Private ruling: Employee share scheme
Date of advice: 24 February 2021
Published: April 2021

Ruling: Q1: Will the Company obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA1997) in respect of the irretrievable cash contributions made by the Company to the Trustee (the Trustee) of the Company Employee Share Plan Trust (the Trust) to fund the subscription for, or acquisition on-market of Company shares by the Trust pursuant to the Company Employee Share Plan (the Plan)? | 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 in relation to the on-going administration of the Trust? | A2: Yes | Q3: Are irretrievable cash contributions made by the Company to the Trustee of the Trust, funding the subscription for, or on-market acquisition of Company shares by the Trust under the Plan, deductible to the Company at a time determined by section 83A-210 of the ITAA 1997in respect of those Employee Share Scheme (ESS) interests which are subject to Division 83A of the ITAA 1997? | A3: Yes | Q4: Will the Commissioner seek to 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 in respect of irretrievable cash contributions to the Trustee of the Trust to fund the subscription for, or on-market acquisition of Company shares by the Trust? | A4: No | Q5: If the Trustee of 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 sections 6-5 or 20-20 of the ITAA 97, or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 97? | A5: No | Q6: Will the provision of the Company shares to participants 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 on-market acquisition of Company shares by the Trust, be treated as a fringe benefit within the meaning of section 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 aggregate fringe benefits amount of 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 Company shares? | A8: No

Relevant facts and circumstances: Company is the head company of the Company Group (Group). The Plan was developed to motivate and reward Group employees in a way that aligns their interests with the performance of the Group. The Plan is part of the remuneration strategy and aims to allow eligible Group employees (Participants) to acquire shares in the Company. The Trust was established to administer the Plan and provide an opportunity for the Participants to receive an equity interest in the Company. All Participants are Australian residents. The Plan The Plan operates as follows: It is at the board's discretion to extend an invitation to certain employees to apply for a number of Performance Rights specified on the invitation. Each Performance Right entitles the holder to subscribe for one Share. A grant of Performance Rights, does not confer any right or interest, whether legal or equitable, in Shares until all Vesting Conditions have been satisfied or waived in terms of the Plan or by the Company at its discretion; and where required, the Vested Performance Rights have been validly exercised in accordance with the Plan. The relevant vesting conditions include both Service and Performance Conditions relevant to the Participants position. Vested Performance Rights may be exercised by the Participant lodging a Notice of Exercise within the Exercise Period and complying with such other requirements as are specified in the Offer. The Company will give notice to the Participant as to the number of Shares to be delivered in respect of the Vested Performance Rights as soon as practicable after the Performance Rights have become vested and within 60 days after the Performance Rights have Vested the Company will deliver the Shares. All Shares issued, transferred or allocated on the vesting or exercise of a Participant's Performance Rights will rank pari passu in all respects with the Company's then existing ordinary fully paid shares. Performance Rights will lapse if: • Vesting Conditions are not satisfied by the end of the applicable Vesting Period • Are not Vested and the Participant ceases to be employed by the Group, unless terms and conditions specified at the time of grant deem otherwise in particular circumstances • Are Vested Performance Rights that have not been exercised • Are transferred by the Participant without the Board's consent, or • Otherwise expire under the terms and conditions specified at the time of Grant. The Company will pay all costs and expenses in relation to the establishment and operation of the Plan. Any brokerage, commission, stamp duty or other transaction costs in connection with the disposal of a Participant's Shares acquired under the Plan will be paid for by the Participant. The Trust The sole purpose of the Trust is acquiring, holding and transferring Shares in accordance with the Plan and the terms of the Trust Deed. The Trust is an independent legal entity and is not part of the Group. The Trust has been established to be an 'employee share trust' as defined in sub-section 130-85(4) of the ITAA 1997. Broadly, the Trust operates in accordance with the Trust Deed as follows: • The Company makes irretrievable cash contributions to the Trustee of the Trust to fund the subscription for, or acquisition on-market of Company shares by the Trust pursuant to the Plan • The Trustee must within 7 days, or as directed by the Board, subscribe for or acquire shares where written notice is received from the Company to do so. Importantly, the Trustee will be the legal owner on acquisition of Plan Shares, the Company or any of its subsidiaries are not permitted to have any beneficial interest in the Shares • The Trustee will receive direction from the Company as to when to allocate Plan Shares to a Participant • The Trustee must transfer or dispose of Plan Shares in accordance with the Plan and any specific Offer terms • The Trustee must notify the Company when it transfers or allocates Shares to a Participant and must notify the Company of the relevant details • Forfeiture of Plan Shares by a Participant will result in the Plan Shares being held by the Trustee on an unallocated basis. The Company by notice can direct the Trustee to reallocate those shares for the benefit of another Participant, or hold the proceeds of sale in the fund to meet future obligations under the Plan • Nothing in the Trust Deed confers or is intended to confer on the Company or any Group Company, any charge, lien or any other proprietary right or proprietary interest in the Shares acquired by the Trustee • The Trustee and the Participant must not transfer, sell or otherwise deal with a Plan Share during any Restriction Period • At the direction of the relevant Participant the Trustee can sell Plan Shares that the Participant is entitled to. The Trustee will apply the proceeds first to disposal costs (including brokerage fees, commission, stamp duty or other transaction costs) and the balance to the Participant • The Trustee can deduct from an amount to be paid to a Participant an amount for the purpose of tax payable on behalf of the Participant • A Participant is entitled to so much of the Net Income of the Trust attributable to Plan Shares, sale of Plan Shares, and transactions or events related to Plan Shares held by the Trustee on behalf of the Participant • The Trustee may apply the balance of the net income to which no Participant is presently entitled, subject to any restrictions in the Plan Rules, to meet any reasonable costs and expenses incurred in administrating the Trust, and • The balance of the Net Income of the Trust to which no Participant is presently entitled may be accumulated by the Trustee as an Accretion to the Trust.


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. Under the Plan, the Company grants Performance Rights and Shares to Participants and makes irretrievable cash contributions to the Trust (in accordance with the Plan and the Trust Deed) which the Trustee will use to acquire Shares (either on-market or by subscription) for allocation to Participants to satisfy their Rights or allocation of Shares. | Detailed Reasoning - Incurred in carrying on a business: The Company must provide the Trustee with the funds required to enable the Trustee for or acquire Company Shares. After a contribution is made by the Company to the Trust, it becomes part of the Trust Fund according to the Trust Deed. The cash contributions made to the Trust by the Company are irretrievable and non-refundable to the Company in accordance with the Trust Deed as: • The Trust was established for the purpose of transferring shares in accordance with the Plan and terms of the Trust Deed • Neither the Company nor any Group Company have any beneficial interest, in any Shares that are subscribed for by the Trustee, and • Nothing in the Trust Deed confers or is intended to confer on the Company or any Group Company, any charge, lien or any other proprietary right or proprietary interest in the Shares acquired by the Trustee. 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 irretrievable cash contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. Therefore, subsection 8-1(1) is satisfied. | Detailed Reasoning - Not capital or of a capital nature: Upon weighing up the fact and circumstances of this case we consider the irretrievable cash contributions by the Company to the Trustee are for the purpose of acquiring Company Shares to meet commitments under the Plan. 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 Group. 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 cash contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure of 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: As discussed in response to Question 1 above, section 8-1 allows a deduction for 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. The Company, as the head of the Group, operates the Plan to retain and incentivise employees. Company incurs ongoing administration costs for operating the Plan such as: • employee plan record keeping • production and dispatch of holding statements to employees • costs incurred in the acquisition of Shares on market (e.g. brokerage costs and the allocation of Shares to Participants) • preparing the annual audit of the financial statements, and • preparing the annual income tax returns of the Trust. The cost outlined above are revenue in nature on the basis they are part of the ordinary cost of remunerating employees and costs necessarily incurred in running the Plan 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) . | 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 Rights, under an ESS. 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 Plan is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which Performance Rights granted to the Group employees by virtue of the Trust Deed and the Plan will amount to ESS interests, as they represent a right to acquire a beneficial interest in a share in the Company granted to employees as a result of their employment with the Group. The Plan contains a number of interrelated components which includes 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, indirectly as part of the Plan, to acquire ESS interests. The deduction for the irretrievable cash contribution 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 Plan. | 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 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. | 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. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In an employee share scheme, 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 of share capital from the trustee. The character of the contribution of share capital received by the Company from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Under this arrangement, as the Company issues shares in itself to the Trustee, in exchange for the subscription proceeds, the character of the newly issued share is one of capital. Therefore, the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature. This view is supported by the reasoning in ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee. Accordingly, when the Company receives subscription proceeds from the Trustee of the Trust where the Trustee has subscribed for new Shares in the Company to satisfy obligations to Participants, that subscription price received by the Company is a capital receipt. That is, it will not be on revenue account and it will not be ordinary income under section 6-5. | Detailed Reasoning - 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 for the subscription of Shares by the Trustee of the Trust. There is no insurance contract in this case, so the amount 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. Subsection 20-25(1) defines a recoupment as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing. The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing. To the extent that section 8-1 allows a deduction for bad debts or rates or taxes, section 20-30 will apply such that if there was a recoupment of that deduction, that amount would be assessable. The receipt by the Company is in return for issuing Shares to the Trustee of the Trust, not as a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes that could be subject to section 20-30. The subscription proceeds will therefore not be an assessable recoupment under section 20-20. | Detailed Reasoning - Capital Gains Tax (CGT): Section 102-20 states 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. The relevant CGT events that may be applicable when the subscription proceeds are received by the Company from the Trustee of the Trust are CGT event D1 (creating a 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. In relation to CGT event H2, 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. When the Trustee of the Trust satisfies its obligations under the Trust Deed by subscribing for new Shares in Company, the subscription proceeds received by the Company will not be included in the assessable income of the Company under section 6-5 or section 20-20 and will also not trigger a CGT event under Division 104. | Detailed Reasoning - Detailed reasoning: An employer's liability 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. In general terms, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. In particular, paragraph (h) of subsection 136(1) of the FBTAA excludes the following from being a 'fringe benefit': (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 83A-B or 83A-C of that Act applies; The Commissioner accepts that the Plan is an ESS, the Performance Rights for the Company Shares provided under the Plan are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests. Accordingly, the provision of Performance Rights under the Plan will not be subject to FBT on the basis that they are acquired by Participants under an ESS (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA. In addition, when a Performance Right is later exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the right and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme ). | Detailed Reasoning - Detailed reasoning: As stated above in response to Question 6, an employer's liability to 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. 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 ITAA 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 Plan. 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 Plan. Therefore, the irretrievable cash contribution made by the Company to fund the subscription for or acquisition on-market of Company Shares by the Trust 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. As stated above in response to Question 7, without the provision of a 'fringe benefit', no amount will be subject to FBT. The benefits provided to the Trustee by way of irretrievable cash contributions to the Trust and to Participants by way of the provision of Performance Rights under the Plan are excluded from the definition of a fringe benefit for the reasons provided in questions 6 and 7 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 of Company 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.