Private ruling: Deductibility of shares issued to employees under an Employee Share
Date of advice: 26 July 2016
Published: September 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the Employee Share Offer an employee share scheme under Division 83A of the ITAA 1997? | A1: Yes. | Q2: Are you entitled to a deduction for the issue of shares to employees under section 8-1 of the ITAA 1997? | A2: No. | Q3: Are you entitled to a deduction under section 83A-205 of the ITAA 1997? | A3: No.

Relevant facts and circumstances: The company ("you") listed on the Australian Stock Exchange following an Initial Public Offering. The business was valued as part of this process and an additional allotment of shares were issued. The shares were issued in two parts: a) Public offering X b) Employee offering Y Under the employee offering, shares were offered to all your permanent employees with a specified length of service (herein referred to as the Employee Share Offer). The purpose of the share offer was to reward staff for their service, akin to a bonus. The share offer was funded by you; there was zero cost for the share acquisition by the employee. The shares did not carry any performance or time clauses and the employee was the beneficial owner of the shares upon issue, meaning that they could sell the shares at any time. You have treated the issue of the shares to your employees under the Employee Share Offer as an employment expense in your financial statements.

Relevant legislative provisions: Section 8-1 of the Income Tax Assessment Act 1997 ("ITAA 1997") | Division 83A of the ITAA 1997 | Section 83A-10 of the ITAA 1997 | Section 83A-35 of the ITAA 1997 | Section 83A-45 of the ITAA 1997 | Section 83A-205 of the ITAA 1997

Reasons for decision: Detailed Reasoning - Detailed reasoning: Under subsection 83A-10(1) of the ITAA 1997, an ESS interest, in a company, is a beneficial interest in: a) a share in the company; or b) a right to acquire a beneficial interest in a share in the company. You offered shares to your permanent employees with a specified length of service. The shares were held beneficially by the employees upon issue. Therefore the shares are ESS interests under subsection 83A-10(1) of the ITAA 1997. An employee share scheme is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2) of the ITAA 1997). The shares were only offered to your permanent employees with a specified length of service. The purpose of the share offer was to reward employees for their service, akin to a bonus. It is clear that the shares were offered to the employees in relation to their employment. Therefore, the Employee Share Offer is an employee share scheme within the meaning of Division 83A of the ITAA 1997. As an employer who provides your employees or their associates with ESS interests under an employee share scheme, you have certain reporting obligations. More information about your obligations and employee share schemes can be found on our website. | Detailed Reasoning - Question 2: You are not entitled to a deduction for the issue of shares to your employees under section 8-1. | Detailed Reasoning - 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 your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, subsection 8-1(2) of the ITAA 1997 prevents such a deduction 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 the ITAA 1997 or Income Tax Assessment Act 1936 ("ITAA 1936") prevents you from deducting it. The purpose of the Employee Share Offer was to reward employees for their service. Although the Employee Share Offer is related to the remuneration of employees, which would ordinarily be a deductible expense, the issue of ESS interests represents the issue of share capital. The issue of shares is not categorised as a loss or outgoing of a company. As you have not incurred a loss or outgoing in relation to the Employee Share Offer, you are not eligible for a deduction under section 8-1 of the ITAA 1997. | Summary: You are not entitled to a deduction under section 83A-205 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: A specific deduction is allowable to employers providing ESS interests under a Division 83A employee share scheme, however the Employee Share Offer does not meet the relevant criteria. Under section 83A-205 of the ITAA 1997, an employer can deduct an amount for shares, rights or stapled securities it provides to its employees under an employee share scheme if they are eligible for a reduction in their assessable income under section 83A-35 of the ITAA 1997. The amount the employer can deduct is equal to that reduction (subsection 83A-205(3)). Section 83A-35 of the ITAA 1997 sets out criteria which must be met for the employee to reduce their taxable income by up to $1000. The criteria include: • The sum of the employee's taxable income, reportable fringe benefits total, reportable superannuation contributions and total investment loss for the income year is $X or less; (section 83A-35(2)); • The scheme is offered in a non-discriminatory way to at least 75% of Australian resident permanent employees of the company who have completed at least X years of service (whether continuous or non-continuous) (section 83A-35(6)); and • The shares or rights provided are not at real risk of forfeiture (section 83A-35(7)); • The ESS interests available for acquisition under the scheme relate to ordinary shares (section 83A-45(2)); • The scheme is operated so that employees are not permitted to dispose of the ESS interest, or the beneficial interest in the share acquired as a result of the ESS interest, for a minimum holding period of three years, or when the acquirer of the interest ceases being employed by the employer (subsections 83A-45(4) and (5)); and • The employee does not immediately after acquiring the interest, hold a beneficial interest in more than 10% of the shares of the company, or control more than 10% of the voting rights of the company (section 83-45(6)). Whilst the $X income cap is disregarded for the purposes of determining eligibility for an employer deduction under section 83A-205, the other conditions must be satisfied. The conditions of the Employee Share Offer did not include a minimum holding period. The employees were beneficial owners of the shares upon issue and could sell them at any time. As such, the scheme does not meet the requirements of subsections 83A-45(5) and (6), and so you are not eligible for the specific deduction allowable to employers under section 83A-205 of the ITAA 1997.

Question 1: The Employee Share Offer is an employee share scheme under Division 83A of the ITAA 1997.