1 Will Company X, as head entity of the Company X tax consolidated group, 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 or any subsidiary member of the Company X tax consolidated group to Company Y as trustee for the Company X Employee Share Trust (the Trustee) to fund the on-market subscription for, or acquisition of, Company X shares by the Company X Employee Share Trust (the Trust)?
Yes. Question 2A Will Company X, as head entity of the Company X tax consolidated group, obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, for costs incurred in relation to the on-going administration of the Trust? Answer Yes. Question 2B Will Company X, as head entity of the Company X tax consolidated group, obtain an income tax deduction, pursuant to section 40-880 of the ITAA 1997, for costs incurred in relation to the establishment of the Trust? Answer Yes. Question 2C Will Company X, as head entity of the Company X tax consolidated group, obtain an income tax deduction, pursuant to section 25-5 of the ITAA 1997, for costs incurred in relation to managing the tax affairs associated with the Trust? Answer Yes. Question 3 Will irretrievable cash contributions made by Company X or any subsidiary member of the Company X tax consolidated group to the Trustee, to fund the subscription for, or acquisition of, Company X shares by the Trust, be deductible to Company X at a time determined by section 83A-210 of the ITAA 1997 where contributions are made before the acquisition of the relevant ESS interests? Answer Yes. Question 4
If the Trust satisfies its obligation under the Employee Securities Incentive Plan (ESIP) dated XX August 20XX (20XX ESIP) and the ESIP dated XX November 20YY (20YY ESIP), collectively the Company Plans, 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 capital gains tax (CGT) event under Division 104 of the ITAA 1997? Answer No. Question 5 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 full, any deduction claimed by Company X as head entity of the Company X tax consolidated group in respect of the irretrievable cash contributions made by Company X or any subsidiary member of the Company X tax consolidated group to the Trustee to fund the subscription for, or acquisition on-market of, Company X shares by the Trust? Answer No. Question 6 Will the provision of Convertible Securities by Company X to employees of Company X under the Company Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986
(FBTAA)? Answer No. Question 7 Will the irretrievable cash contributions made by Company X or any subsidiary of Company X to the Trustee, 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? Answer No. Question 8 Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company X or any subsidiary of Company X, 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 Questions 1 to 5: Income tax years ended 30 June 20XX to 30 June 20XX For Questions 6 to 8: Fringe benefit tax years ended 31 March 20XX to 31 March 20XX The scheme commenced on: In a particular income year
Company X Limited 1. Company X is listed on the Australian Stock Exchange. 2. Company X carries on a business for the purpose of gaining or producing assessable income. 3. As detailed in Company X's 20XX Annual Report, the objective of the company's remuneration strategy is to attract and retain a high calibre of employees and to compensate its personnel with remuneration packages that are competitive within the market. 4. The remuneration framework was developed with Company X's strategic objectives in mind and aims to ensure that its workforce is incentivised and rewarded for their work. 5. As part of the overall remuneration strategy, in addition to fixed remuneration, Company X offers an incentive program to eligible personnel whereby they receive shares in the company upon the satisfaction of certain performance conditions. 6. Company X will incur the following costs in relation to the on-going administration of the Trust: • Employee plan record keeping; • Production and dispatch of holding statements to employees; • Provision of annual income tax return information for employees;
• Costs incurred in the acquisition of shares on market (e.g., brokerage costs and the allocation of such shares to Participants); and • Management of employee termination. 7. Company X will incur the following costs in relation to the establishment and implementation of the EST, including but not limited to: • Legal advice obtained in respect of the implications which may arise for both Company X and the Participants of the Plans in respect of the EST structure; • Legal documents required in respect of the EST and the Plans; • Legal advice obtained in respect of the drafting of changes required to the existing Plans in order to accommodate the EST structure; and • Professional fees associated with the establishment of the EST including such costs associated with the creating and registration of the EST with various authorities.
8. Company X will also incur costs relating to tax advice associated with the implementation of the EST, including taxation fees associated with the drafting and lodgement of the private ruling application with the ATO. In addition, Company X will incur costs in relation to the annual audit of the financial statements and annual income tax return of the Trust. Company Plans 9. Company X operates the following two plans (collectively the Company Plans) which form part of its remuneration strategy: • The Employee Securities Incentive Plan (ESIP) dated XX August 20XX (20XX ESIP); and • The ESIP dated XX November 20YY (20YY ESIP). 10. Company X and one of its subsidiaries, Company Z, are the employers of individuals that participate in the Company Plans (Employer Entities). 11. The 20YY ESIP is ongoing with new offers to relevant employees annually. 12. No further incentives are planned to be provided under the 20XX ESIP. However, it is Company X's intention to seek an ASX waiver under ASX Listing Rule 6.23 to allow for the use of the Company X Employee Share Trust (the Trust) for any remaining performance rights on issue under this plan.
13. As of X August 20XX, there are XX,XXX,XXX Convertible Securities on issue under the 20XX ESIP. The 20XX ESIP 14. The Board will determine the commencement date of the Plan (Rule 2.2) and eligibility for participating in the Plan (Rule 3.1). 15. Eligible Participants (hereafter referred to as Participants), upon being issued written invitations by the Board (Rule 3.2(a)), can apply for up to a specified number of Securities [1] which vest according to performance criteria. The invitation will outline the number of Securities that a Participant can apply for, and the relevant conditions attached to the Securities (Rule 3.2(b)). 16. A Participant may accept the invitation in accordance with the instructions accompanying the invitation, ancillary documentation (if any), the Plan Rules and the constitution of the Company by submitting a completed Application Form (Rule 3.4). 17. The Board may accept an Application Form from a Participant in whole or in part (Rule 3.6(a)).
18. To the extent it accepted the Application Form, the Company will grant the Participant the relevant number and type of Securities, subject to the terms and conditions set out in the invitation, the Plan Rules and the Ancillary Documentation (Rule 4.1) and issue the Participant a certificate (Rule 4.2). 19. Participants do not have any legal, equitable or other interest in any share underpinning the Convertible Security (unless expressly set out in the Plan Rules) (Rule 5.1(a)) and accordingly is not entitled to: • notice of, or to vote, or attend shareholders' meetings of the Company; nor • receive any dividends declared by the Company (Rule 5.1(b)). 20. Restrictions on Participants' dealings with Convertible Securities includes no disposal (Rule 5.2) and no hedging of economic exposure of the Convertible Security (Rule 5.3). 21. Unless determined otherwise by the Board, a Convertible Security will not be quoted on the ASX or any other recognised exchange (Rule 5.5).
22. A Convertible Security will vest when a Vesting Notice in respect of that Convertible Security is given to the Participant (Rule 6.1), noting that vesting conditions may be waived (as determined by the Board) (Rule 6.2). 23. To exercise a Convertible Security, the Participant must (Rule 7.1(b)): • deliver a signed Notice of Exercise; and • subject to clause 7.2, pay the Exercise Price (if any) to or as directed by the Company, at any time prior to the earlier of: • any date specified in the Vesting Notice; and • the Expiry Date. 24. As soon as practicable after the valid exercise of a Convertible Security, the Company will: • Issue, allocate or cause to be transferred the number of shares to which the Participant is entitled (Rule 8(a)); and • Issue a substitute Certificate for any remaining unexercised Convertible Securities held by that Participant (Rule 8(b)). 25. Convertible Securities may be forfeited, for example under the following circumstances (subject to the Board's discretion): • Purported disposal of the Convertible Security by a Participant in breach of the Plan Rules (Rule 5.2(a));
• Where a Participant ceases to be eligible to participate in the Plan (e.g., termination or resignation of employment) (Rule 9.1); • Where the Board determines that a Participant has acted fraudulently or dishonestly or wilfully breached their duties to the Company X group company (Rule 9.2); • Failure to satisfy the vesting conditions (Rule 9.3); • A Participant becomes insolvent (Rule 9.4); or • Expiration date of the Convertible Security occurs prior to vesting (Rule 9.5). 26. Notwithstanding the above examples of forfeiture circumstances, the Board also has the discretion to decide that some or all of the Participant's Convertible Securities will not be forfeited at that time (on any conditions which it thinks fit), but will be forfeited at the time and subject to the conditions it may specify by written notice to the Participant (Rule 9.6). 27. Where a Convertible Security has been forfeited in accordance with these rules (Rule 10): • the Convertible Security will automatically lapse;
• the Participant or the Participant's agent or attorney must sign any transfer documents required by the Company to effect the forfeiture of that Convertible Security; and • the Company will not be liable for any damages or other amounts to the Participant in respect of that Convertible Security. 28. All Plan shares will rank equally in all respects with the shares of the same class for the time being on issue (except for any rights attaching to the shares by reference to a record date prior to the date of the allotment or transfer of the Plan shares) (Rule 12.1). 29. If Plan shares are in the same class as shares which are listed on the ASX, the Company will apply for quotation of the Plan shares issued (or any unquoted Plan shares transferred) within the time required by the Listing Rules after the date of allotment (Rule 12.2).
30. The Board may, in its discretion, use an employee share trust or other mechanism for the purposes of holding Company X shares and Plan shares before or after the exercise of a Convertible Security or delivering any Plan shares arising from exercise of a Convertible Security under these Rules on such terms and conditions as determined by the Board. For the avoidance of doubt, the Board may do all things necessary for the establishment, administration, operation and funding of an employee share trust (Rule 17). The 20YY ESIP 31. The Board will determine the commencement date of the Plan (Rule 2.2) and eligibility for participating in the Plan (Rule 3.1). 32. ESS Participants (hereafter referred to as Participants), upon being issued written invitations by the Board (Rule 3.2(a)), can apply for up to a specified number of Securities [2] which vest according to performance criteria. The invitation will outline the number of Securities that a Participant can apply for, and the relevant conditions attached to the Securities (Rule 3.2(b)).
33. The Participant may accept the invitation in accordance with the instructions accompanying the invitation, ancillary documentation (if any), the Plan Rules and the constitution of the Company by submitting a completed Application Form (Rules 3.3 and 3.4). 34. The Board may accept an Application Form from a Participant in whole or in part (Rule 3.6(a)). 35. To the extent it accepted the Application Form, the Company will grant the Participant the relevant number and type of Securities, subject to the terms and conditions set out in the invitation, the Plan Rules and the Ancillary Documentation (Rule 4.1) and issue the Participant a certificate (Rule 4.2). 36. Participants do not have any legal, equitable or other interest in any share underpinning the Convertible Security (unless expressly set out in the Plan Rules) (Rule 5.1(a)) and accordingly is not entitled to: • notice of, or to vote, or attend shareholders' meetings of the Company; nor • receive any dividends declared by the Company (Rule 5.1(b)).
37. Restrictions on Participants' dealings with Convertible Securities includes no disposal (Rule 5.2) and no hedging of economic exposure of the Convertible Security (Rule 5.3). 38. Unless determined otherwise by the Board, a Convertible Security will not be quoted on the ASX or any other recognised exchange (Rule 5.5). 39. A Convertible Security will vest when a Vesting Notice in respect of that Convertible Security is given to the Participant (Rule 6.1), noting that vesting conditions may be waived (as determined by the Board) (Rule 6.2). 40. To exercise a Convertible Security, the Participant must (Rule 7.1(b)): • deliver a signed Notice of Exercise; and • subject to clause 7.2, pay the Exercise Price (if any) to or as directed by the Company, at any time prior to the earlier of: • any date specified in the Vesting Notice; and • the Expiry Date. 41. As soon as practicable after the valid exercise of a Convertible Security, the Company will: • Issue, allocate or cause to be transferred the number of shares to which the Participant is entitled (Rule 8(a)); and
• Issue a substitute Certificate for any remaining unexercised Convertible Securities held by that Participant (Rule 8(b)). 42. Convertible Securities may be forfeited, for example under the following circumstances (subject to the Board's discretion): • Purported disposal of the Convertible Security by a Participant in breach of the Plan Rules (Rule 5.2(a)); • Where the Board determines that a Participant has acted fraudulently or dishonestly, acted in contravention of a Company policy or wilfully breached their duties to the Company X group company (Rule 9.1); • Failure to satisfy the vesting conditions (Rule 9.2); • Where a Participant ceases to be an eligible ESS Participant in the Plan (Rule 9.3); • A Participant becomes insolvent (Rule 9.4); or • Expiration date of the Convertible Security occurs prior to vesting (Rule 9.5).
43. Notwithstanding the above examples of forfeiture circumstances, the Board also has the discretion to decide that some or all of the Participant's Convertible Securities will not be forfeited at that time (on any conditions which it thinks fit), but will be forfeited at the time and subject to the conditions it may specify by written notice to the Participant (Rule 9.6). 44. Where a Convertible Security has been forfeited in accordance with these rules (Rule 10): • the Convertible Security will automatically lapse; • the Participant or the Participant's agent or attorney must sign any transfer documents required by the Company to effect the forfeiture of that Convertible Security; and • the Company will not be liable for any damages or other amounts to the Participant in respect of that Convertible Security. 45. All Plan shares will rank equally in all respects with the shares of the same class for the time being on issue (except for any rights attaching to the shares by reference to a record date prior to the date of the allotment or transfer of the Plan shares) (Rule 12.1).
46. If Plan shares are in the same class as shares which are listed on the ASX, the Company will apply for quotation of the Plan shares issued (or any unquoted Plan shares transferred) within the time required by the Listing Rules after the date of allotment (Rule 12.2). 47. The Board may, in its discretion, use an employee share trust or other mechanism for the purposes of holding Company X shares and Plan shares before or after the exercise of a Convertible Security or delivering any Plan shares arising from exercise of a Convertible Security under these Rules on such terms and conditions as determined by the Board. For the avoidance of doubt, the Board may do all things necessary for the establishment, administration, operation and funding of an employee share trust (Rule 17). Company X Employee Share Trust (the Trust) 48. The Amended Trust Deed was amended on XX October 20XX replacing the former Trust Deed. 49. The Trust was set up for the sole purpose of subscribing for, acquiring, holding and transferring shares in connection with the Company Plans for the benefit of the Participants in those Company Plans. 50. Company Y is the current trustee for the Trust.
51. The Trust will be funded by contributions from Company X or a member of the Company X Group (i.e., for the subscription or purchase of shares in accordance with the Company Plans) as specified in clause 5.3 of the Amended Trust Deed. 52. Company X or a member of the Company X Group are likely to contribute funds by way of capital contributions to the Trust when written notice is provided by the Board to the Trustee. A notice can be issued from time to time, however, typically are issued when the incentives vest to the Participant and are subsequently exercised by the Participant or when incentives vest and are converted into vested rights. 53. These funds will be used by the Trustee of the Trust to acquire the shares in Company X either by on-market purchase or via a subscription for new shares in Company X based on the notice provided by Company X (clause 5.2 of the Amended Trust Deed).
54. Upon being directed by the Board, the Plan Trustee must allocate the specified number of Plan shares to the specified Participant on the date as directed by the Board (clause 5.1(a) of the Amended Trust Deed). The Participant will become the beneficial owner of the allocated Plan shares. 55. The Plan Trustee will hold any and all allocated Plan shares held on behalf of the Participant and agrees that the Participant is absolutely entitled to these shares (clause 3.1(b) of the Amended Trust Deed). The Plan Trustee also holds on behalf of, and the Participant is entitled to, all other benefits and privileges attached to or resulting from the allocated shares (clause 3.1(a) of the Amended Trust Deed). The Plan Trustee's activities as trustee of the Trust will be limited to the Company Plans (clause 4.2(a) of the Amended Trust Deed).
56. The structure of the Trust and the Company Plans is such that the shares may be dealt with at any time after the Restrictive Period lapses by allocating shares to each Participant by way of transfer into the name of the Participant (i.e., legal title) (or to a third party nominated Participant) upon notification by the Board (clause 9.2 of the Amended Trust Deed). 57. The Amended Trust Deed removed clauses 5.1(a)(iv), 5.2(e) and 6(b)(i)(C) from the Trust Deed and included a revised clause 6(b)(i)(A). 58. The Trustee did not exercise any of the broad discretionary powers contained in clauses 5.1(a)(iv), 5.2(e), 6(b)(i)(C) and 6(b)(i)(A) of the Trust Deed.
Income Tax Assessment Act 1936 Part IVA Income Tax Assessment Act 1936 section 177A Income Tax Assessment Act 1936 section 177C Income Tax Assessment Act 1936 section 177D Income Tax Assessment Act 1936 section 177F Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 subsection 8-1(1) Income Tax Assessment Act 1997 section 8-10 Income Tax Assessment Act 1997 section 20-20 Income Tax Assessment Act 1997 section 25-5 Income Tax Assessment Act 1997 subsection 25-5(1) Income Tax Assessment Act 1997 section 40-880 Income Tax Assessment Act 1997 subsection 83A-10(1) Income Tax Assessment Act 1997 subsection 83A-10(2) Income Tax Assessment Act 1997 section 83A-210 Income Tax Assessment Act 1997 section 104-35 Income Tax Assessment A
All legislative references are to provisions of the ITAA 1936 or to provisions of the ITAA 1997, unless otherwise indicated. Question 1 Will Company X, as head entity of the Company X tax consolidated group, 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 or any subsidiary member of the Company X tax consolidated group to Company Y as trustee for the Company X Employee Share Trust (the Trustee) to fund the on-market subscription for, or acquisition of, Company X shares by the Company X Employee Share Trust (the Trust)? 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, under 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 carries on a business which provides assessable income. Company X operates an ESS as part of its remuneration strategy.
Under the Company Plans, an incentive program is offered to eligible Participants whereby they receive shares in the company upon the satisfaction of certain performance conditions. The shares are allocated and held in the Trust on behalf of the Participant until the relevant dates under the Company Plans. Incurred in carrying on a business Company X must provide the Trustee with the funds required to enable the Trustee to subscribe for, or acquire, shares. The contributions made by Company X to the Trustee are irretrievable as: • all funds received by the Trustee from Company X in the form of contributions will constitute accretions to the capital of the Trust and will not be repaid to Company X, unless funds received by the Trustee from Company X are paid to Company X where the Trustee subscribes for shares in accordance with the Amended Trust Deed and the Company Plans • nothing in the Amended Trust Deed confers, or is intended to confer, on Company X any proprietary right or proprietary interest in the shares acquired by the Trustee.
Company X will grant in the future ESS interests as part of its incentive program for Participants. The costs incurred by Company X for the acquisition of shares to satisfy grants of ESS interests 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 X. Costs incurred are likely to be in relation to more than one grant of shares, and Company X intends to continue making contributions on a regular basis as part of the ongoing process of remunerating Participants and the Trust is expected to acquire shares regularly. This indicates that the irretrievable cash contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure for Company X.
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 X 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 under the Company Plans. Question 2A Will Company X, as head entity of the Company X tax consolidated group, obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, for costs incurred in relation to the on-going administration of the Trust? Detailed reasoning As discussed above in Question 1, section 8-1 allows a deduction for all losses and outgoings to the extent they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income, except where the outgoings are of a capital nature.
Company X carries on a business which provides assessable income. Company X operates an ESS as part of its remuneration strategy. Company X will incur on-going administration costs associated with the services provided by the Trustee in respect of the Company Plans which are set out in the facts and circumstances. Under clause 4.3 of the Amended Trust Deed, Company X must also pay all costs associated with the administration of the Trust. Therefore, Company X's ongoing administrative costs of the Trust are necessarily incurred in carrying on its business for the purpose of producing its assessable income. Furthermore, the costs are not capital in nature given the advantage sought by the costs are not to add to its profit-making structure, the expenses are regular and recurrent, and their essential character is that of a working expense of the business. Accordingly, Company X will be entitled to deduct costs incurred in relation to the on-going administration of the Trust under section 8-1 (Taxation Determination TD 2022/8 Income Tax: deductibility of expenses incurred in establishing and administering an employee share scheme ). Question 2B
Will Company X, as head entity of the Company X tax consolidated group, obtain an income tax deduction, pursuant to section 40-880 of the ITAA 1997, for costs incurred in relation to the establishment of the Trust? Detailed reasoning Establishment expenses are outgoings associated with the creation of an ESS which are set out in the facts and circumstances. 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 Company Plans 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 2C Will Company X, as head entity of the Company X tax consolidated group, obtain an income tax deduction, pursuant to section 25-5 of the ITAA 1997, for costs incurred in relation to managing the tax affairs associated with the Trust? Detailed reasoning Section 8-10 of the ITAA 1997 states that if more than one provision applies, the most appropriate provision should be used. 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 ITAA 1997. Section 25-5 is such a provision listed in Division 12 dealing with tax-related expenses, such as managing a taxpayer's tax affairs (subsection 25-5(1)).
Accordingly, to the extent that Company X incurs costs in managing the tax affairs of the Trust, including obtaining accounting, tax and legal advice in relation to the Company Plans, Company X will be entitled to deduct these tax-related expenses under subsection 25-5(1). Question 3 Will irretrievable cash contributions made by Company X or any subsidiary member of the Company X tax consolidated group to the Trustee, to fund the subscription for, or acquisition of, Company X shares by the Trust, be deductible to Company X at a time determined by section 83A-210 of the ITAA 1997 where contributions are made before the acquisition of the relevant ESS interests? 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 Company Plans are 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 X (or a member of the Company X tax consolidated group). Company X's ESS contains a number of interrelated components which include the provision of irretrievable cash contributions by Company X 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 Company Plans, to acquire ESS interests. The deduction for the irretrievable cash contributions can only be deducted from the assessable income of Company X 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 Company Plans. Question 4
If the Trust satisfies its obligation under the Employee Securities Incentive Plan (ESIP) dated XX August 20XX (20XX ESIP) and the ESIP dated XX November 20YY (20YY ESIP), collectively the Company Plans, 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 capital gains tax (CGT) event under Division 104 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 term 'income according to ordinary concepts' is not a defined term. However, case law has identified certain factors to be taken into consideration. The characterisation of the subscription proceeds received by Company X from the Trustee can be determined by the character of the right or thing disposed of in exchange for the subscription proceeds ( GP International Pipecoaters v. Federal Commissioner of Taxation
[1990] HCA 25). Where Company X issues the Trustee 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, which is of a capital nature. Accordingly, the subscription proceeds should not be treated as ordinary income assessable in the hands of Company X under section 6-5. Section 20-20 Section 20-20 relevantly provides for the assessment of recoupments received by way of insurance or indemnity, or if it is a recoupment of a loss or outgoing that is deductible because of a provision listed in the table in section 20-30. The subscription proceeds received by Company X from the Trustee would not represent an amount received by way of insurance or indemnity as there is no insurance contract and the receipt does not arise because of a statutory or contractual right of indemnity nor in the nature of compensation. None of the provisions listed in section 20-30 are relevant to a receipt of subscription proceeds. Therefore, the subscription proceeds received by Company X from the Trustee does not constitute an assessable recoupment under section 20-20. Division 104
A capital receipt will only be included as an assessable net capital gain 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). However, paragraphs 104-35(5)(c) and 104-155(5)(c) 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 shares constitute 'equity interests' (per subsection 974-75(1)), 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 under Division 104. Question 5 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 full, any deduction claimed by Company X as head entity of the Company X tax consolidated group in respect of the irretrievable cash contributions made by Company X or any subsidiary member of the Company X tax consolidated group to the Trustee to fund the subscription for, or acquisition on-market 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 of the ITAA 1936, 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 6 Will the provision of Convertible Securities by Company X to employees of Company X under the Company Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? 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 definition. Paragraph (h) of subsection 136(1) of the FBTAA 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 Company Plans, and subsequently granted to Participants pursuant to the Company Plans, are ESS interests for the purposes of subsection 83A-10(1). Therefore, Company X's Company Plans constitute 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 or options to acquire shares or shares granted under the Company Plans will be acquired by the employees at a discount, they are ESS interests to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies. Accordingly, the provision of rights or options to acquire shares or shares by Company X to Participants under the Company Plans 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. 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 to ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme ). Question 7
Will the irretrievable cash contributions made by Company X or any subsidiary of Company X to the Trustee, 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? 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 (ha) of the 'fringe benefit' definition excludes a benefit constituted by the acquisition of money or property by an EST within the meaning of subsection 130-85(4) of the ITAA 1997.
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 shares 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(4)(c)). The Commissioner accepts that the Company Plans are an ESS as a share granted under the Company Plans is an ESS interest under subsection 83A-10(1) of the ITAA 1997, being a beneficial interest in either a share in a company or a right to acquire a share in a company. Shares are an ESS interest to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies because a Participant acquires the ESS interest under an ESS for nil consideration, which is at a discount.
Accordingly, paragraphs 130-85(4)(a) and (b) are satisfied because: • the Trust acquires shares in a company, namely Company X • 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 Amended Trust Deed and the Company Plans. 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 subsection 130-85(4), including paragraph 130-85(4)(c). The other activities undertaken by the Trustee are merely incidental to managing the Company Plans. Therefore, the irretrievable cash contributions made by Company X (or a subsidiary member of the Company X income tax consolidated group) to the Trustee of the Trust, to fund the subscription for, or acquisition of, shares pursuant to the Company Plans, will not be a fringe benefit. Question 8
Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company X or any subsidiary of Company X, 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? Detailed reasoning Section 67 involves arrangements to avoid or reduce fringe benefits tax. Essentially, it is the general anti-avoidance provision in the FBTAA and its operation is comparable to Part IVA of the ITAA 1936, in that the section requires the identification of an 'arrangement' and a 'tax benefit', includes a sole or dominant purpose test, and is activated by the making of a determination by the Commissioner.
As determined above, the irretrievable cash contributions made by Company X to the Trustee do not constitute fringe benefits within the meaning of subsection 136(1), nor would the grant of ESS interests (or cash payments) to Participants under the Company Plans if an EST was not used. Therefore, the fringe benefits liability is not any less than it would have been but for the existence of the arrangement (i.e., the EST). Therefore, the Commissioner will not seek to make a determination that section 67 applies to increase the fringe benefits taxable amount to Company X 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, shares by the Trustee pursuant to the Company Plans. > [1] Securities means a security in the capital of the Company granted under the Plan Rules, including a Plan Share, Option, Performance Right or other Convertible Security. [2] Securities means a security in the capital of the Company granted under these Rules, including a Plan Share, Option, Performance Right or other Convertible Security.