisfy the ESS interests.

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 to 4 - application of the single entity rule in section 701-1 | The consolidation provisions of the Income Tax Assessment Act 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 Company income tax consolidated group (TCG) are treated, for income tax purposes, as having been undertaken by the Company as the head Company of the TCG. | 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 Company and each employing Company which is a subsidiary member of the Company in relation to questions 5 to 6.