Employee share scheme: indeterminate rights not fringe benefits

Is the grant by a company of indeterminate rights to employees in relation to their employment excluded from the definition of fringe benefit by paragraph 136(1)(f) or 136(1)(h) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Yes. The grant of indeterminate rights to employees of a company in relation to their employment is excluded from the definition of fringe benefit by paragraph 136(1)(f) or 136(1)(h) of the FBTAA.

A company operates a scheme under which the company grants rights (indeterminate rights) to its employees in relation to their employment at a discount.

The rights granted entitle the employees to acquire: • either shares in the company or cash, to be determined at a future time at the discretion of the company; or • a number of company shares, where that number cannot be determined at the time of grant but will be determined at a future time.

The definition of benefit in subsection 136(1) of the FBTAA includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility. The indeterminate rights come within the definition of 'benefit'.

Generally, a benefit provided to an employee by their employer in respect of the employee's employment is a fringe benefit as defined in subsection 136(1) of the FBTAA. However, the definition of 'fringe benefit' does not include: • a payment of 'salary or wages' (paragraph (f) of the definition); or • 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 (ITAA 1997) to which Subdivision 83A-B or 83A-C of that Act applies (paragraph (h) of the definition).

At the time the indeterminate rights are granted it may be considered unclear if paragraph (f) or (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA applies because: • at that time, the employee has not acquired rights that are ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997; and • if they are rights to shares or cash, it is also unclear if the employee will ultimately receive cash that would on payment be considered salary or wages.

Although the indeterminate rights are not ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997 at the time they are granted, where they are ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined): • the indeterminate rights will, pursuant to section 83A-340 of the ITAA 1997, be treated as if they had always been ESS interests; and • as they will constitute the acquisition of ESS interests acquired under an employee share scheme (within the meaning of the ITAA 1997) to which Subdivision 83A-B or Subdivision 83A-C of the ITAA 1997 applies, they will be excluded from the definition of fringe benefit by paragraph 136(1)(h) of the FBTAA.

Alternatively, where an employee's indeterminate rights are ultimately satisfied with cash instead of shares, the granting of the rights: • will be viewed as one of a series of steps in the payment of salary or wages; and • will not be viewed as a separate benefit to the payment of salary or wages which are excluded from the definition of fringe benefit by paragraph 136(1)(f) of the FBTAA.

Therefore, the grant of indeterminate rights to employees of the company in relation to their employment will be excluded from the definition of fringe benefit by either paragraph 136(1)(f) or (h) of the FBTAA.