1 Is Company A entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of irretrievable cash contributions made by Company A to the Trustee of the Trust to fund the subscription for, or on-market acquisition of, ordinary shares in Company A (Shares) to satisfy the issue of Shares by the Trustee to Employees pursuant to the Plan?
Yes. Question 2 Will Company A's irretrievable cash contributions to the Trustee, to fund the subscription for, or on-market acquisition of, Shares to satisfy Company A's obligations with respect to the issue of Shares to Employees pursuant to the Plan, be deductible to Company A at a time determined by section 83A-210 of the ITAA 1997? Answer Yes. Question 3 Will Company A be entitled to deduct an amount under section 8-1 of the ITAA 1997 in respect of the costs incurred in relation to the ongoing administration of the Trust? Answer Yes. Question 4 Will Company A be entitled to deduct an amount under section 40-880 of the ITAA 1997 in respect of costs incurred in the establishment or amendment of the Plan or the Trust? Answer Yes. Question 5 Will the Commissioner seek to make a determination under subsection 177F(1) of the Income Tax Assessment Act 1936 (ITAA 1936), as a result of section 177D of the ITAA 1936, to deny, in part or in full, any deduction claimed by Company A in respect of the:
irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or on-market acquisition of, Shares by the Trustee to satisfy ESS interests issued to Employees pursuant to the Plan costs incurred by Company A in relation to the ongoing administration of the Trust? Answer No. Question 6 Will the provision of Share Rights and Shares to Employees under the Plan constitute a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? Answer No. Question 7 Will the irretrievable cash contributions made by Company A to the Trustee, to subscribe for, or acquire on-market, Shares pursuant to the Plan or to fund the ongoing administration of the Trust, constitute a 'fringe benefit' within the meaning of that term in subsection 136(1) of the FBTAA? Answer No. Question 8
Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregated fringe benefits taxable amount to Company A, by the amount of tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for, or on-market acquisition of, Shares by the Trustee? Answer No.
Background Company A is a public company that provides services. Company A is the head company of the Company A tax consolidated group (Company A TCG). The Plan Company A established the Plan to assist in the reward, retention and motivation of Eligible Employees, and to provide an opportunity for Eligible Employees to receive Shares. The Plan allows Company A to grant Share Rights to Employees. A Share Right means a right (including an option) granted to a Participant under the Plan to acquire a Share or Shares (or part of a Share) by way of either issue or transfer. While the Plan is not restricted to Australian tax-resident employees, the scope of this ruling is limited to Share Rights granted under the Plan to Australian tax-resident employees who engage in activities that derive income assessable in Australia. Offer The Plan Committee (the Board or committee acting on behalf of Company A) may make an Offer to any Eligible Employee. An Offer must be in writing and state the following: the name and address (including email address) of the Eligible Employee to whom the Offer is made the date of the Offer the amount (if any) that will be payable for the grant of a Share Right
the maximum number of Share Rights for which the Eligible Employee (or, if permitted, a Controlled Entity or Controlled Entities) may make application the number of Shares, or a formula for calculating the number of Shares, into which each Share Right may be converted if the Plan Committee has made a determination that the Share Rights may only be satisfied by way of transfer of the underlying Shares or issue of the underlying Shares the expected Date of Issue the time period for lodging an Application with Company A any applicable Performance Conditions and Performance Periods if no Performance Conditions are specified in the Offer, the Vesting Dates whether or not the Share Rights will require exercise by the Participant if no exercise is required by the Participant, the Share Delivery Dates or Share Delivery Periods if exercise is required by the Participant, the Exercise Dates and the Exercise Price or manner of determining the Exercise Price any applicable disposal restrictions and the Restriction Period any other specific terms and conditions.
Subject to the Eligible Employee nominating a Controlled Entity approved by the Plan Committee to accept all or part of an Offer, an Offer is personal and can only be accepted by the Eligible Employee to whom the Offer is made. Share Rights Following receipt of a completed Application, Company A may accept the Application and issue the relevant number of Share Rights to the Eligible Employee or Controlled Entity. Unless the Plan Committee determines otherwise, no monetary or other consideration beyond consideration comprising the services that are expected to be provided by an Eligible Employee to or for the benefit of the Group will be payable for the grant of a Share Right. Share Rights which have Performance Conditions will not vest and become a Vested Share Right unless those Performance Conditions have been satisfied during the applicable Performance Period. Share Rights without Performance Conditions will become a Vested Share Right on the Vesting Date specified in the Offer. The Plan Committee has the discretion to reduce or waive Performance Conditions, reduce any Performance Period, or determine a new Vesting Date.
Unless the Offer provides for the exercise of a Share Right by a Participant, on or before the applicable Share Delivery Date or Share Delivery Period and subject to the Plan Rules, Applicable Law, Company A's absolute discretion and terms of the Share Right, Company A must either: cause the issue to the Participant of the Share arrange or procure the transfer to the Participant of the Share. Where the Offer provides for the exercise of a Share Right by a Participant, Share Rights may be exercised during the applicable Exercise Period by the Participant giving Company A a signed Exercise Notice, the Certificate for the Share Rights (if certificated), and payment of the Exercise Price (if applicable). On valid exercise and subject to the Plan Rules and the Listing Rules, Company A's absolute discretion and terms of the Share Right, Company A must, within a reasonable period, either: cause the issue to the Participant of the Share arrange or procure the transfer to the Participant of the Share. Restrictions on disposal of Shares Unless otherwise determined by the Plan Committee, no Shares acquired pursuant to Share Rights shall be subject to restrictions on disposal.
If the Shares are Restricted Shares, the holder must not dispose of, deal with, or grant a Security Interest over the Restricted Shares. At the end of the Restriction Period, the Restricted Shares will be released from the Plan if the Plan Committee determines it is appropriate and other conditions are satisfied. Lapse of Share Rights Unless otherwise determined by the Plan Committee, an Unvested Share Right will lapse when: the Performance Conditions have not been satisfied during the Performance Period the Participant or Nominating Employee resigns from their Employment with a body corporate in the Group the employer of the Participant or Nominating Employee ceases to be a Subsidiary of Company A the Plan Committee determines that the Share Right should lapse any other circumstance, determined by the Plan Committee and specified in the relevant Offer as a circumstance that will cause an Unvested Share Right to lapse, happens. A Vested Share Right will lapse when: the Plan Committee determines that the Share Right should lapse
any other circumstance, determined by the Plan Committee and specified in the relevant Offer as a circumstance that will cause a Vested Share Right to lapse, happens. If a Share Right requires exercise by the Participant and is not validly exercised during the Exercise Period, the Share Right will lapse on expiry of the Exercise Period. Trust Company A established the Trust under a deed entered into between Company A and the Trustee. The Trustee is an independent third party. The recitals of the Trust Deed state that the sole activities of the Trust will be obtaining Shares and ensuring that the Shares are provided to Participants who are, or will become, the beneficial owners of Shares pursuant to the Plan and other activities that are merely incidental. The Trustee's activities in its capacity as trustee of the Trust will be limited to the Plan. In addition, the Trustee has the powers to: enter into and execute all agreements, deeds and documents subscribe for, purchase or otherwise acquire and to sell or otherwise dispose of Shares open bank accounts and retain on current or deposit account at any bank any money which it considers proper
take and act upon the advice or opinion of any legal practitioner or other professional do all acts, matters or things which it may deem necessary or expedient for the purpose of giving effect to, and carrying out, the trusts, powers and discretions conferred on the Trustee by the Trust Deed or the law. Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of section 130-85(4) of the ITAA 1997. Neither the Trustee nor any company in the Group may grant an Encumbrance over any Plan Share. Nothing in the Trust Deed confers, or is intended to confer, on Company A any Encumbrance, proprietary right or proprietary interest in the Shares acquired by the Trustee. Acquisition and transfer of Shares If directed by the Board, the Trustee must, for the purpose of enabling Company A to satisfy its obligations to allocate Shares under the terms of the Plan, acquire: Shares in the ordinary course of trading on the market Shares by way of an off-market transaction new Shares issued by Company A The Trustee must hold the Shares on trust in accordance with the Trust Deed. Funding
Company A must provide the Trustee with any funds required by the Trustee to comply with its obligations to acquire Shares under the Trust Deed. Company A must pay to the Trustee such fees and reimburse such expenses incurred by the Trustee as Company A and the Trustee agree. All funds received by the Trustee from Company A will constitute Accretions to the corpus of the Trust and will not be repaid to Company A and no Participant shall be entitled to receive such funds, unless funds received by the Trustee from Company A are paid to Company A where the Trustee subscribes for Shares in accordance with the Trust Deed, the Plan or relevant terms of participation. Where an amount paid by Company A to the Trustee is in excess of the amount required, Company A may require the Trustee to: apply such amount to subscribe for, acquire and/or allocate and deliver Shares in accordance with the Trust Deed, the Plan or the relevant terms of participation deposit the funds into any account opened and operated by the Trustee in accordance with the Trust Deed.
Company A must pay all Trust Expenses which means all expenses, outgoings, costs and charges incurred in establishing and operating the Plan and includes any amount of income or other Tax payable by Company A and/or the Trustee in relation to the Plan and the costs of the audit of the Trust but excludes any costs directly related to selling and transferring Plan Shares or exercising Share Rights (if any). Unallocated Shares The balance of the Net Income of the Trust for a Financial Year to which no Participant is presently entitled may be accumulated by the Trustee as an Accretion to the Trust. Rights in respect of Allocated Plan Shares Subject to the Applicable Law, the Plan Rules and terms of the relevant Offer, a Participant with Vested Allocated Plan Shares is presently entitled to so much of the Net Income of the Trust for a Financial Year which is attributable to: the Participant's Allocated Plan Shares the proceeds of sale arising from the sale of Share Rights or Shares by the Trustee on behalf of the Participant transactions or events related to the Participant's Allocated Plan Shares or property related to, or arising from, the Participant's Allocated Plan Shares.
All legislative references are to provisions of the ITAA 1936 or to provisions of the ITAA 1997, unless otherwise indicated. Question 1 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 A carries on a business which provides assessable income. Company A operates an ESS as part of its remuneration strategy. Under the Plan, Company A grants Share Rights to Participants and makes irretrievable cash contributions to the Trustee (in accordance with the Plan and the Trust Deed) which the Trustee will use to acquire Shares for allocation to Participants. Incurred in carrying on a business Company A must provide the Trustee with any funds required by the Trustee to comply with its obligations to acquire Shares under the Trust Deed. The contributions made by Company A to the Trustee are irretrievable as:
all funds received by the Trustee from Company A will constitute Accretions to the corpus of the Trust and will not be repaid to Company A, unless funds received by the Trustee from Company A are paid to Company A where the Trustee subscribes for Shares in accordance with the Trust Deed, the Plan or relevant terms of participation nothing in the Trust Deed confers, or is intended to confer, on Company A any Encumbrance, proprietary right or proprietary interest in the Shares acquired by the Trustee. Company A has granted (and will grant in the future) ESS interests as part of its remuneration and reward program for Participants. The costs incurred by Company A for the acquisition of Shares to satisfy grants of ESS interest arise as part of these remuneration arrangements, and contributions to the Trust are part of an ongoing series of payments in the nature of remuneration of its employees. Therefore, subsection 8-1(1) is satisfied. Not capital or of a capital nature
The costs will be an outgoing incurred for periodic funding of an ESS for employees of Company A. Costs incurred are likely to be in relation to more than one grant of Share Rights, and Company A intends to continue satisfying the outstanding Share Rights using Shares acquired by the Trust. This indicates that the irretrievable cash contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure of Company A. While the irretrievable cash 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 comparatively small. Therefore, the payments are not capital, or of a capital nature, and paragraph 8-1(2)(a) is not satisfied. Accordingly, Company A will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee to acquire Shares to satisfy ESS interests issued pursuant to the Plan. Question 2 Detailed reasoning
Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to the Trust to purchase Shares in excess of the number required to grant the relevant ESS interests to the employees arising in the year of income under an ESS. 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 . The Plan is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests (that is 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 Company A (or the Group). Company A's ESS contains a number of interrelated components which include the provision of irretrievable cash contributions by Company A to the Trustee. These irretrievable cash contributions enable the Trustee to acquire Shares for the purpose of enabling each Participant, indirectly as part of the Plan, to acquire ESS interests.
The deduction for the irretrievable cash contributions can only be deducted from the assessable income of Company A in the income year when the 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. Question 3 Detailed reasoning In addition to the reasoning provided in Question 1, Company A incurs ongoing administration costs for operating the Trust and has appointed the Trustee to administer the Trust. Company A must pay all Trust Expenses which includes all expenses, outgoings, costs and charges incurred in operating the Plan (including any amount of income or other Tax payable by Company A and/or the Trustee in relation to the Plan and the costs of the audit of the Trust but excludes any costs directly related to selling and transferring Plan Shares or exercising Share Rights).
These costs are regular and recurrent which are deductible under section 8-1 as they are costs necessarily incurred by Company A in running the ESS while carrying on its business for the purpose of gaining or producing its assessable income. These costs are not capital or of a capital nature as the loss or outgoings are regular, recurrent and part of the ordinary employee remuneration costs of Company A (ATO Interpretative Decision ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible ). Question 4 Detailed reasoning Establishment expenses are outgoings associated with the creation of an ESS and include fees and start-up costs incurred in establishing the employee share trust (EST) and ESS plan rules. Amendment expenses include legal fees paid amending the EST and the ESS plan rules.
Section 40-880 allows deductions for certain business capital expenditure that fall outside the scope of the deduction provisions of the income tax law. It requires the expenditure to be capital and in relation to the business. As this expenditure relates to remuneration of employees of the employer company who work within that business, the expenditure must be incurred in relation to that business. Section 40-880 contains limitations and exceptions in subsections 40-880(3) to (9) which may prevent a deduction being allowed. Subsection 40-880(3) indicates that the expenditure is only deductible to the extent that the business is carried on for a taxable purpose. The other limitations and exceptions in subsections 40-880(4) to (9) do not prevent the expenses from being deductible under section 40-880. Therefore, establishment and amendment expenses of the Plan or the Trust are deductible in equal proportions over five years under section 40-880 to the extent that the business carried on is for a taxable purpose (Taxation Determination TD 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an employee share scheme). Question 5 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 be obtained but for section 177F, 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 EST where the conditions of Division 83A are met. In this case, the ESS 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 subsection 177D(2), the Commissioner has concluded that the ESS is not being entered into or carried out for the dominate purpose of enabling Company A to obtain a tax benefit. Question 6 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 'fringe benefit' definition. In particular, paragraph (h) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA excludes a benefit constituted by the acquisition of an ESS interest under an ESS (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C applies. The Commissioner accepts that the Plan is an ESS as a Share Right granted under the Plan is an ESS interest under paragraph 83A-10(1), being a beneficial interest in either a share in a company or a right to acquire a share in a company. A Share Right is also an ESS interest to which Subdivision 83A-B or 83A-C applies because a Participant acquires the ESS interest under an ESS for nil consideration, which is at a discount.
Accordingly, the provision of ESS interests under the Plan will not be subject to FBT on the basis that they are acquired 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 'fringe benefit' definition in subsection 136(1) of the FBTAA. In addition, when a Share Right 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 Share Right 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 shares scheme ). Question 7 Detailed reasoning As stated above in response to Question 6, an employer's liability to 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.
One benefit excluded from being a fringe benefit, pursuant to paragraph (ha) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an EST within the meaning of 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 share 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)). As stated above in the response to Question 6, the Commissioner accepts that the Plan is an ESS and a Share Right granted under the Plan is an ESS interest under paragraph 83A-10(1)(b), as well as an ESS interest to which Subdivision 83A-B or 83A-C applies.
Accordingly, paragraphs 130-85(4)(a) and (b) are satisfied because: the Trust acquires shares in a company, namely Company A the Trust 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 the employees in accordance with the Trust Deed and 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 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 EST under section 130-85(4), including paragraph 130-85(4)(c). The other activities undertaken by the Trustee are merely incidental to managing the Plan. Therefore, the irretrievable cash contributions made by Company A, to fund the subscription for, or acquisition on-market of, Shares pursuant to the Plan or the ongoing administration of the Trust, will not be a fringe benefit. Question 8 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 6 and 7, without the provision of a fringe benefit, no amount will be subject to FBT. The benefits provided to the Trustee by way of irretrievable cash contributions to the Trust under the Plan are excluded from the definition of a fringe benefit for the reasons provided in response to Question 7. 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 of Company A by the amount of tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or on-market acquisition of, Shares.