1 For the purposes of satisfying the reporting requirements in Division 392 of Schedule 1 to the Taxation Administration Act 1953 (TAA), and determining whether the provision of Shares in the taxpayer to its employees under an Employee Incentive Plan should be reported by the taxpayer under the Start-up Concession, will the Shares issued to an eligible participant satisfy all of the conditions in sections 83A-33 and 83A-45 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes This ruling applies for the following period 1 July 20XX to 30 June 20XX Question 2 Will the cash contributions made by the taxpayer by way of loan to fund the subscription for Shares pursuant to the Employee Incentive Plans constitute a fringe benefit within the meaning of section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? Answer No The scheme commences on: 1 July 2021
Background The taxpayer is an Australian registered company and is an Australian tax resident, with subsidiary companies. Each of the taxpayer's subsidiary is an Australian tax resident within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The taxpayer intends to incorporate further subsidiaries as required for operations of the group. The taxpayer has not formed an income tax consolidated group within meaning of Part 3-90 of the Income Tax Assessment Act 1997 (ITAA 1997). No entity within the taxpayer's group is, or has at some earlier time been, listed on any stock exchange nor has any of such entity has been incorporated for more than 10 years. The aggregated turnover of the taxpayer was less than $XXX million. The taxpayer does not have a predominant business of share trading or investment in Shares. Employee Incentive Plan The taxpayer intends to establish an employee incentive program as a way to reward employees. The taxpayer provided the key terms of the Plan.
The Plan states that the Restriction Period will apply except as approved by the Board. The Plan provides that the discretion of the Board in approving a reduction to the Restriction Period must be done in accordance with section 83A-45(5) of the ITAA 1997. Employee Share Trust A Trust will be established by deed (Trust Deed) for the purpose of holding shares for any employee share schemes established by the taxpayer including the Plan. The Trustee agrees under the relevant Trust Deed that its activities will be limited to such employee share schemes. The taxpayer will provide a loan to the Trust which will use the funds to subscribe for shares at market value. Upon receiving the subscription amount, the Company will issue shares to the Trust and the Trustee of the Trust will be registered as the owner of those shares. The Board will offer certain persons that provide services the opportunity to participate in the Plan. The invitation to participate will be made pursuant to the Plan.
Where a person then accepts the invitation to participate in the Plan by signing and returning an Acceptance Form, that person is then required to pay the relevant Issue Price to acquire shares from the relevant Trustee. The Issue Price that employees are required to pay will be 85% of the market value of the ordinary shares in the Vertical at the time they acquire the Shares. The Powers of the Trustee of the Trust are set out the relevant Trust deed. Any income of the Trust may be accumulated by the Trustee. The Trust Deed does not permit the Trustee to otherwise distribute income. The Trustee must only apply the capital of the Trust as would be permitted in accordance with section 130-85(4) of the ITAA 1997.
section 83A-33 of the ITAA 1997 section 83A-45 of the ITAA 1997 subsection 130-85(4) of the ITAA 1997
Question 1 For the purposes of satisfying the reporting requirements in Division 392 of Schedule 1 to the TAA 1953, and determining whether the provision of Shares in the equity capital of the taxpayer to employees under an Employee Incentive Plan should be reported by the taxpayer under the Start-up Concession, will the Shares issued to an eligible participant satisfy all of the conditions in sections 83A-33 and 83A-45 of the ITAA 1997? Summary The ESS interests meet the conditions for the start-up concession. The reporting obligation of the taxapyer is to report in the ESS Statement and ESS Annual Report the provision of the Shares under the start-up concession for the year in which the Shares were acquired. Detailed reasoning Division 83A of the ITAA 1997 applies to an ESS interest if the ESS interest is acquired under an employee share scheme at a discount. Subsection 83A-10(1) states that an ESS interest, in a company, is a beneficial interest in: a share in the company; or a right to acquire a beneficial interest in a share in the company.
Subsection 83A-10(2) states that an employee share scheme is a scheme under which ESS interests in a company are provided to employees or associates of employees, (including past or prospective employees) of the company; or subsidiaries of the company; in relation to the employees' employment. The combined effect of section 83A-20 and paragraph 83A-105(1)(a) is that Division 83A (and, in particular, either Subdivision 83A-B or 83A-C) will apply to an ESS interest if an employee acquires an ESS interest under an employee share scheme and at a discount. Unless Subdivision 83A-C applies, Subdivision 83A-B will apply and the discount will be included in an employee's assessable income when they acquire the ESS interest: subsection 83A-25(1) of the ITAA 1997. However, an employee may be entitled to reduce the amount included in their assessable income if they meet one of two sets of conditions. In this case the relevant conditions are for ESS interests in start-ups under section 83A-33 of the ITAA 1997. The Explanatory Memorandum for theTax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 explains how the start-up concession operates as follows:
What is the small start-up concession? 1.70 The start-up concession provides that an employee does not include a discount on ESS interests acquired in their assessable income if the scheme meets certain conditions and their employer meets certain conditions. [Schedule 1, item 6, section 83A-33] 1.71 In relation to shares, the discount is not subject to income tax and the share, once acquired, is then subject to the capital gains tax system with a cost base reset at market value. ... 1.76 The small start-up concession applies to the exclusion of all other ESS taxation rules. That is, those eligible for the small start-up concession cannot access either the $1,000 up-front concession or the deferred taxation concession. [Schedule 1, items 9 and 14, paragraphs 83A-35(2)(c) and 83A-105(1)(ab)] ESS start-up concession The ESS start-up concession within section 83A-33 provides for an employee to exclude a discount on ESS interests acquired from their assessable income, subject to certain conditions being met by the scheme and their employer. Section 83A-33 is applicable in relation to ESS interests acquired on or after 1 July 2015.
To be eligible for the 'start-up' tax concession certain eligibility criteria under section 83A-33 and the further conditions under section 83A-45 must be met. Section 83A-33 Under the primary conditions in section 83A-33: • The company that grants the ESS interest (and its subsidiaries and holding companies within the meaning of the Corporations Act 2001 and any subsidiaries of its holding companies) must not have any equity interests listed on an approved stock exchange in the income year prior to the ESS interest being acquired by the employee: (subsection 83A-33(2)). • The company that grants the ESS interest (and its subsidiaries and holding companies within the meaning of the Corporations Act 2001 and any subsidiaries of its holding companies) must have been incorporated for less than 10 years before the end of the first mentioned company's most recent income year before the employee acquired the interest (subsection 83A-33(3)).
• The company that grants the ESS interests must have had an aggregated turnover not exceeding $XXX million in the income year prior to the year the interests are granted. The turnover test includes connected entities (subsection 83A-33(4)). • In the case of an ESS for options (i.e. a beneficial interest in a right), the exercise price must not be less than the market value of shares in the company at the date of grant of the options (subsection 83A-33(5)). • In the case of an ESS that is a share plan, the shares must not be offered for more than a 15% discount on the market value of the shares at the date of grant (subsection 83A-33(5)). • The employing company (which can be a subsidiary of the company granting the ESS interests) must be an Australian resident taxpayer (subsection 83A-33(6)). Application to the circumstances In this instance, the primary conditions under section 83A-33 will be met for the Shares the Participants will acquire under the Plan. Section 83A-45 criteria In addition, there are further eligibility criteria set out under section 83A-45 that must be met, which are:
• The acquirer must be employed by the company that issued the ESS interest, or a subsidiary of that company, when their ESS interest was acquired (subsection 83A-45(1)). • All of the ESS interests available for acquisition under the employee share scheme must relate to ordinary shares (subsection 83A-45(2)). • The acquirer must satisfy an integrity rule that is designed to prevent contrived schemes which provide employees with shares in unrelated companies. Such schemes involve creating a company within the group that principally engages in trading or investing in the unrelated shares. The created company also employs the taxpayer under the scheme (subsection 83A-45(3)).
• the scheme must be operated so that all the employees must hold the ESS interest (or any share acquired on exercise of an ESS interest that is a right) for three years or until the employee ceases employment - however, the Commissioner may reduce the minimum holding period in situations in which all employees are effectively required to exercise and/or dispose of their ESS interests under a 100% takeover provided certain conditions are met (subsection 83A-45(4)) and subsection 83A-45(5)). • There is a 10% limit on the shareholding and voting power that the employee/associate can have under the ESS - specifically, immediately after the employee acquires the interest they must not hold a beneficial interest in more than 10% of the shares in the company and not be in a position to cast or control the casting of more than 10% of the maximum number of votes that might be cast at a general meeting of the company (subsection 83A-45(6)) taking into account and including any shares and any voting rights that they would have by exercising any rights they have over shares (subsection 83A-45(7)). Application to the circumstances
In this instance, the conditions in section 83-45A are met. Conclusion The conditions imposed by section 83A-33 and section 83A-45 are therefore met. Question 2 Will the cash contributions made by the taxpayer by way of loan to the Trustee of the Vertical Trust to fund the subscription for Shares pursuant to the Employee Incentive Plan constitute a fringe benefit within the meaning of section 136(1) of the FBTAA? Summary The cash contributions made by the taxpayer by way of loan to the Trustee to fund the subscription for Shares pursuant to the Employee Incentive Plan will not constitute a fringe benefit within the meaning of section 136(1) of the FBTAA. Detailed reasoning An employer's liability to fringe benefits tax ('FBT') arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 ('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. One benefit excluded from being a 'fringe benefit', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA 1986, is a benefit constituted by the acquisition of money or property by an employee share trust within the meaning of the ITAA 1997. Subsection 130-85(4) provides: An employee share trust , for an *employee share scheme, 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: (i) the company; or (ii) a *subsidiary of the company; and (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b).
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)(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 2019/13: Income tax: what is an 'employee share trust'? ('TD 2019/13')
Activities are merely incidental under paragraph 130-85(4)(c) if they are a natural incident or consequence of the trust obtaining, holding and providing shares or rights under an ESS (paragraph 11 of TD 2019/13). 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 this instance, paragraph 130-85(4)(a) and (b) are satisfied. In the present case, the activities that the Trustee is permitted to undertake under the deed are indicative of those required to administer an employee share trust and are incidental to the primary purposes stated in paragraphs 130-85(4)(a) and (b). This is consistent with the purpose of the Trust, namely for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under subsection 130-85(4). Therefore, the cash contribution made by way of loan to the Trustee to fund the subscription for shares will not be a fringe benefit.