Private ruling: Employee Share Trust
Date of advice: 31 August 2018
Published: October 2018
Ruling period: Income tax years: | Income tax year end 20xx - Income tax year end 20xx | Fringe benefits tax years: | 1 April 20xx - 31 March 20xx
Date scheme commenced: xx Month 20xx

Ruling: Q1: Will the Company obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the irretrievable cash contributions made by the Company to the Trustee of Employee Share Trust (the Trust) to fund the subscription for or acquisition on-market of the Company’s shares by the Trust? | A1: Yes. | Q2: Will the Company obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by the Company in relation to the on-going administration of the Trust? | A2: Yes. | Q3: Will irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition on-market of the Company’s shares, be deductible to the Company at a time determined by section 83A-210 of the ITAA 1997? | A3: No. | Q4: If the Trust satisfies its obligation under the Plan by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under section 6-5 or 20-20 of the ITAA 1997 or trigger a capital gain tax (CGT) event under Division 104 of the ITAA 1997? | A4: No. | Q5: Will the Commissioner seek to make a determination under section 177F that Part IVA of the Income Tax Assessment Act 1936 (the ITAA 1936) applies to deny, in part or in full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition on-market of the Company’s shares? | A5: No. | Q6: Will the provision of options or shares by the Company to its employees (including foreign employees) under the Plan be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A6: No. | Q7: Will the irretrievable cash contributions made by the Company to the Trustee of the Trust, to fund the subscription for or acquisition on-market of the Company’s shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | A7: No. | Q8: Will the Commissioner seek to 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 of the Trust, to fund the subscription for or acquisition on-market of the Company’s shares? | A8: No.

Relevant facts and circumstances: The Company is an Australian publicly listed company and the head company of the income tax consolidated group. Employee share plan The Company has implemented an Employee Share Plan (Plan) as part of its remuneration strategy. Broadly, the Plan operates to provide eligible employees (Participants) with a right to acquire a share in the Company subject to the relevant performance conditions being satisfied. Employee share trust To facilitate the operation of the Plan, the Company has established an Employee Share Trust (Trust) for the sole purpose of obtaining shares in the Company for the benefit of the Participants, including subscribing for or acquiring, allocating, holding and delivering shares under the Plan for the benefit of Participants. The acquisition of shares is funded by the irretrievable cash contributions made by the Company to the Trustee of the Trust in accordance with the Plan and the terms of the Trust Deed. Shares will be acquired and held by the Trust for the benefits of the Participants subject to relevant performance conditions are satisfied.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 section 83A-20 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 104-5 | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1997 section 974-75 | Income Tax Assessment Act 1936 section 177A | Income Tax Assessment Act 1936 section 177C | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 section 177F | Fringe Benefits Tax Assessment Act 1986 section 66 | Fringe Benefits Tax Assessment Act 1986 section 67 | Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision: Summary: The irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the acquisition of the Company’s shares are employee remuneration costs directly related to enhancing the profitability and future growth of the Company. They are not business outgoings of capital or of a capital in nature. Therefore, the irretrievable cash contributions will be an allowable deduction to the Company pursuant to section 8-1 of ITAA 1997. The Company will be entitled to a deduction under section 8-1 of the ITAA 1997 in respect of costs incurred in relation to the on-going administration of the Trust. The costs are not capital or capital in nature on the basis that they are regular and recurrent employment expenses. As the Company does not and will not provide the cash contribution to the trust prior to the issue of rights to Participants, section 83A-210 of the ITAA 1997 will not apply to determine the timing of the deduction allowable to the Company in respect of the contributions made to the Trust to fund the acquisition of the Company’s shares. If the Trustee of the Trust satisfies its obligation under the Plans by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under either section 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997. | Detailed Reasoning - Section 6-5: Under subsection 6-5(1) of the ITAA 1997, assessable income includes income according to ordinary concepts, which is called ordinary income. When the Company receives the subscription proceeds from the Trustee of the Trust for subscription of new shares in the Company to satisfy its obligations under the Plan, the subscription proceeds received by the Company are of a capital receipt. That is, the contributions will not be on revenue account and will not be assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Section 20-20: Division 20 of the ITAA 1997 deals with amounts included to reverse the effect of past deductions and section 20-20 deals with assessable recoupments. Under subsection 20-20(1) of the ITAA 1997, an amount is not assessable income to the extent that it is ordinary income, or it is statutory income because of a provision outside of this Subdivision. Subsections 20-20(2) and (3) refer to recoupment of a loss or outgoing, received by way of insurance, indemnity or other recoupment. Also, the table in section 20-30 of the ITAA 1997, which shows the deductions for which recoupments are assessable, does not include provision for funding an employee share trust to acquire shares for employees. The contributions made by the Company to the Trustee to fund the subscription of its shares is a loss or outgoing incurred by the Company as part of its remuneration strategy and is an integral part of the conduct of its business. The contribution will be an allowable deduction to the Company under section 8-1 of the ITAA 1997. The subscription money received by the Company from the Trustee is the receipt in exchange for the issue of the Company’s shares and is not an amount received by ways of insurance or indemnity. Accordingly, for the above reasons, the subscription proceeds received by the Company do not constitute assessable recoupments under subsection 20-20(2) or subsection 20-20(3) of the ITAA 1997. | Detailed Reasoning - Division 104: Section 102-20 of the ITAA 1997 states a taxpayer can make a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the event. The relevant CGT events that may be applicable when the Company received the subscription proceeds in exchange for the issue of its shares under the Plan are: ● CGT event D1 (creating contractual or other rights) – section 104-35 of the ITAA 1997 ● CGT event H2 (receipt for event relating to a CGT asset) – section 104-55 of the ITAA 1997 CGT event D1 Subsection 104-35(1) of the ITAA 1997 states that CGT event D1 happens if a taxpayer creates a contractual right or other legal or equitable right in another entity. However, paragraph 104-35(5)(c) of the ITAA 1997 relevantly provides that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. ‘Equity interests in a company’ is defined in item 1 of the table in subsection 974-75(1) of the ITAA 1997 as an interest in the company as a member or stockholder of the company. In this instance D1 will not apply as the legal or other equitable right (being the right of the employee to acquire shares in the Company upon the payment of the subscription proceeds) is created at the time the relevant right was first issued (i.e. granting of rights). The subsequent payment of the subscription proceeds is not in connection with the creation of rights; it is consideration for the issue of shares. CGT event H2 CGT event H2 happens if an act, transaction or event occurs to a CGT asset owned by a taxpayer and the occurrence does not result in an adjustment to the cost base or reduced cost base (subsection 104-155(1) of the ITAA 1997). However, paragraph 104-155(5)(c) of the ITAA 1997 relevantly provides that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Again, consideration of the subscription proceeds received by the Company from the Trustee was established that they are for the issue of shares and are integral to the arrangement whereby the acquisition, holding and the allocation of the shares by the Trustee to Participants are interrelated components of the Plan. As part of the Plan, contractual rights of employees are exercised on their behalf to acquire shares in the Company, rather than an act, transaction or event related to a CGT asset owned by the Company. Accordingly, a CGT event under Division 104 of the ITAA 1997 does not arise when the Trustee subscribes for fully paid ordinary shares in the capital of the Company. Therefore, when the Trustee satisfies its obligations under the Plan by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under section 6-5 or section 20-20, or trigger a CGT event under Division 104. | Detailed Reasoning - Question 5: Part IVA of the ITAA 1936 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 of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. Having regarded to the relevant circumstances of the present case, it cannot be concluded that the scheme was entered into for the dominant purpose of enabling the Company to obtain a tax benefit. Therefore, the Commissioner will not make a determination under section 177F that Part IVA of the ITAA 1936 applies to deny, in part of in full, any deduction claimed by the Company for the irretrievable cash contributions made to the Trustee. | Detailed Reasoning - Question 6: A ‘fringe benefit’ will only arise under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where benefits are provided by employers to employees or associates of employees. Under the definition of ‘fringe benefit’, a benefit must also be provided ‘in respect of the employment of the employee’. Paragraph 136(1)(h) of the FBTAA states that a fringe benefit does not include: 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; Rights granted by the Company to Participants are ESS interests, within the meaning of subsection 83A-10(1) of the ITAA 1997, as they are rights to acquire shares in the Company provided to Participants in relation to their employment under the Plan which is an employee share scheme, within the meaning of subsection 83A-10(2) of the ITAA 1997. Accordingly, paragraph 136(1)(h) of the FBTAA applies to exclude the provision of rights or shares by the Company to the employees from being a fringe benefit. | Detailed Reasoning - Question 7: A ‘fringe benefit’ will only arise under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where benefits are provided by employers to employees or associates of employees. Under the definition of ‘fringe benefit’, a benefit must also be provided ‘in respect of the employment of the employee’. Paragraph 136(1)(ha) of the FBTAA states that a fringe benefit does not include 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 ); A benefit constituted by the cash contributions made by the Company to the Trustee of the Trust which is an employee share trust under the Plan is specifically excluded from the definition ‘fringe benefit’ under paragraph 136(1)(ha) of the FBTAA. | Detailed Reasoning - Question 8: In Question 7 of this Ruling, it was determined that the cash contributions by the Company to the Trust is excluded from the definition of a fringe benefit under subsection 136(1) of the FBTAA as the contribution is made as part of remuneration strategy of the Company. Further, in Question 6 of this ruling, it was concluded that the dominant purpose of the Plan is to provide remuneration to eligible employees who participate in the scheme in a form that promotes the Company’s business objectives rather than to obtain a tax benefit. Therefore, the fringe benefit liability incurred by the Company is not any less than it would have been but for the existence of the arrangement. Accordingly, 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 the tax benefit gained from the cash contribution made the Company to the Trustee of the Trust to fund the subscription for or acquisition on market of the Company’s shares.