1 Will the Company obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by the Trusts to fund the subscription for, or acquisition on-market of, Company shares by the Trusts for the purposes of the Plans?
Yes Question 2 Will the irretrievable contributions made by the Company to the Trusts, to fund the subscription for, or acquisition on-market of, Company shares pursuant to the Plans be deductible to the Company at a time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests? Answer Yes Question 3 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 the irretrievable cash contributions made by the Company to the Trusts to fund the subscription for, or acquisition on - market of, Company shares pursuant to the Plans? Answer No Issue 2 Question 4 Will the irretrievable cash contributions made by the Company to the Trusts to fund the subscription for, or acquisition on-market of, Company shares pursuant to the Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? Answer No Question 5
Will the Commissioner 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 the irretrievable cash contributions made by the Company to the Trusts to fund the subscription for, or acquisition on-market of, Company shares pursuant to the Plans? Answer No This ruling applies for the following periods for questions 1 to 3: Income year ended 30 June 20XX to 30 June 20XX This ruling applies for the following periods for questions 4 and 5: Fringe benefits tax year ended 31 March 20XX to 31 March 20XX The scheme commences on: DD MM YYYY
The Company is an Australian resident public company listed on the Australian Securities Exchange. As part of the Company's remuneration strategy, it will provide benefits to its employees and directors under the Plans. The grant of awards under the Plans is a component of the Company's compensation and benefits packages. The Plans are governed by the Plan Rules. Under the Plans participants may receive an award of shares, restricted shares, rights or options. The Company may require that shares to be acquired for a participant under the Plans are to be registered in the name of a trustee, or a nominee of a trustee and are to be held by that trustee or nominee on behalf of that participant in accordance with the terms of a trust. Awards under the Plans may: • in the case of shares, be subject to a restriction period, during which a participant may not dispose of, deal in, or grant a security interest over any interest in share • in the case of an award of rights or options, be satisfied by an allocation of shares or, in certain circumstances, a cash payment in lieu of an allocation of shares
• in both cases, be subject to performance, service or other conditions that must be satisfied or circumstances which must exist before vesting. The trusts were established by the Company to facilitate and administer equity incentive plans established by the Company with vesting terms and conditions based on performance, service or other conditions and plans established under certain plan rules. The Company will provide the trustee with the funds required by the trustee to subscribe for or purchase company shares. Contributions made by the Company to the trustee of the trusts for the acquisition of shares may not be repaid to the Company or any group company. The trustee of the trusts must apply any funds received from the Company to subscribe for or purchase shares to be held by the trustee as trust shares. The Company is not a beneficiary of the trusts and has no entitlement to any shares forming the assets of the trusts at any time. The settlement of rights or options in cash will not be paid by the relevant trustee.
The Company intends to make cash contributions on an ongoing basis to enable the trustee to acquire shares to satisfy the rights granted to participants under the Plans.
All legislative references are to provisions of the Income Tax Assessment Act 1936 or Income Tax Assessment Act 1997 , unless otherwise indicated. Issue 1 Question 1 Summary The Company will be entitled to a deduction under section 8-1 in respect of the irretrievable cash contributions made by the Company to the trustees of the trusts to fund the subscription for, or acquisition on-market of shares, as the contributions are part of an on-going series of payments in the nature of remuneration of the Company's employees. 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 is an Australian incorporated company which produces assessable income from carrying on a business. As outlined in question 2 below, the Company operates a number of employee share schemes (ESS) as part of its remuneration strategy.
Under the Plans, the Company grants interests in shares, rights and options to employees and makes irretrievable cash contributions to the trusts which the trustee uses to acquire shares (either on-market or by subscription) for allocation to participants in accordance with the terms of the trust deeds. Incurred in carrying on a business The Company must provide the trustee of each of the trusts with all the funds required to enable the trustee to subscribe for, or acquire, the shares. The cash contributions made by the Company to the trusts are irretrievable and non-refundable to the Company in accordance with the trust deeds, as: all funds provided to the trustee will constitute accretions to the corpus of the trusts and will not be repayable by the trustee other than by way of the trustee paying the issue price when it subscribes for shares the Company is not a beneficiary of the trusts and has no entitlement to shares or other trust property, or any entitlement to any return of contributions made to the trusts
on termination of the Trust, the Company and members the Company's group do not have any entitlement to any part of the capital or income of the trusts, including any shares or cash that may form part of the Trust Assets, at any time. The Company has granted, and in the future will grant, interests in rights, options and shares to participants under the Plans as part of its remuneration and reward program. The costs incurred by the Company for the acquisition of shares to satisfy its obligations under the Plans in respect of the grant of rights, options or shares arise as part of the Company's remuneration arrangements, and contributions to the trusts are part of an on-going series of payments in the nature of remuneration of its employees. As such, it is incurred in the process of carrying on a business for gaining or producing the Company's assessable income. Therefore, if the Company makes a cash contribution to the trusts to acquire or subscribe for Company shares to satisfy the grant of shares, rights or options pursuant to the Plans, the amount has been incurred for the purposes of subsection 8-1(1). Not capital or of a capital nature
The cash contributions will be an outgoing incurred for periodic (rather than once-off) funding of an ESS for employees of the Company. The cash contributions are made as part of an ongoing process of remunerating employees, with the Trust expected to acquire shares regularly. Nothing in the facts suggests any intention for any contribution to be retained in the Trust for an extended period of time. 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. Accordingly, the Company will be entitled to a deduction under section 8-1 in respect of the irretrievable cash contributions made by the Company to the trustee of the trusts to fund the subscription for, or acquisition on-market, of Company shares pursuant to the Plans. Question 2 Summary
Pursuant to section 83A-210, where irretrievable cash contributions are made at a time before the participants acquire the relevant ESS interest, the irretrievable cash contribution will be deductible to the Company under section 8-1 in the income year in which the ESS interest is acquired by the participant under the Plan. Detailed reasoning It is often the case that an outgoing will be both incurred and paid in the same year of income, and as such, the amount is deductible in that income year for the purposes of section 8-1 (paragraph 15 of Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred'- timing of deductions ). However, section 83A-210 modifies this rule in certain circumstances in respect of contributions provided by an employer to a trust to purchase Shares under an ESS.
The effect of section 83A-210 is to deem the time an employer incurred the outgoing to be the time when the ESS interest is acquired by a beneficiary under an arrangement, rather than the time when the employer makes the contribution to the trust, if the contribution was made before the ESS interests are acquired. 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 . An 'employee share scheme' is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employee's employment. An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Shares that are purchased by the trustee to satisfy its obligation under the Plans, and subsequently granted to participants pursuant to the Plans, are ESS interests for the purposes of section 83A-10(1).
Shares that are purchased by the trustee to satisfy its obligations under the Plans, and subsequently allocated to participants pursuant to the Plans, are ESS interests for the purposes of section 83A-210. Certain plans Awards granted under certain plans satisfy the definition of 'employee share scheme' in subsection 83A-10(2) as they are each 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 in relation to their employment with the Company. The granting of ESS interests to participants under certain plans, the provision of the cash contributions to the trustee, the acquisition and holding of shares by the trustee and the allocation of shares to participants are all interrelated components of the ESS. All the components constitute an arrangement for the purposes of section 83A-210 that must be carried out so that the scheme can operate as intended.
The Company will make irretrievable cash contributions to the trusts and instruct the trustees to acquire and hold sufficient shares in order for the trusts to settle their obligations in respect of the allocation of shares and the grant of rights and options to employees under certain plans. The Company may make irretrievable cash contributions at a time before a participant acquires a beneficial interest in a share, or beneficial interest in a right to a beneficial interest in a share. The deduction for the irretrievable cash contribution can only be deducted from the assessable income of the Company in the income year when relevant beneficial interest in a share, or beneficial interest in a right to a beneficial interest in a share, is acquired by a participant under the Plan, as provided by section 83A-210. Indeterminate rights
Other plans provided under the relevant rules may be settled by allocation of a share or a cash payment. A right which may be settled in cash is an indeterminate right because that right entitles the participant to acquire either a share or cash, to be determined at a future time at the discretion of the employer. Although the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate right will, pursuant to section 83A-340, be treated as if it had always been an ESS interest.
Section 83A-210 applies equally to contributions made in respect of ESS interests and indeterminate rights. Therefore, an irretrievable cash contribution in respect of an indeterminate right is taken to have been paid at the acquisition time of the ESS interest. If an indeterminate right becomes an ESS interest, deductible contributions made in respect of those rights can be claimed in the income year when the ESS interest is deemed to have been acquired under section 83A-340 (this will be the year in which the indeterminate right was granted to the employee). Once this has been established, such contributions can be matched to ESS interests issued to the employee and where necessary the relevant earlier income year assessments can be amended to allow the deduction (Item 28 of subsection 170(10AA).
It is important to note that an indeterminate right which is satisfied by the provision of cash never becomes an ESS interest and the contribution to the trusts in respect of the provision of that right is permanently deferred. However, where that ESS interest is subsequently issued to another participating employee, this employee becomes the 'ultimate beneficiary' and the deduction is available in the income year that the participating employee acquired this ESS interest. Question 3 Summary Part IVA will not apply 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 to fund the subscription for or acquisition of shares by the trusts. Detailed reasoning Part IVA is a general anti-avoidance provision which 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. Issue 2 Question 4 Summary The irretrievable cash contributions made by the Company to the trustee pursuant to a trust deed, to fund the subscription for or acquisition on-market of shares will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA by virtue of the exclusion in paragraph 136(1)(ha) of the FBTAA 1986 on the basis that the trust deed satisfies the definition of an employee share trust in subsection 130-85(4). 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. 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 definition. Paragraph 136(1)(ha) of the FBTAA excludes from the definition of 'fringe benefit': (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 ); Therefore, for the irretrievable cash contributions to be excluded from the definition of 'fringe benefit', the Trust must be an 'employee share trust' as defined in subsection 130-85(4). 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 are relevant. To qualify as an EST, a trustee's activities must be limited to:
obtaining shares or rights in a company (paragraph 130-85(4)(a)) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the ESS to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph 130-85(4)(b) other activities that are merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and (b) (paragraph 130-85(c)). In the present case, paragraphs 130-85(4)(a) and (b) are satisfied because: the trusts acquire shares in a company, namely the Company as stated above in response to question 2, the Commissioner accepts that the Plans are ESS under which ESS interests are provided to participants the trustee ensures that ESS interests (as defined in subsection 83A-10(1)) are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to participants in accordance with the trust deeds and the Plans.
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 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'? (TD 2019/13). Activities that involve 'investing in assets other than shares or rights to shares in the employer company' or that result in employees being provided 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 trusts 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). The other activities undertaken by the trustee under the trust deeds are merely incidental to managing the Plans. Therefore, paragraph 136(1)(ha) of the FBTAA 1986 applies to exclude the irretrievable cash contributions made by the Company to the trustee to fund the subscription for, or acquisition of, shares by the trusts from being a fringe benefit. Question 5 Summary The Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to the Company by the amount of tax benefit gained from the irretrievable cash contributions made by the Company to the trusts. Detailed reasoning
Section 67 of the FBTAA is a general anti-avoidance provision of 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 4, without the provision of a fringe benefit, no amount will be subject to FBT. The irretrievable cash contributions made by the Company to the trustees (pursuant to the trust deeds) will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA for the reasons outlined in response to question 4. 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 by the amount of the tax benefit gained from the irretrievable cash contributions made by the Company to the trustee to fund the subscription for, or acquisition of shares.