1 Will Company X (as head entity of Company X income tax consolidated group) be entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of irretrievable contributions made by Company X (or a subsidiary member of Company X's income tax consolidated group) to the trustee (Trustee) of the employee share trust (the Trust) to fund the subscription for, or acquisition on-market of the shares of Company X (Shares)?
Yes. Question 2a Will the irretrievable cash contributions made by Company X (or a subsidiary member of Company X income tax consolidated group) to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares by the Trustee to satisfy ESS interests issued pursuant to the Plan, be deductible to Company X under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997, if the contributions are made before the acquisition of the relevant ESS interests by the ultimate beneficiaries? Answer Yes. Question 2b Will the irretrievable contributions made by Company X (or a subsidiary member of Company X income tax consolidated group) to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, Shares by the Trustee to satisfy ESS interests issued pursuant to the Plan, be deductible to Company X under section 8-1 of the ITAA 1997 in the income year when the contributions are made, if the contributions are made in the same or a later year to that income year in which the relevant ESS interests were acquired by the ultimate beneficiaries? Answer Yes. Question 3
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 full, any deduction claimed by Company X for the irretrievable cash contribution made to the Trust to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plan? Answer No. Question 4 Will the provision of ESS interests to employees of Company X (or its subsidiaries) under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (Cth) (FBTAA)? Answer No. Question 5 Will the irretrievable cash contributions made by Company X (or a subsidiary member of Company X income tax consolidated group) to the Trustee of the Trust, to fund the subscription for or acquisition on-market and / or off-market of, Shares pursuant to the Plan, constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA? Answer No. This ruling applies for the following periods : Questions 1 - 3: Income tax year ended 30 June 20XX Income tax year ended 30 June 20XX Income tax year ended 30 June 20XX Income tax year ended 30 June 20XX
Income tax year ended 30 June 20XX Questions 4 & 5: FBT years ended 31 March 20XX FBT years ended 31 March 20XX FBT years ended 31 March 20XX FBT years ended 31 March 20XX FBT years ended 31 March 20XX
Company X (Company) is a publicly listed company on the Australian Securities Exchange and the head entity of an income tax consolidated group (Group). Company E is the employing entity of the Group and may make contributions in respect of the employee share schemes (ESS). As part of the Company's strategy to attract and retain key talent, the Company rewards employees with a mix of remuneration commensurate with their position and responsibilities. The Company operates a number of ESS plans (collectively referred to as Plans) in accordance with Division 83A of the Income Tax Assessment Act 1997 (ITTA 1997). The Plans allow grants of shares (Shares) in the Company as well as options (Options) and rights (Rights) to acquire Shares (Awards) to eligible employees. An Eligible Employee becomes a participant of the Plan (Participant) on issue of an Award. There may be vesting and service conditions attached to the Awards under each relevant Plan. Company X established an employee share trust under the terms of the employee share plan trust deed (Trust Deed) and appointed an independent third party to be the trustee of the Trust (Trustee).
The Trust was established to facilitate the acquisition, holding of and allocation of Shares to Participants in accordance with employee equity plans, including the Plan. Company X's reasons for using an employee share trust arrangement for the existing and any future equity based incentive plans include: • a company is unable to hold its own shares under Australian corporate law. The Trust is a vehicle which enables Shares to be held for the purpose of the Plans; • the Trust will facilitate the acquisition of Shares, either on market or by the new issue of Shares by the Company; • the Trust provides an arm's length vehicle for acquiring and holding Shares in the Company, either by way of a new issue or acquiring on-market - i.e., providing flexibility relating to capital management; • the Trust will be an efficient structure for giving effect to disposal restrictions (or vesting conditions, where applicable). As the Trustee is the legal owner, employees have no ability to deal in the Shares;
• contributing to the Trust to acquire Shares before Awards vest, may enable the Company to hedge against a potential increase in costs to satisfy Awards due to share price growth, as well as the potential for insufficient Shares being available on-market immediately prior to vesting; • the Trust provides the flexibility to acquire and hold Shares that will be allocated to employees under the Plans. When vesting conditions are not met and Awards lapse, the Trust enables Shares held for such lapsed Awards to be 'recycled' to satisfy other grants of Awards; • the Trust establishes independent records and accounts for participating employees. The Trust Deed states the Trust broadly operates as follows: • the sole activities of the Trustee are to acquire and hold Shares for the purpose of providing them to Participants on vesting of Awards or to make a grant of Shares in accordance with the relevant Plan; • the Trustee has to manage and administer the Trust consistently with the requirement under 'employee share trust' in subsection 130-85(4) of the ITAA 1997; and
• under the terms of the Trust Deed, Company X will instruct the Trustee to subscribe for, purchase or allocate a number of Shares and only make irretrievable cash contributions to the Trustee on or around the time that Awards are vested and exercised (either automatically or by the Participants), or Shares are to be granted. Shares subscribed to or acquired for the benefit of a Participant are to be registered in the name of the Trustee (Plan Shares) and shall be allocated to that Participant as soon as practical after the date of subscription or acquisition. Participants are entitled to receive dividends and bonus shares and participate in a rights issue in respect of the Plan Shares held by the Trustee on their behalf. The Trustee declares to hold the Trust property on behalf of Participants under the Trust Deed. The Deed also limits the Trustee's power in relation to unallocated Shares and balance of the net income of the Trust that no beneficiaries are presently entitled to at the end of each income year. The Trustee can only apply capital proceeds and dividends received from unallocated Shares to purchase further Shares or to meet relevant costs of the Trust.
The Trustee may only exercise the voting rights in respect of Plan Shares held for a Participant as directed by the Participant. The Trustee must not exercise any voting rights relation to unallocated Shares. Neither the Company nor any member of the Group has any charge, lien or any other proprietary right or interest in the Shares held on Trust by the Trustee. The Trust Deed further provides that no amount of income or capital of the Trust can be applied under the Trust Deed for the benefit of the Company or any member of the Group. The Contributions made by Company X were only in respect of the Award granted to Australian employees that are employed by the Company for the purposes of producing assessable income in Australia.
Income Tax Assessment Act 1936 Part IVA Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 130-85 Income Tax Assessment Act 1997 Division 83A Income Tax Assessment Act 1997 section 995-1 Fringe Benefits Tax Assessment Act 1986 section 136
Question 1 Summary Company X will be entitled to a deduction under section 8-1 in respect of irretrievable contributions made by Company X to the Trustee to fund the subscription for, or acquisition on-market of the Shares. 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. Company X carries on a business in Australia and it operates an employee share scheme as part of its remuneration strategy. In accordance with the Plans and the Trust Deed, Company X grants Shares, Rights or Options to employees and will make irretrievable cash contributions to the Trustee to enable the Trustee to purchase Shares to satisfy its obligation under the Plans. Incurred in carrying on a business
Pursuant to the Trust Deed, any contributions made by Company X or any member of the Group to the Trustee will constitute accretions to the capital of the Trust and will be irretrievable to Company X and any other member of the Group, and non-refundable by the Trustee. As the funds are not repayable by the Trustee, the contributions will represent a permanent loss or outgoing incurred by Company X. The costs incurred for the acquisition of Shares to satisfy Awards arise as part of these remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. Not capital, or of a capital nature Irretrievable cash contributions are outgoings incurred for periodic funding of an ESS for employees and part of the broader remuneration expenditure of Company X. The contributions may secure an enduring or lasting benefit for Company X that is independent of the year to year benefits that Company X derives from a loyal and contented workforce, and that enduring benefit is considered to be sufficiently small. Therefore, the payments are not capital, or of a capital nature. Question 2a & 2b
The deduction under section 8-1 would generally be allowable in the income year in which Company X provided the money to the Trustee, but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210. Detailed Reasoning The granting of the beneficial interests in the Shares, the provision of the money to the Trustee under the arrangement, the acquisition and holding of the Shares by the Trustee and the allocation of Shares to Participants are all interrelated components of Company X's ESS. All the components of the scheme must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed. Consequently, the provision of money to the Trustee is considered to be for the purpose of enabling Participants, indirectly as part of the ESS, to acquire Shares. The deduction under section 8-1 would generally be allowable in the income year in which Company X provided the money to the Trustee.
However, the amount of money used by the Trustee to purchase excess Shares is intended to meet obligations arising from a future grant of Rights or Options. The excess payment therefore occurs before the employees acquire the relevant Rights or Options under the scheme. Section 83A-210 will apply and the excess payment will be deductible to the employer in the year of income when the relevant Rights or Options are subsequently granted to Participants. 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. Indeterminate rights under the Plans
A right or an option to the Share provided under the Plans is an indeterminate right because that right entitles the employee to acquire either a Share or cash, to be determined at a future time at the discretion of Company X. 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 Participant 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 Participant). Once this has been established, such contributions can be matched to ESS interests issued to the Participants and where necessary the relevant earlier income year assessments can be amended to allow the deduction (Item 28 of subsection 170(10AA) of the ITAA 1936).
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 Trust in respect of the provision of that Right or Option is permanently deferred. However, where that ESS interest is subsequently issued to another Participant, this Participant becomes the 'ultimate beneficiary' and the deduction is available in the income year that this Participant acquired this ESS interest. Question 3 The Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by Company X in respect of the irretrievable cash contributions made by Company X to the Trustee of the Trust to fund the subscription for or on-market acquisition of Company X's Shares by the Trust. Detailed Reasoning Part IVA of the ITAA 1936 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 of the ITAA 1997 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 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 X to obtain a tax benefit. Question 4 Summary The provision of Awards or Shares by Company X and Company E to their employees under the Plan will not be a 'fringe benefit' within the meaning of the term in subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (Cth) (FBTAA). Detailed Reasoning An employer's liability to fringe benefits tax (FBT) arises under section 66 of 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 'fringe benefit' definition. In particular, paragraph (h) of subsection 136(1) of the FBTAA 1986 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 employee share scheme, the Awards and 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 Awards and Shares 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 Right or Option 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 or Option 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). Question 5 Summary The irretrievable payments made by Company X or Company E to the Trustee, to fund the acquisition by the Trust of Shares, will not be treated as a fringe benefit within the meaning of the term in subsection 136(1) of the FBTAA. Detailed Reasoning
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 in subsection 130-85(4) 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 Company X; and • the Trust ensures that ESS interests as defined in subsection 83A-10(1) (being Rights or Options) are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating them to the Participants in accordance with 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)), whilst the other activities undertaken by the Trustee are merely incidental to managing the Plan. Therefore, the cash contribution made by Company X to fund the subscription for or acquisition on-market of Company X's Shares by the Trust will not be a fringe benefit.