Private ruling: Employee Share Scheme
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will Company A (as head company of the income tax consolidated group) obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for an irretrievable cash contribution it makes to the Trustee of the Company A employee share trust (EST) in respect of an option issued under Company A's option plans? | A1: Yes | Q2: If the answer to question 1 is yes, will the irretrievable cash contribution be deductible when the relevant option has been granted and an irretrievable cash contribution has been made to the EST to acquire a Company A share? | A2: Yes | Q3: 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 Company A in respect of the irretrievable cash contributions made by Company A to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A's shares by the EST? | A3: No | Q4: Will the provision of options or shares by Company A to its employees under Company A's option plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA 1986)? | A4: No | Q5: Will the irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986? | A5: No | Q6: Will the Commissioner make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to Company A, by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares? | A6: No




Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Facts: Company A is the head company of an income tax consolidated group (Company A). | Company A operates option plan 1 and option plan 2 (the option plans). | Company A established an EST to facilitate the provision of shares in Company A to participants of the option plans. | The Trustee of the EST is an external trustee acting in an independent capacity on behalf of the beneficiaries of the EST. | Company A amended option plan 2 in order to facilitate the issue/transfer of shares to employees via the EST. No other substantive amendments were made. | All options issued prior to 1 July 2009 (apart from those issued to some foreign based employees) that have not yet lapsed, satisfy the definition of a 'qualifying right' under section 139CD of the former Division 13A of the ITAA 1936. | The option plans operate to provide eligible employees with the opportunity to receive options over shares in Company A. In order to receive shares, the participant must satisfy both vesting criteria, as well as pre-determined criteria outlined in the plan rules. On the basis that these have been satisfied, following payment of the exercise price the participant will be entitled to shares in the company (one ordinary share for every option). The shares will be held in the EST on behalf of the participant subject to conditions as specified in the plan rules. At the time these conditions are satisfied, the participant will become eligible to withdraw the shares from the EST. | The EST was established for the sole purpose of obtaining shares for the benefit of employees of Company A pursuant to the option plans and constitutes an employee share trust under subsection 130-85(4) of the ITAA 1997. | The commercial reasons for the operation of the options plans and EST are to: | · provide greater flexibility to accommodate the long term incentive arrangements both now and into the future as Company A continues to expand its operations. | · capital management flexibility in that the EST can use the contributions made to acquire shares or subscribe for new shares. | · provides an arm's-length vehicle through which shares can be acquired and held in the company on behalf of employees. | · assist with meeting its requirements under the Corporations Act 2001 , in relation to dealing with shares. | The EST is funded by contributions from Company A (i.e. for the purchase of shares in accordance with the option plans). In accordance with the operation of the option plans, contributions have and will occur subsequent to the participant's valid request to exercise their options. Once the exercise notice and option exercise price are received from employees, Company A will provide the EST with the cash amount necessary to acquire shares to satisfy the acquisition/subscription of shares (based on instructions from Company A) related to these exercised options. | Irretrievable cash contributions are and will be made regularly and progressively to the EST in accordance with the plan rules and Trust Deed. There are currently no excess cash contributions that have been made to the EST. | Shares acquired by the Trustee are immediately allocated to the relevant employees and held on their behalf. No unallocated shares should arise. | Company A does not intend to price hedge by providing funds to the EST to acquire shares on market either before or after the grant of options in order to lock-in the cost of the equity at the current share price. | Company A does not intend to introduce a holding lock which requires shares to remain in the EST for an additional holding period (after allocation to participants) before the employee is entitled to the shares. | Detailed reasoning: Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. Broadly, the provision provides an entitlement to a deduction from assessable income for any loss or outgoing, to the extent that it is incurred in gaining or producing assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. | However, subsection 8-1(2) of the ITAA 1997 (so far as it is relevant) prevents such a deduction to the extent that it is a loss or outgoing of capital, or of a capital nature. | Losses or outgoings incurred: Company A provides cash contributions (being irretrievable or non-refundable to Company A) to the Trustee to be used in accordance with the Trust Deed and plan rules to enable the Trustee to subscribe for and/or acquire Company A shares as part of the employee share scheme. | The purpose of the contributions made by Company A is to remunerate its employees under an employee share scheme as part of their overall employee remuneration costs and therefore incurred by Company A in carrying on their business. | On this basis, it is concluded that the irretrievable cash contributions made by Company A will be considered to be losses or outgoings incurred for the purpose of subsection 8-1(1) of the ITAA 1997. | The contributions made by Company A will be recurring and made from time to time as part of the overall employee remuneration costs and therefore not capital in nature. | Detailed reasoning: In accordance with the operation of the plans, irretrievable cash contributions will occur subsequent to the participant's valid request to exercise their options. Accordingly, the deduction for the irretrievable cash contribution under section 8-1 of the ITAA 1997 would be allowable in the income year in which Company A incurred the outgoing. | Question 3: Part IVA of the ITAA 1936 is a general anti-avoidance provision. Part IVA gives the Commissioner the discretion 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. This discretion is found in subsection 177F(1) of the ITAA 1936. | The following requirements must be met before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936: | (i) a 'tax benefit', as identified in section 177C, was or would but for subsection 177F(1), has been obtained; | (ii) the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and | (iii) having regard to section 177D, the scheme is one to which Part IVA applies. | Subsection 177A(1) of the ITAA 1936 provides that scheme means: | (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and | (b) any scheme, plan, proposal, action, course of action or course of conduct. | It is considered that this definition is sufficiently wide to cover the option plans, which utilise payments made by Company A to the Trustee of the EST (in accordance with the Trust Deed) to fund the acquisition of Company A shares on behalf of participating employees by the Trustee. | Tax benefit is defined in subsection 177C(1) of the ITAA 1936 to include: | (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; | In order to determine whether a tax benefit has been derived by Company A from the scheme, it is necessary to examine the alternative hypotheses or counterfactuals. That is, what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out - other schemes Company A might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration. | In this regard, it is relevant to consider that without the use of an EST, Company A could have simply chosen to buy shares for on-market via a broker (subject to Corporations Act 2001 requirements) or alternatively remunerate the employees via and entirely different method such as discretionary cash bonuses. A comparison between these counterfactuals/alternative forms of remuneration and the scheme reveals no tax benefit because the amounts that would be deductible under both of them would be substantially the same as the amount deductible with the use of the EST arrangement. | A third counterfactual/alternative form of remuneration is Company A issuing new shares to participants. Under section 83A-205 of the ITAA 1997 an employer (or the holding company of an employer) can deduct an amount for ESS interests provided to a participant under an ESS if the participant is eligible for the upfront tax concession in section 83A-35 of the ITAA 1997, disregarding the $180,000 adjusted income threshold. The maximum deduction in respect of each participant is $1,000. | Accordingly, in this situation, Company A would be limited to a maximum deduction of $1,000 pursuant to section 83A-205 of the ITAA 1997. However, there is no limit to the deduction available to Company A with the use of the EST arrangement. Therefore, to the extent the value of the shares provided to an employee exceeds $1,000, a tax benefit would be obtained in connection to the use of the EST arrangement. | In deciding whether Part IVA applies to a scheme, it is necessary to consider whether, having regard to each of the factors set out in paragraph 177D(b) of the ITAA 1936, it would be concluded that the person, or one of the persons who entered into the scheme or any part of it, did so for the purpose of enabling a relevant taxpayer to obtain a tax benefit in connection with the scheme. | 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. | Further, as published in the 'ESS - guide for employers', the Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust to enable it to acquire securities to provide to employees. | Therefore, having regard to the eight factors set out in paragraph 177D(b) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling Company A to obtain a tax benefit. | Question 4: An employer's liability to FBT arises under section 66 of the FBTAA 1986 which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA 1986 by reference to the taxable value of each fringe benefit provided. | No amount will be subject to FBT unless a 'fringe benefit' is provided. | A fringe benefit will only arise under subsection 136(1) of the FBTAA 1986 where benefits are provided 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 (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986, states that a fringe benefit does not include: | (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; | Section 83A-5 of the ITAA 1997 notes that one of the objects of Div 83A of the ITAA 1997 is to ensure that benefits provided to employees under employee share schemes are subject to income tax at the employees marginal rates under income tax law (instead of being subject to fringe benefits tax law). | Division 83A of the ITAA 1997 | For options that satisfy subsection 83A-5(1) and options that satisfy subsection 83A-5(2) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997), it is determined that these options are excluded from being a fringe benefit under paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 as they are an acquisition of an ESS interest under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies. | Former Division 13A of the ITAA 1936 | Where former Division 13A of the ITAA 1936 is relevant, the former section 136(1)(ha) of the FBTAA 1986 would have applied to those options acquired before 1 July 2009. The operation of this provision would have resulted in the same outcome (as for options acquired post 1 July 2009). That is, these options will also not be subject to fringe benefits tax. | Former paragraph 136(1)(hb) of the FBTAA 1986 excluded from the definition of a 'fringe benefit' the following: | a benefit constituted by the acquisition by a person under an employee share scheme (within the meaning of Division 13A of Part III of the Income Tax Assessment Act 1936 ; | Subsection 83A-20(2) of the ITAA 1997 ensures that Subdivision 83A-B of the ITAA 1997 does not apply if the ESS interest is a beneficial interest in a share that you acquire as a result of exercising a right, if you acquired a beneficial interest in the right under an employee share scheme (i.e. it does not constitute a second acquisition point for tax purposes). | Further, as stated above a fringe benefit will only arise under subsection 136(1) of the FBTAA 1986 where the benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee. | The beneficial interest in a share that arises upon the exercise of an option/right under the option plans is considered to be provided as a result of the employee exercising rights (previously obtained). When an employee receives a right or option under the option plans, they obtain a right to acquire a beneficial interest in a share in the company. When these rights are subsequently exercised, any benefit received would be in respect of the exercise of these rights, and not in respect of employment. | Therefore, the benefit (beneficial interest in a share) that arises to an employee upon the exercise of options/rights granted under the option plans does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of' the employment relationship. | Accordingly, the acquisition of options or shares pursuant to the option plans will not be subject to fringe benefits tax on the basis that they are excluded from the definition of a 'fringe benefit'. | Question 5: Section 40 of the FBTAA 1986 provides that where a person (the provider) provides property to another person (the recipient), the provision of property by the provider to the recipient shall be taken to constitute a benefit. | Subsection 136(1) of the FBTAA 1986 defines property benefit as a benefit referred to in section 40 of the FBTAA 1986. The contribution from Company A to the EST will prima facie give rise to a property fringe benefit under sections 136 and 40 of the FBTAA 1986 on the basis that the Trustee of the EST has been established to provide benefits to employees of Company A and is an associate of each employee for the purposes of the FBTAA 1986. | Subsection 136(1) of the FBTAA 1986 defines a fringe benefit, in relation to an employee, as a benefit in respect of the employment of the employee, but does not include: | (ha) 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 ); | An EST is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides that an EST for an employee share scheme (having the meaning given by subsection 83A-10(2) of the ITAA 1997) is a trust whose sole activities are: | (a) obtaining shares or rights in a company; and | (b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of: | (ii) a subsidiary of the company; and | (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). | Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because: | · the EST acquires shares in the company; and | · the EST ensures that the ESS interests being beneficial interests in those shares, are provided under an employee share scheme, to the employees in accordance with the Trust Deed and relevant rules of the option plans. | Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will also require that the Trustee undertake incidental activities that are a function of managing the option plans and administering the EST. | For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, the Commissioner considers that activities which are merely incidental include: | · the opening and operation of a bank account to facilitate the receipt and payment of money; | · the receipt of dividends in respect of shares held by the EST on behalf of an employee, and their distribution to the employee; | · the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; | · dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme; | · the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares; | · the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and | · receiving and immediately distributing shares under a demerger. | 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 merely incidental. | Where employees choose to fund the option exercise price with a loan from an external financier, the EST will still satisfy the sole activities test. This is a permitted activity as margin loan arrangements of the employees do not affect the EST's satisfaction of the sole activities test, as the arrangement is purely an arrangement between the employee and the external financier. | Based on the above, it is accepted that the EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997. The functions of the Trustee of the EST (acquiring and allocating ESS interests) are limited to those activities mentioned in paragraph 130-85(4)(a) and (b) of the ITAA 1997, or are merely incidental activities as referred to in paragraph 130-85(4)(c) of the ITAA 1997. | Paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 excludes the contributions to the Trustee of the EST from being a fringe benefit. Company A will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the EST to fund the acquisition of Company A shares in accordance with the Trust Deed. | Although contributions made by Company A to the EST will be made after 1 July 2009, it is appropriate to consider the application of former paragraph 136(1)(ha) of the FBTAA 1986, as outlined above, to contributions made in respect of all options issued by Company A. | Accordingly, the contributions to the EST in relation to options issued prior to 1 July 2009 to which former Division 13A of the ITAA 1936 still applies should also not be subject to FBT on the basis that the sole activities of the EST are "obtaining shares or rights to acquire shares" in the company for employees or their associates. The analysis above regarding satisfaction of the sole activities test is equally relevant to the application of the former provision, paragraph 136(1)(hb) of the FBTAA 1986. | a benefit constituted by the acquisition by a trust of money or other property where the sole activities of the trust are obtaining shares, or rights to acquire shares, in a company or a holding company..., of the first-mentioned company, and providing those shares or rights: | To employees, or associates of employees, of the first-mentioned company; or | to persons who are engaged in foreign service (within the meaning of section 139GBA of the ITAA 1936) for the first-mentioned company, or associates of those persons;" | To the extent it is determined that the former paragraph 136(1)(hb) of the FBTAA 1986 should be applied in respect of contributions in relation to options issued to which former Division 13A of the ITAA 1936 still applies, it is accepted that the EST will satisfy the requirements in this provision such that these payments would also not be subject to FBT. | Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. | PS LA 2005/24 also provides guidance on the application of other general anti-avoidance rules to an arrangement. It succinctly explains how section 67 of the FBTAA 1986 operates. Most notably, paragraphs 145-148 provide as follows: | 145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA. | 146. 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(s) to obtain a tax benefit. | 147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose. | 148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement: | (i) a benefit is provided to a person; | (ii) an amount is not included in the aggregate fringe benefits amount of the employer; and | (iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into. | The Commissioner will only make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. In Miscellaneous Taxation Ruling MT 2021 under the heading "Appendix, Question 18" 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... | PS LA 2005/24 provides instructions and practical guidance to Tax officers on the application of Part IVA and other General Anti-Avoidance Rules. Paragraph 151 of PS LA 2005/24 states: | 151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA. | In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the EST, and to participants by way of the provision of options and shares under the option plans are excluded from the definition of a fringe benefit for the reasons given above. Therefore, as these benefits have been excluded from the definition of a fringe benefit and as there is also no FBT currently payable under the option plans, the FBT liability is not any less than it would have been but for the arrangement. | Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA 1986 applies to include an amount in the aggregate fringe benefits amount of Company A in relation to a tax benefit obtained under the option plans.