1 Will Company X obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the irretrievable cash contributions made by Company X to the trustee of the Company X Employee Share Trust (Trustee) to fund the subscription for or acquisition of Company X shares by the Company X Employee Share Trust (Trust) to satisfy employee share scheme (ESS) interests issued pursuant to the Plan (Plan) in respect of Participants whose activities are all related to generating assessable income for Company X?
Yes Question 2 Will Company X as head entity of the Company X income tax consolidated group (Company X TCG) obtain an income tax deduction, pursuant to section 25-5 of the ITAA 1997, in respect of costs incurred by Company X or any subsidiary member of the Company X TCG in managing its own tax affairs in relation to the Employee Share Scheme? Answer Yes Question 3 Will Company X as head entity of the Company X TCG obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by Company X or any subsidiary member of the Company X TCG in relation to the on-going administration of the Trust? Answer Yes Question 4 Will Company X as head entity of the Company X TCG obtain an income tax deduction, pursuant to section 40-880 of the ITAA 1997, in respect of costs incurred by Company X or any subsidiary member of the Company X TCG in relation to the establishment of the Trust? Answer Yes Question 5
Will irretrievable cash contributions made by Company X or any subsidiary member of the Company X TCG to the Trustee, to fund the subscription for or acquisition on-market of Company X shares by the Trust, be deductible to Company X at a time determined by section 83A-210 of the ITAA 1997? Answer Yes Question 6 If the Trust satisfies its obligation under the Plan by subscribing for new shares in Company X, will the subscription proceeds be included in the assessable income of Company X under section 6-5 or section 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997? Answer No Question 7 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 in full, any deduction claimed by Company X in respect of the irretrievable cash contributions made by Company X or any member of the Company X TCG to the Trustee to fund the subscription for or acquisition of Company X shares by the Trust? Answer No Question 8 Will the provision of rights by Company X to Participants under the Plan be a fringe benefit within the meaning of subsection 136(1) of the
Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)? Answer No Question 9 Will the irretrievable cash contributions made by Company X to the Trustee pursuant to the Deed, to fund the subscription for or acquisition on-market of Company X shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986? Answer No Question 10 Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to Company X Employer Entities by the amount of tax benefit gained from irretrievable cash contributions made by Company X to the Trustee, to fund the subscription for or acquisition on-market of Company X shares? Answer No This ruling applies for the following periods : For ruling questions 1 to 7 Income tax years ended 30 June 20XX to 30 June 20XX For ruling questions 8 to 10, the ruling period is the fringe benefit tax years ended 31 March 20XX to 31 March 20XX. The scheme commences on: In a particular income year
Company X Company X is an Australian incorporated company involved in a particular industry. Company X is the head entity of Company X income tax consolidated group (Company X TCG) consisting of itself and wholly owned Australian subsidiaries. Company X's remuneration policy aims to embody transparency, competitiveness and reasonableness, with the goal of retaining key talent in alignment with business and shareholder objectives. As part of the overall remuneration strategy, in addition to fixed remuneration, Company X offers certain employee and executives, payments of shares upon the satisfaction of certain performance conditions. This is implemented through the Plan. Company X and a number of wholly owned subsidiaries of the Company X TCG are employers of individuals that participate in the Plan (Employer Entities). The Plan The Plan was approved by Company X's shareholders on a certain date. The terms and conditions of the Plan are set out in the Company X Plan Rules (Plan Rules). The terms on which Participants are invited to participate in the Plan are set out in the invitation letter (Invitation). Under the Plan and Plan Rules:
a. Eligible Participants are issued an invitation by the Board, to apply for a specified number of rights which vest according to performance criteria. The Invitation will outline the number of rights offered and the performance conditions. b. Once the Eligible Participant has received the invitation, they may accept the invitation in accordance with the instructions accompanying the invitation, unless the Board determines otherwise. c. Eligible Participants may nominate, by written notice to the Board, a nominee in whose favour the Participant wishes to renounce the invitation. The Board may, in its discretion, resolve not to allow a renunciation of an Invitation in favour of a nominee. A nominee can be an immediate family member of the Eligible Participant, a trustee of the Eligible Participant's family trust whose beneficiaries are limited to the Eligible Participant and/or immediate family members, or a company whose members only comprise of the Eligible Participant or immediate family members. d. The grant of rights is subject to receiving a signed and completed Application Form for rights. e. The rights will be issued to Participants for nil consideration.
f. The rights will not vest and be exercisable unless the vesting conditions attaching to the right have been satisfied or a change of control event occurs. The Board may, in its absolute discretion, waive the vesting conditions upon death, total or permanent disability, retirement or redundancy of the Participant. g. A Participant may exercise any vested right at any time after the Board notifies them that the right has vested and before it lapses. h. Following the exercise of a vested right, the Participant will be entitled to shares in Company X (one ordinary share for every right unless the Invitation states otherwise). i. All shares issued under the Plan on the exercise of a right will rank equally with other shares which are on issue and a Participant will be entitled to dividends and to exercise voting rights attached to the shares. j. At the time these conditions are satisfied, within 10 business days of delivery of the required documentation (i.e., the certificate for rights and notice of exercise of rights), the Company will issue the Participant the shares as being fully paid. k. Rights can lapse in a number of ways, including:
i. by expiry of the right in accordance with its terms; ii. the receipt of a notice from the Participant to the effect that they have elected to surrender the rights; iii. if the Board determines that the Participant has acted fraudulently, dishonestly or wilfully breached the Participant's duties; or iv. The rights could also lapse according to another provision of the Plan Rules or in accordance with the terms of an invitation. l. The Board may, at any time, establish a Trust for the sole purpose of acquiring and holding Shares in respect of rights which a Participant may exercise, or has exercised, and vested rights, including for the purpose of enforcing disposal restrictions and appointing a trustee of the Trust. Further the Trustee will hold shares for and on behalf of Participants as the beneficial owner. m. Participants are subject to transfer restrictions under the Plan Rules. The Board may, in its discretion, determine that a restriction period will apply to shares issued to a Participant (for up to a maximum of X years). A Participant may not deal with any Company X share acquired under the Plan until the end of the restriction period.
n. The Board may, by written notice, deem any unvested, or vested but unexercised, rights of a Participant to have lapsed or do all such things necessary to cancel any shares issued on exercise of the Participant's rights if the Participant has: i. acted fraudulently or dishonestly; ii. engaged with gross negligence; iii. demonstrated serious and wilful misconduct; iv. caused a material adverse effect on the reputation of the Company; v. their employment or office terminated due to serious or wilful misconduct or otherwise for cause without notice; or vi. becomes ineligible to hold their office due to Part 2D.6 of the Corporations Act (Rule 10.2). Rights may be granted under the Plan to non-residents of Australia with the Board able to adopt additional rules and rights subject to additional or modified terms. Contributions to the Trust may be made to acquire Shares in relation to rights granted to non-resident Participants. The consideration of contributions made with respect to non-resident Participants (and any associated Australian tax implication for Company X) is outside the scope of this ruling. Company X Employee Share Trust (Trust)
The Trust was established for the sole purpose of subscribing for, acquiring, holding and transferring shares for the benefit of Participants under the Plan. The trustee of the Trust (Trustee) is an external trustee acting in an independent capacity on behalf of the beneficiaries of the Trust. The Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4) of the ITAA 1997. The Trust broadly operates as follows: o. Company X or a member of the Company X TCG will provide the Trustee with the funds required for the purchase of shares in accordance with the Plan and all funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee. p. Company X or a member of the Company X TCG is likely to contribute funds, by way of capital contribution to the Trust when written notice is provided by the Board to the Trustee. Such a notice can be issued from time to time, however, typically are issued when the rights vest to the Participant and are subsequently exercised by the Participant or when rights vest and are converted into vested rights.
q. These funds will be used by the Trustee to acquire the shares in Company X either from other shareholders or via a subscription for new shares in Company X based on the notice provided by Company X. r. Allocated Shares acquired by the Trustee must be allocated to the relevant employees and held on their behalf as soon as reasonably practicable where required to do so, or permitted, by the relevant Plan Rules. Each Participant will be the beneficial owner of and absolutely entitled to their Allocated Shares. s. Unallocated Shares must be held by the Trustee on behalf of Participants and employees generally. The Trustee must deal with each Unallocated Share in the manner set out in a notice from the Board. t. If the Trustee is an associate of Company X, the Trustee must not exercise any voting rights in relation to Unallocated Shares. If the Trustee is not an associate of Company X, the Trustee may exercise voting rights in relation to Unallocated Shares, but only where the Trustee determined that voting in those circumstances is 'merely incidental' to obtaining, holding and providing shares to Participants.
u. At any time after expiry of the restriction period (if any), the Trustee must transfer the relevant number of shares into the name of the relevant Participant or any third party nominated by the Participant (i.e. legal title) upon a withdrawal notice being lodged with and approved by the Board. v. The Trustee can sell Allocated shares on behalf of a Participant where permitted to do so by the Participant. w. The Trustee is not entitled to receive from the Trust any fees, charges, commission or other remuneration for operating or administering the Trust. However, Company X must pay or reimburse to the Trustee from Company X's own resources any such fees, commission or other remuneration incurred by the Trustee, as Company X and the Trustee agree from time to time. x. In the event that the Trust is terminated, the Trustee must not pay any of the surplus assets to Company X and each of its subsidiaries. Associated costs Company X will incur various on-going administration costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust, such as: y. Employee plan record-keeping
z. Production and dispatch of holding statements to employees aa. Provision of annual income tax return information for employees bb. Costs incurred in the acquisition of shares cc. Management of employee termination dd. Preparing the annual audit of the financial statements of the Trust ee. Preparing the annual income tax returns of the Trust Company X has and will incur on-going administration costs associated with the company's accounting and legal advisors in relation to the Plan. Company X will incur various costs in relation to the establishment and implementation of the Trust, including: ff. legal advice obtained in respect of the implications which may arise for both Company X and the Participants of the Plan in respect of the EST structure; gg. legal documents required in respect of the EST and the Plan; hh. legal advice obtained in respect of the drafting of changes required to the existing Plan in order to accommodate the EST structure; and ii. professional fees associated with the establishment of the EST including such costs associated with the creating and registration of the EST with various authorities.
Company X will also incur costs in managing its own tax affairs, including: jj. Tax advisor fees associated with the drafting and lodgment of the private binding ruling application with the ATO.
Income Tax Assessment Act 1936 Part IVA Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 20-20 Income Tax Assessment Act 1997 subsection 25-5(1) Income Tax Assessment Act 1997 section 40-880 Income Tax Assessment Act 1997 section 83A-10 Income Tax Assessment Act 1997 section 83A-210 Income Tax Assessment Act 1997 Division 104 Income Tax Assessment Act 1997 subsection 130-85(4) Fringe Benefits Tax Assessment Act 1986 section 67 Fringe Benefits Tax Assessment Act 1986 subsection 136(1)
All references are to the Income Tax Assessment Act 1997 (ITAA 1997). Question 1 Summary Yes, Company X will be entitled to a deduction under section 8-1 of the ITAA 1997 in respect of the irretrievable cash contributions made by Company X to the Trustee of the Trust to fund the subscription for, or acquisition on-market of Company X shares, as the contributions are part of an on-going series of payments in the nature of remuneration of Company X's employees/Participants. Detailed reasoning Subsection 8-1(1) of the ITAA 1997 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 is an Australian incorporated company involved in a certain industry. Company X operates an ESS as part of its remuneration strategy.
Under the Company X Plan, Company X grants rights to employees and makes cash contributions to the Trust (in accordance with Trust Deed) which the Trustee uses to acquire shares (either on-market or by subscription) for allocation to Participants to satisfy their rights or allocation of Shares. Company X must provide the Trustee with all the funds required to enable the Trustee to subscribe for, or acquire, the Company X shares. The cash contributions made by Company X to the Trust are irretrievable and non-refundable to Company X in accordance with the Trust Deed, as: All funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee; and On termination of the Trust, the Trustee must not pay any of the Surplus Assets to any Group Company. Therefore, if Company X makes a cash contribution to the Trust to acquire or subscribe for Company X shares to satisfy the grant of rights pursuant to the Plan, the amount has been incurred for the purposes of subsection 8-1(1) of the ITAA 1997.
The costs incurred by Company X for the acquisition of shares to satisfy its obligations under the Plan in respect of the grant of rights or shares arise as part of Company X's remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. As such, it is incurred in the process of carrying on a business for gaining or producing Company X's assessable income. The cash contributions will be an outgoing incurred for periodic (rather than once-off) funding of an ESS for employees of Company X. The cash contributions are made as part of an ongoing process of remunerating employees, with the Trust expected to acquire shares regularly. Nothing in the facts suggests any intention for any contribution to be retained in the Trust for an extended period of time. While the 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 sufficiently small. Therefore, the payments are not capital, or of a capital nature.
Company X will be entitled to a deduction under section 8-1 of the ITAA 1997 in respect of the irretrievable cash contributions made by Company X to the Trustee of the Trust to fund the subscription for, or acquisition on-market, of Company X shares. Question 2 Summary Yes, costs incurred by Company X in managing its own tax affairs, such as obtaining tax advice in relation to the ESS, are tax-related expenses deductible under subsection 25-5 of the ITAA 1997. Detailed reasoning Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature. Section 8-10 of the ITAA 1997 states that if more than one provision applies, the most appropriate provision should be used (i.e. the specific provision should override the general provision). Division 12 of the ITAA 1997 sets out particular types of deductions that are dealt with by a specific provision of either the ITAA 1936 or the ITAA 1997. Section 25-5 of the ITAA 1997 is such a provision listed in Division 12 dealing with tax-related expenses.
Subsection 25-5(1) of the ITAA 1997 allows a deduction for tax-related expenses, such as, managing your tax affairs. Company X incurs costs in managing its own tax affairs, including: • Tax advisor fees associated with the drafting and lodgment of the private binding ruling application with the ATO. These costs are tax-related expenses deductible under subsection 25-5(1) of the ITAA 1997. Question 3 Summary Yes, the on-going administration costs incurred by Company X associated with the services provided by the Trustee of the Trust are deductible to Company X under section 8-1 of the ITAA 1997 as they are costs necessarily incurred in operating the ESS while carrying on its business for the purpose of gaining or producing its assessable income. Detailed reasoning Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, incurred in producing exempt or non-assessable non-exempt income or where a provision of the tax law prevents the deduction.
Company X carries on a business in a particular industry. Company X operates an ESS as part of its remuneration strategy. Company X has and will incur various on-ongoing administration costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust, such as: a. Employee plan record-keeping b. Production and dispatch of holding statements to employees c. Provision of annual income tax return information for employees d. Costs incurred in the acquisition of shares (e.g. brokerage costs and the allocation of shares to Participants) e. Management of employee termination f. Preparing the annual audit of the financial statements of the Trust g. Preparing the annual income tax returns of the Trust Pursuant to the Trust Deed, the Trustee is not entitled to receive from the Trust any remuneration in respect of its performance of its obligations as trustee of the Trust. Instead, Company X is required to pay or reimburse to the Trustee any fees, commission or other remuneration incurred by the Trustee, as Company X and the Trustee agree from time to time.
These costs are regular and recurrent employment expenses which are deductible to Company X under section 8-1 of the ITAA 1997 as they are costs necessarily incurred in operating the ESS while carrying on its business for the purpose of gaining or producing its assessable income. For completeness, these costs are not capital or of a capital nature as the loss or outgoings are regular and recurrent and are part of the ordinary employee remuneration costs of the company (see also ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible ). Question 4 Summary Yes, the costs incurred by Company X in respect of the establishment of the Trust are deductible under section 40-880 of the ITAA 1997 as they are incurred by Company X in relation to its business. Detailed reasoning Establishment expenses and section 40-880 As explained in FC of T v Sharpcan Pty Ltd [2019] HCA 36 ( Sharpcan ), section 40-880 covers deductions that are allowed for business related expenses, its purpose being to target (at [46]):
"black hole" expenditure, namely business expenses incurred by taxpayers that fall outside the scope of deduction provisions of income tax law. Thus, as s 40-880(1) provides, a deduction under s 40-880 is "only allowed to the extent that the expenditure is not taken into account in some way elsewhere in the income tax law". Section 40-880 (in part) provides that: (1) The object of this section is to make certain *business capital expenditure deductible over 5 years, or immediately in the case of some start-up expenses for small businesses, if: (a) the expenditure is not otherwise taken into account; and (b) a deduction is not denied by some other provision; and (c) the business is, was or is proposed to be carried on for a *taxable purpose. ... Deduction (2) You can deduct, in equal proportions over a period of 5 income years starting in the year in which you incur it, capital expenditure you incur: (a) in relation to your *business ; or ... However, there are limits to the deductions that are allowed under section 40-880. This is discussed below. Application of section 40-880 to the expenses incurred by Company X
In the present case, Company X has incurred a number of costs in relation to the establishment and implementation of the Trust for employees of the Employer Entities (listed at paragraph 17 above). In order for the expenses incurred by Company X to be deductible under subsection 40-880(2), they must not only be in relation to a business, but they must be in relation to the business being carried on by Company X. When considering what is meant by 'in relation to' in paragraph 40-880(2)(a), paragraph 2.25 of the Explanatory Memorandum (EM) to Tax Laws Amendment (2006 Measures No. 1) Bill 2006 states: The provision is concerned with expenditure that has the character of a business expense because it is relevantly related to the business. The concept used to establish this character or requisite relationship between the expenditure incurred by the taxpayer and the business carried on (current, past or prospective) is "in relation to". The connector "in relation to" allows the appropriate latitude to enable the deductibility of qualifying capital expenditure incurred before the business commences or after it has ceased. Taxation Ruling TR 2011/6
Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues provides guidance on the nature of the connection required between the expense and the business being carried on. Paragraphs 73 and 75 state: 73. The use of the expression 'in relation to' in subsection 40-880(2) rather than 'in carrying on' or the preposition 'on' to qualify the closeness of the required connection indicates that Parliament intended there to be greater latitude in the connection that needs to exist. ... 75. The words 'in relation to', whilst positing a test that is not as strict as 'in carrying on' however indicate that the expenditure in question is sufficiently relevant to the business to impress on it the character of a business expense of that business. The phrase 'in relation to' was considered by the High Court in PMT Partners Pty Ltd (In Liquidation) v Australian National Parks & Wildlife Service [1995] HCA 36 , whereBrennan CJ, Gaudron and McHugh JJ observed, in considering the application of the Commercial Arbitration Act 1985 (NT), at [26]:
Inevitably, the closeness of the relation required by the expression 'in or in relation to' in s 48 of the Act, indeed, in any instrument - must be ascertained by reference to the nature and purpose of the provision in question and the context in which it appears. Toohey and Gummow JJ also observed: The question of sufficiency of nexus is, of course, dependent on the statutory context. (at 330)... The connection which is required by the phrase 'in relation to' is a question of degree. There must be some "association" which is "relevant" or "appropriate". The question of the relevance or appropriateness of the connection is a question which cannot be divorced from the particular statutory context. (at 331) Expenditure that relates to remuneration of employees who work within that business, can be said to be incurred in relation to that business . As explained by the High Court in W Nevill & Co Ltd v Federal Commissioner of Taxation [1937] HCA 9 ( W Nevill ), all such expenses are: part of the necessary expenses of conducting the business... connected with the ever recurring question of personnel.
Whilst voluntary and indirect remunerative expenses will usually be sufficiently connected to the business being carried on, there will be some instances where the connection is not established (see, Benstead Services Pty Ltd v FC of T [2006] AATA 976).However, this will usually only occur where the purpose (or benefit) of the expense can be attributed to someone or something other than a genuine employee. In relation to the present case, it is not suggested that the establishment of the Trust in the context of the ESS arrangement and the costs related thereto can be attributed to something other than a need to remunerate genuine employees of the business. In the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 which introduced the Bill for Division 83A, the benefits of employee share schemes as a remuneration vehicle to businesses were observed: 1.25 However, the rules also specifically aim to improve the alignment of employee and employer interests. In recognition of the economic benefits derived from employee share scheme arrangements, the rules provide for tax concessions for employees participating in employee share schemes.
1.26 Tax support is provided on the grounds that aligning the interests of employees and employers encourages positive working relationships, boosts productivity through greater employee involvement in the business, reduces staff turnover and encourages good corporate governance. Therefore, it is accepted that where an expense is incurred by an employing entity in relation to the establishment of an EST to which Division 83A applies, and the employees who are to be provided the ESS interest are the employees of that employing entity, such expenses have the requisite connection with the business being carried on. They are, as was described in W Nevill, an expense connected with the ever-recurring question of personnel. Before being entitled to a deduction under section 40-880, it is necessary to consider whether any limits or exceptions may apply. The subsections that may be relevant to Company X are: (5) You cannot deduct anything under this section for an amount of expenditure you incur to the extent that: (a) it forms part of the *cost of a *depreciating asset that you *hold, used to hold or will hold; or
(b) you can deduct an amount for it under a provision of this Act other than this section; or (c) it forms part of the cost of land; or (d) it is in relation to a lease or other legal or equitable right; or (e) it would, apart from this section, be taken into account in working out: (i) a profit that is included in your assessable income (for example, under section 6-5 or 15-15); or (ii) a loss that you can deduct (for example, under section 8-1 or 25-40); or (f) it could, apart from this section, be taken into account in working out the amount of a *capital gain or *capital loss from a *CGT event; or (g) a provision of this Act other than this section would expressly make the expenditure non-deductible if it were not of a capital nature; or (h) a provision of this Act other than this section expressly prevents the expenditure being taken into account as described in paragraphs (a) to (f) for a reason other than the expenditure being of a capital nature; or (i) it is expenditure of a private or domestic nature; or (j) it is incurred in relation to gaining or producing *exempt income or *non-assessable non-exempt income.
(6) The exceptions in paragraphs (5)(d) and (f) do not apply to expenditure you incur to preserve (but not enhance) the value of goodwill if the expenditure you incur is in relation to a legal or equitable right and the value to you of the right is solely attributable to the effect that the right has on goodwill. The only possible relevant paragraph that may have application is paragraph 40-880(5)(f), which provides that you cannot deduct an amount to the extent it could (apart from this section), be taken into account in working out a capital gain or loss from a CGT event. However, there is an exception to this paragraph, it being contained in subsection 40-880(6). The expenses incurred establishing the Trust are not taken into account in working out the amount of a capital gain or loss in relation to the CGT assets of the Trust or the Company X TCG.
It is noted that the Trustees of the Trust hold the ESS interests on behalf of the employees who have a beneficial interest in the ESS interests (being shares or rights). The expenses incurred in establishing the Trust would not be taken into account in working out any capital gain or capital loss to the employees in relation to the ESS interests. In addition, the Trustees of the Trust hold the ESS interests on behalf of the employees who have a beneficial interest in the ESS interests (being shares or rights). The expenses incurred in establishing the Trust would not be taken into account in working out any capital gain or capital loss to the employees in relation to the ESS interests As a consequence, paragraph 40-880(5)(f) does not apply and there is no need to consider the application of subsection 40-880(6). It is accepted that the Trust was established for the benefit of its employees. The costs incurred in the establishment of the Trust are deductible to Company X under section 40-880 as they are in relation to its business and none of the exceptions or limitations in section 40-880 apply. Question 5 Summary
Yes, pursuant to section 83A-210 of the ITAA 1997, where irretrievable cash contributions are made at a time before the Participants acquire the relevant ESS interest, the irretrievable cash contribution can only be deducted from the assessable income of Company X in the income year when the ESS interest is acquired by the Participant under the Plan. Detailed reasoning It is often the case that an outgoing will be both incurred and paid in the same year of income, and as such, the amount is deductible in that income year for the purposes of section 8-1 of the ITAA 1997. [1] However, section 83A-210 of the ITAA 1997 modifies this rule in certain circumstances in respect of contributions provided by an employer to a trust to purchase shares under an ESS. The effect of section 83A-210 is to deem the timing an employer incurred the outgoing to be the time when the ESS interest is acquired by a beneficiary under an arrangement, rather than the time when the employer makes the contribution to the trust, if the contribution was made before the ESS interests are acquired. 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 . An ESS interest in a company is defined in subsection 83A-10(1) 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. Shares that are purchased by the Trustee to satisfy its obligation under the Company X ESS, and subsequently granted to Company X Participants pursuant to the Plan, are ESS interests for the purposes of section 83A-210. The Company X ESS satisfies the definition of an 'employee share scheme' in subsection 83A-10(2) as it is a scheme under which ESS interests in Company X are provided to the Participants of Company X in relation to their employment with Company X.
The granting of the ESS interest to the Participants, the provision of the cash contributions to the Trustee, the acquisition and holding of shares by the Trustee and the allocation of shares to Participants are all interrelated components of the Company X ESS. All the components constitute an arrangement for the purposes of section 83A-210 that must be carried out so that the scheme can operate as intended. Company X will make irretrievable cash contributions to the Trust and intends to only hold sufficient shares in the Trust to settle obligations arising from Performance Rights currently on issue under the Plan. Therefore, where irretrievable cash contributions are made at a time before the Participants acquire the relevant ESS interest, the irretrievable cash contribution can only be deducted from the assessable income of Company X in the income year when the ESS interest is acquired by the Participant under the Plan, as provided by section 83A-210 of the ITAA 1997. Question 6 Summary
No, if the Trust satisfies its obligation under the Plan by subscribing for new shares in Company X, the subscription proceeds will not be included in the assessable income of Company X under section 6-5 of the ITAA 1997 (because it is capital in nature); section 20-20 of the ITAA 1997 (because it is not an assessable recoupment); or trigger a CGT event under Division 104 of the ITAA 1997 (because it is excluded by paragraphs 104-35(5)(c) and 104-155(5)(c) of the ITAA 1997). Detailed reasoning Section 6-5 Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. The expression " income according to ordinary concepts " is not a defined term. However, case law has identified certain factors which may assist in determining whether a receipt is properly characterised as income according to ordinary concepts. As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In GP International Pipecoaters v. Federal Commissioner of Taxation
(1990) 170 CLR 124; (1990) 64 ALJR 392; (1990) 93 ALR 193; (1990) 21 ATR 1; 90 ATC 4413; [1990] HCA 25 ( Pipecoaters ), the High Court of Australia found that: To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. The character of the subscription proceeds received by Company X from the Trust can be determined by the character of the right or thing disposed of in exchange for the receipt. Where Company X issues the Trust with new shares in itself, the character of the newly issued share is one of capital. Therefore, the receipt of the subscription proceeds takes the character of share capital, and accordingly, is of a capital nature.
In conclusion, the subscription proceeds should not be treated as ordinary income assessable in the hands of Company X under section 6-5 of the ITAA 1997. Section 20-20 Subsection 20-20 relevantly provides for the assessment of recoupment received by way of insurance or indemnity or under a provision listed in section 20-30. By its very nature, the subscription proceeds received by Company X from the Trust will not represent an amount received by way of insurance or indemnity. There is no insurance contract involved; and the receipt does not arise because of a statutory right or contract of indemnity nor in the nature of compensation. Therefore, the receipt of the subscription proceeds does not constitute an assessable recoupment under subsection 20-20(2) of the ITAA 1997. As for subsection 20-20(3), an amount that Company X receives as recoupment of a loss or outgoing, except by way of insurance or indemnity, is an assessable recoupment if such loss or outgoing is deductible in the current or a prior income year because of a provision listed in the table in section 20-30.
None of the provisions listed in section 20-30 are relevant to the current circumstances. Therefore, the subscription amount also does not constitute an assessable recoupment under subsection 20-20(3) of the ITAA 1997. Division 104 A capital receipt will only be included as an assessable net capital gain only if it arises as a result of a CGT event (section 102-20 of the ITAA 1997). The only CGT events that may have possible application to the receipt of the subscription proceeds are CGT event D1 (Creating a contractual or other rights) and/or CGT event H2 (Receipt for event relating to a CGT asset). Paragraphs 104-35(5)(c) and 104-155(5)(c) of the ITAA 1997 respectively provide that CGT event D1 and CGT event H2 do not apply if a company issues or allots equity interests or non-equity shares in the company. As the ordinary shares of Company X constitute "equity interests" (see subsection 974-75(1) of the ITAA 1997), neither CGT event D1 nor CGT event H2 will occur. Accordingly, the subscription proceeds will not be assessable as a capital gain to Company X. Question 7 Summary
No, Part IVA of the ITAA 1936 will not apply to deny, in part or in full, any deduction claimed by Company X in respect of the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for or acquisition from other shareholders of Company X 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 employee share trust arrangement.
Therefore, having regard to the eight factors set out in subsection 177D(2) 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 8 Summary No, the provision of rights to acquire ordinary shares or shares by Company X to employees under the Plan will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986 as they are excluded by paragraph 136(1)(h) of the FBTAA 1986 as ESS interests acquired under an 'employee share scheme'. Detailed reasoning An employer's liability to fringe benefits tax ( FBT ) arises under section 66 of the FBTAA 1986, 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 1986 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 definition.
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; An 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employee's employment. An ESS interest in a company is defined in subsection 83A-10(1) 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. Shares that are purchased by the Trustee to satisfy its obligation under the Plan, and subsequently granted to Company X Participants pursuant to the Plan, are ESS interests for the purposes of section 83A-10(1).
Therefore, Company X's ESS constitutes an 'employee share scheme' within the meaning of subsection 83A-10(2) because it is a scheme under which ESS interests in Company X are provided to the employees of Company X in relation to their employment with Company X. As the rights to acquire ordinary shares or shares granted under the Plan will be acquired by the employees at a discount, they are ESS interests to which subdivision 83A-B of the ITAA 1997 applies. Accordingly, the provision of rights to acquire ordinary shares or shares by Company X to Participants under the Plan will not be subject to FBT on the basis that they are acquired by Participants under an 'employee share scheme' (to which subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph 136(1)(h) of the FBTAA 1986. In addition, when a right to acquire ordinary shares 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 to acquire shares and not in respect of employment (refer ATO ID 2010/219
Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme ). Question 9 Summary No, the irretrievable cash contributions made by Company X to the Trustee pursuant to the Trust Deed, to fund the subscription for or acquisition on-market of Company X shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986 by virtue of the exclusion in paragraph 136(1)(ha) of the FBTAA 1986 on the basis that the Trust Deed satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997. Detailed reasoning Paragraph (ha) of subsection 136(1) of the FBTAA 1986 excludes from the definition of 'fringe benefit': (ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997 ); Therefore, for the irretrievable cash contributions to be excluded from the definition of 'fringe benefit', the Trust must be an 'employee share trust' as defined in subsection 130-85(4) of the ITAA 1997.
Subsection 130-85(4) provides that 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 the present case, paragraphs 130-85(4)(a) and (b) are satisfied because: a) The Trust acquires shares in a company, namely Company X; and b) The Trust ensures that ESS interests as defined in subsection 83A-10(1) (discussed above in Questions 5 and 8 are provided under an employee share scheme (discussed above in Questions 5 and 8) by allocating those shares to the Participants of Company X 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 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'? (TD 2019/13). According to paragraph 13 of TD 2019/13, 'investing in assets other than shares or rights to shares in the employer company' is not an activity that is 'merely incidental' as it is not a natural incident or consequence of administering an ESS. [2] Neither is the provision of 'additional benefits to participants and/or employees, over and above the delivery of the ESS interests or resulting shares and any dividend equivalent payment that accrues directly from the employee's ESS interest'. Accordingly, the Trust Deed contains only powers and/or duties that are merely incidental, as required by subsection 130-85(4)(c) of the ITAA 1997.
The Trust Deed, therefore, satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 and, in turn, paragraph 136(1)(ha) of the FBTAA 1986 applies to exclude the irretrievable cash contributions made by Company X to the Trustee under the Trust Deed from being a fringe benefit. Question 10 Summary No, the Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount to the Company X Employer Entities. Detailed reasoning PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) provides guidance on the application of Part IVA of the ITAA 1936 and other general anti-avoidance rules. In respect of section 67 of the FBTAA 1986, guidance is provided at paragraphs 185 to 188 of PSLA 2005/24. As discussed above, the irretrievable cash contributions made by Company X to the Trustee (pursuant to the Trust Deed) will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986. Therefore, the fringe benefits liability is not any less than it would have been but for the existence of the arrangement.
In conclusion, the Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount by the amount of the tax benefit gained from the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for, or acquisition from other shareholders of, shares in Company X. > [1] Paragraph 15 of TR 97/7. [2] See also paragraph 11 of TD 2019/13.