Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust

Does section 83A-210 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to determine the timing of the deduction allowable to an employer in respect of money provided to a trust to purchase shares in excess of the number required to meet obligations arising from the grant of options under an employee share scheme?

Yes. Section 83A-210 of the ITAA 1997 applies to determine the timing of the deduction, but only in respect of the amount of money provided to the trust to purchase shares in excess of the number required to meet obligations arising in the year of income from the grant of options, under an employee share scheme.

The employer operates an employee share scheme (the scheme) as part of its remuneration strategy.

Under the scheme the employer grants its employees options to acquire shares in the employer. The options are granted to the employees for nil consideration and are subject to vesting conditions.

The options are ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997.

On vesting, the options become exercisable and employees are entitled to be provided with shares in the employer.

To facilitate the operation of the scheme the employer has established a trust for the purpose of acquiring and holding shares in order to provide participating employees with shares when they exercise the options granted under the scheme.

Under an arrangement, the employer provides the trust with an amount of money that is in excess of the amount necessary to acquire sufficient shares to satisfy its potential obligations arising from the grant of options under the scheme in the year of income.

The money provided by the employer to the trust under this arrangement is deductible under section 8-1 of the ITAA 1997.

The trustee uses all the money provided by the employer to acquire shares in the employer. The shares which are in excess of the number required to satisfy its obligations in relation to options already granted under the scheme are intended to meet its obligations from the grant of options in the following year.

The trustee holds the shares pending allocation of the shares to the participating employees when the options are exercised.

The provision of money to the trustee of an employee share trust by the employer for the purpose of remunerating its employees under an employee share scheme is an outgoing in carrying on the employer's business and is deductible under section 8-1 of the ITAA 1997.

The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.

Section 83A-210 of the ITAA 1997 provides that if: (a) at a particular time, you provide another entity with money or other property: (i) under an arrangement; and (ii) for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and (b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest; then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time.

Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the trustee and the acquisition of ESS interests (directly or indirectly) by the employee under an employee share scheme in relation to the employee's employment.

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 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.

An option granted to an employee under the scheme will be an ESS interest as it is a right to acquire a beneficial interest in a share in a company. A share purchased by the trustee to satisfy the option to acquire shares under the scheme, for an employee in relation to the employee's employment, is itself provided under the same scheme.

The granting of the beneficial interests in the options, 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 the participating employees are all interrelated components of the employee share scheme. 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 the participating employees, indirectly as part of the employee share scheme, to acquire the options. A deduction for the purchase of shares to satisfy the obligation arising from the grant of options is therefore allowable to the employer in the year in which the money was paid to the trustee, under section 8-1 of the ITAA 1997.

However, the amount of money used by the trustee to purchase excess shares is intended to meet obligations arising from a future grant of options. The excess payment therefore occurs before the employees acquire the relevant options under the scheme. Section 83A-210 of the ITAA 1997 will apply and the excess payment will be deductible to the employer in the year of income when the relevant options are subsequently granted to the employees.