1 Is Company X entitled to claim deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by Company X to Company Y (the Trustee) as trustee for Company X Employee Share Trust (the Trust) to acquire shares to satisfy granting ESS interests made under the Company X Equity Incentive Plan (EIP) and the Company X Non Executive Director Share Plan (NED Plan) (collectively, the Plans)?
Yes. Question 2 Will irretrievable contributions made by Company X to the Trustee to fund the acquisition of ESS interests issued pursuant to the Plans, which are made at a time before Eligible Employees acquire the relevant ESS interests, be deductible to Company X at a time determined by section 83A-210 of the ITAA 1997? Answer Yes. Question 3 Will irretrievable contributions made by Company X to the Trustee, to fund the acquisition of ESS interests issued pursuant to the Plans, made at a time on or after the Participant acquires the relevant ESS interest, be deductible to Company X in the income year in which the contribution is made under section 8-1 of the ITAA 1997? Answer Yes. Question 4 Will the Commissioner make a determination under section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) because there is a scheme which satisfies the requirements of section 177D of the ITAA 1936 to deny, in any part or in full, any deduction claimed by Company X for irretrievable contributions made by Company X to the Trustee for the purpose of acquiring shares to satisfy grants of ESS interests under the Plans? Answer No. Question 5
Will the provision of Plan Securities and Share Rights by Company X to the Participants under the Plans constitute a "fringe benefit" under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? Answer No. Question 6 Will the irretrievable contributions made by Company X to the Trustee to fund the acquisition of shares issued pursuant to the Plans be a "fringe benefit" within the meaning of that term in subsection 136(1) of the FBTAA? Answer No. Question 7 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 by the amount of the fringe benefit gained from irretrievable cash contributions made by Company X to the Trustee to fund the acquisition of shares by the Trustee pursuant to the Plans? Answer No. This ruling applies for the following periods: For Questions 1 to 4: 1 July 20XX to 30 June 20XX For Questions 5 to 7: 1 April 20XX to 31 March 20XX The scheme commenced on: DD MM YYYY
Company X Limited 1. Company X is listed on the Australian Securities Exchange (ASX). 2. Company X is the head company of an income tax consolidated group comprising itself and a number of wholly owned Australian resident subsidiaries. 3. Company X carries on a business for the purpose of gaining or producing assessable income. Company Plans 4. Company X operates the following two plans (collectively, the Plans) which form part of its remuneration strategy: • Company X Equity Incentive Plan (EIP), and • Company X Non Executive Director Share Plan (NED Plan). 5. The Plans facilitate opportunities to align the interests of employees with, and to enable employees to be involved and participate in, the future growth and profitability of Company X. 6. Company X has implemented the EIP whereby rights, options and restricted shares (collectively, Plan Securities) will be issued for no consideration, which upon vesting or exercise of the rights will entitle Participants to receive shares in Company X.
7. Company X has also implemented the NED Plan, which invites non executive directors of Company X to elect to sacrifice part or all of the fees for their services as a director to acquire share rights. On vesting of the share rights, the Participant will receive shares which are subject to dealing restrictions for a period of time (Restricted Shares). 8. The Restricted Shares issued pursuant to the NED Plan may be sourced through on-market acquisitions, issued from the capital of Company X or allocated from the Company X Limited Employee Share Trust (the Trust). EIP 9. Company X has implemented the Equity Incentive Plan (EIP) for the granting of Plan Securities, which will typically take the form of Company X ordinary shares (Shares) when vesting, to Eligible Employees. 10. The purpose of the EIP is, among other things, to align the interests of Participants with Company X shareholders through the sharing of personal interest in the future growth and development of Company X. 11. The EIP operates broadly to provide Participants with the opportunity to acquire Shares. All Participants are currently Australian residents for tax purposes.
12. In order to receive Shares, the Participant must satisfy all relevant criteria outlined in the: • relevant offer letters and documentation; and • EIP Rules, adopted by the board of directors of Company X (Board) on XX June 20XX. 13. When the relevant criteria are satisfied, the Participant will be entitled to the Shares allocated to them. 14. Subject to the EIP Rules, the Board may invite "Eligible Employees" of Company X to participate in a grant of Plan Securities, which may comprise any one or more of: • an entitlement to a Share or, in certain circumstances, to a cash payment, subject to satisfaction of applicable conditions (including any Vesting Condition) and compliance with any applicable exercise procedure (Rights). Rights also include Share Appreciation Rights, which entitle a Participant to a number of Shares determined in accordance with a formula notified to the Participant at the time of an Offer, where the formula relates to the appreciation (if any) in value of Shares between the grant date and the date of Vesting;
• an entitlement to receive a Share or, in certain circumstances, to a cash payment subject to satisfaction of applicable conditions (including any Vesting Condition) and compliance with the applicable exercise procedure (including payment of any applicable Exercise Price or compliance with any procedures set by the Board for cashless exercise) (Options); and • Shares allocated to Participants that are subject to restrictions on Dealing, Vesting Conditions and/or other restrictions or conditions (Restricted Shares), (together, an Offer) (Rule 1.1). 15. An "Eligible Employee" for the purposes of the EIP is an employee of the Group (including a Director employed in an executive capacity) or any other person who is declared by the Board to be eligible to receive a grant of Plan Securities under the EIP. 16. Company X, when granting the Plan Securities, should advise Eligible Employees of the following: • the type and number of Plan Securities being offered, or the method by which the number will be calculated; • the amount (if any) that will be payable for the grant of Plan Securities;
• any Vesting Conditions or other conditions that apply, including any Vesting Period; • the terms of exercise for an Option or a Right (where exercisable), including the period(s) during which exercise is permitted; • that Rights or Options will only be settled through an allocation of Shares or by making a cash payment (as applicable) where the Board has made a determination pursuant to Rules 2.2(g) or 3.2(g) at the time of the Offer; • the circumstances in which Rights and/or Options may lapse, Shares (including Restricted Shares) allocated under the EIP may be forfeited or a Participant's entitlement to Plan Securities may be reduced; • how Plan Securities may be treated if the Eligible Employee ceases employment with a Group company and any discretions retained by the Board under Rule 8; and • any restrictions (including the period of restriction) on Dealing in relation to a Restricted Share or Share allocated to the Eligible Employee under the EIP.
17. Company X will grant the Rights to Participants. No amount is payable by the Participant in respect of the grant of a Right unless the Board determines otherwise (Rule 2.1(b)). 18. While the vesting of a Right will typically be satisfied by Company X allocating Shares to the Participant (Rule 2.2(d)), Company X may decide to satisfy the vesting of that Right by way of a cash payment in lieu of an allocation of Shares. 19. Company X will grant Options to Participants with a pre-determined Exercise Price per Option. No amount is payable by the Participant in respect of the grant of an Option unless the Board determines otherwise (Rule 3.1(b)). 20. As soon as practicable following vesting (and, if applicable, exercise) of Plan Securities, the Board must issue to, procure the transfer to or procure the setting aside for, the Participant the number of Shares in respect of which the Plan Securities have vested or have been exercised (Rules 2.3(a) and 3.3(a)). No further action is required on the part of the Participants (Rules 2.3(a) and 3.3(a)). The amount of the cash payment will be calculated with reference to the Current Market Price (Rules 2.4(a) and 3.4(a)).
21. The Current Market Price is the arithmetic average of the daily weighted average market price (rounded to the nearest cent) of all Shares traded on the ASX during the previous five trading days, or any other calculation as determined by the Board (Rule 16.1). 22. Both the Rights and the Options may lapse on the occurrence of the events prescribed in Rules 2.5 and 3.5. 23. Company X will allocate Restricted Shares in accordance with the terms of the relevant Offer to the Participant by way of either: • issuing Restricted Shares; • procuring the transfer of Restricted Shares; or • procuring the setting aside of Restricted Shares. 24. Where Company X allocates Restricted Shares to Participants, the Shares will only cease to be Restricted Shares (i.e. Vest) where (Rule 4.2(a)): • the vesting period and each other relevant condition advised to the Participant have been satisfied or waived by the Board; and • Company X notifies the Participant that the restrictions in respect of the Restricted Shares no longer apply.
25. Restricted Shares may be forfeited on the occurrence of the events prescribed in Rule 4.3. Broadly, forfeiture of the Restricted Shares will result in one of the following occurring: • where the Shares (including Restricted Shares) are held by the Participant, the Participant is deemed to have agreed to dispose of his or her legal and/or beneficial interest (as appropriate) in such Shares for nil consideration for all of his or her Shares and the Shares will be transferred into the name of Company X's nominee who will then hold full legal and beneficial title to those Shares; • where Shares (including Restricted Shares) are forfeited in accordance with the EIP Rules and the Shares are held by the Trustee, the Participant's rights in the Shares will be extinguished for nil consideration and the Shares will be held as general trust property in accordance with the terms of the Trust Deed. The Board may, at any time in the future, direct the Trustee to hold the Shares for the benefit of a different Participant; and
• where a Participant forfeits Shares allocated to him or her on exercise of Options pursuant to the Rules, Company X may, but need not, repay to the Participant any Exercise Price paid by the Participant in respect of the forfeited Shares. 26. Certain Dealings with respect to the Plan Securities are prohibited in accordance with Rule 5, including with respect to Dealings prior to vesting (subject to the Company X Securities Policy). 27. The Board is empowered with discretion to determine the consequences for a Participant's Plan Securities upon cessation of his or her employment (Rule 8). 28. The Options and Rights carry no entitlement to participate in new issues of Shares prior to the Vesting (and, if applicable, exercise) of the Right or Option (Rule 10(a)). 29. The Board is empowered to grant additional Rights or Options or make any adjustments it considers appropriate to the terms of the Rights or Options in certain circumstances (Rule 10). 30. Subject to the terms of the Trust Deed or Offer, the following rules apply to the Shares allocated to Participants under the EIP (Rule 11.1):
• the Participant is entitled to receive all dividends and other distributions or benefits payable to the Participant or to the Trustee in respect of the Shares; • the Participant is entitled to make an application to participate in Company X's Dividend Reinvestment Plan in respect of Shares allocated to, or on behalf of the Participant, subject to the terms and conditions of the Dividend Reinvestment Plan Rules; • the Participant is entitled to exercise, or to direct the Trustee in writing, how to exercise, the voting rights attaching to the Shares, either generally or in a particular case; • any bonus Shares that are issued in respect of the Shares will be issued to the Participant, or to the Trustee on the Participant's behalf, and will be held by the Participant or Trustee as Shares subject to the same terms, conditions and restrictions on Dealing (if any) as the Shares in respect of which they were issued; and
• if rights arise on a rights issue in respect of the Shares, the Participant may Deal with or exercise those rights, or instruct the Trustee (if applicable) in relation to those rights in accordance with the Trust Deed. If the Shares are held by the Trustee on the Participant's behalf and the Participant does not instruct the Trustee how to Deal with the rights, the rights will be Dealt with in accordance with the Trust Deed. 31. Unless or until the Shares are allocated to a Participant following Vesting or exercise of their Rights or Options (as applicable), the Participant has no interest in those Shares in respect of which the Right or Option was granted (Rule 11.2(a)). 32. However, the Board is empowered to determine that a dividend equivalent payment is payable to a Participant in certain circumstances. The payment will be (Rule 11.2): • approximately equal to the amount of dividends that would be payable to the Participant if they had been the owner of the Shares during the relevant Vesting Period; • will not be grossed up or otherwise adjusted for tax; and
• may be satisfied through the allocation of Shares or the payment of cash. 33. Where an employee transfers overseas but continues to hold an office or remain an employee of Company X, the Board has the discretion to determine the consequences of the transfer on the Participant's Shares in accordance with Rule 14. 34. The Board is empowered to exercise its discretion under Rule 6 so as to prevent inappropriate benefits being granted to employees pursuant to the EIP. 35. Subject to Rule 15.3, the EIP is to be administered by the Board, who has the power to: • determine the relevant procedures for the administration of the EIP consistent with the EIP Rules, including to implement an employee share trust or impose a holding lock for the purpose of delivering and holding Shares on behalf of Participants upon the grant of Restricted Shares or the Vesting (and, if applicable, exercise) of Rights or exercise of Options; and • delegate to any one or more persons the exercise of any functions, powers or discretions arising under the EIP Rules.
36. Except as expressly stated otherwise, the Board has absolute and unfettered discretion to exercise any power or discretion under the EIP. NED Plan 37. Under the NED Plan Rules, a non executive director of Company X may salary sacrifice up to 50% of base Director fees (excluding Committee fees) in order to acquire an entitlement to Shares, subject to conditions specified by the Board (Share Rights). 38. On vesting of the Share Rights, the Participants will receive Restricted Shares. The Participant is able to select the relevant Restriction Period under which the Shares will be subject to dealing restrictions. All Participants in the NED Plan are currently residents of Australia for tax purposes. 39. In order to receive Share Rights, and eventually Restricted Shares, the Participant must satisfy the relevant criteria prescribed in the: • NED Plan Rules; and • relevant Invitations and documentation. 40. The Board is to provide non executive directors of Company X with an Invitation to elect to sacrifice part or all of their fees for service as a director in order to acquire Share Rights (Rule 1).
41. Share Rights will be awarded on a Grant Date, subject to any allocation deferral as determined by the Board (Rules 2(a) and 4). 42. Unless determined otherwise by the Board, Share Rights awarded to each Participant are to be calculated in accordance with the formula at Rule 2(b). 43. Share Rights are non-transferrable and carry no dividends or other rights, other than those set out in the NED Plan Rules (Rule 2(c)). 44. Subject to Board discretion, Share Rights will vest and Participants will be allocated Restricted Shares on their Vesting Date, being the date as set out in the relevant Invitation (Rule 3(a)). 45. The Board has the discretion to source Restricted Shares through on-market acquisitions, issued from the capital of Company X or from allocation from the Trust (Rule 3(b)). However, Share Rights must be satisfied by Shares that have been purchased on-market unless Company X shareholders have approved the Participant's participation in the NED Plan to the extent required under the ASX Listing Rules (Rule 3(c)).
46. The Board also has the discretion to implement any restriction it considers appropriate to enforce the Restriction Period, including the imposition of a holding lock on the Restricted Shares, or by having the Restricted Shares held by the Trust on behalf of the Participant until the end of the Restriction Period (Rule 3(d)). 47. Restricted Shares are non-transferrable until the end of the Restriction Period (Rule 3(e)). 48. Until the Restricted Shares have been allocated to, or on behalf of, the Participant, he or she has no interest in the underlying Shares for which the Share Rights have been granted (Rule 3(f)). 49. Restricted Shares will be quoted on the ASX and rank equally with other Shares (Rule 3(g)). 50. Subject to the terms of the Trust Deed (if applicable) (Rule 3(h)): • the Participant is entitled to receive all dividends and other distributions or benefits payable to the Participant or to the Trustee in respect of the Restricted Shares; • the Participant is entitled to exercise, or to direct the Trustee in writing how to exercise, the voting rights attaching to the Restricted Shares;
• any bonus Shares that are issued with respect to the Restricted Shares will be issued to the Participant, or to the Trustee on his or her behalf, and will be held by the Participant or Trustee as Shares subject to the same terms as the Restricted Shares; and • if rights arise on a rights issue in respect of the Restricted Shares, the Participant may deal with or exercise those rights, or instruct the Trustee in relation to those rights in accordance with the Trust Deed. 51. Restricted Shares cannot be dealt with by the Participant until the earlier of (Rule 5(a)): • the Participant ceasing to be a director of Company X; • the time period set pursuant to the Invitation; • the Board determining that the Restriction Period should end (e.g. in exceptional circumstances); and • 15 years from the Grant Date. 52. Restricted Shares that are held on Trust on behalf of a Participant and cease to be subject to any restriction will be transferred from the Trust to the Participant and cease to be subject to the NED Plan Rules (Rule 5(b)).
53. Unless determined otherwise by the Board, Share Rights granted to a Participant who ceases to hold office and which have not vested will remain onfoot subject to their original terms, and will automatically vest on the relevant Vesting Date (Rule 6(a)). 54. Share Rights do not carry any entitlement to participate in new issues of Shares prior to vesting (Rule 8(a)). 55. Each Participant is responsible for all taxes payable in respect of their Share Rights, Restricted Shares and Shares (as the case may be), in addition to all costs and expenses in relation to the disposal of the Shares (Rule 9(b)). 56. The Board has the absolute discretion to (Rule 9(d)): • amend the NED Plan Rules at any time; • make additional rules for the operation, control and administration of the NED Plan, or any matter incidental to the NED Plan; • resolve all questions of fact or interpretation in connection with the NED Plan; and • determine any matters falling for determination in connection with the NED Plan.
57. If there is any inconsistency between the Rules and an Invitation, the Invitation will prevail (Rule 9(f)). 58. Subdivision 83A-C of the ITAA 1997 applies to the Share Rights (subject to the requirements of the Act) (Rule 9(h)). Company X Limited Employee Share Trust (the Trust) 59. The Amended Trust Deed was amended on XX February 20XX replacing the former Trust Deed. 60. In accordance with the Plan Rules, Company X established the Trust for the benefit of the Participants of the Plans. 61. The Board has nominated the Trust for the purposes of administering the Plans. 62. Company X established the Trust to facilitate opportunities to align the interests of its employees with, and to enable employees to be involved and participate in, the future growth and profitability of Company X, including by administering and holding Shares for the benefit of employees who participate in the EIP. 63. Those Shares acquired under the EIP, in addition to certain Restricted Shares acquired under the NED Plan, will be held on trust on behalf of the Participants subject to the conditions outlined in the Plan Rules.
64. When those conditions are satisfied, the Participants can withdraw the allocated Shares (or the cash equivalent) from the Trust. 65. Company Y is the current Trustee for the Trust. 66. The Trust provides capital management flexibility for Company X, in that the Trust can use contributions made by Company X to either acquire Shares on-market, or subscribe for new Shares. 67. The Trust provides an arm's length vehicle through which Shares can be acquired and held on behalf of Participants. 68. In accordance with clause 2.2 of the Amended Trust Deed, the Trustee: • agrees to comply with the relevant Plan Rules; • subject to its obligations under clause 3, will give consideration to any request given to it by the Board, but will not be bound to act in accordance with any such request; and • agrees that its activities, and exercise of its discretions under the Amended Trust Deed will comply with subsection 130-85(4) of the Tax Act. 69. Shares acquired by the Trustee are held on trust for all Participants as beneficiaries in accordance with the Amended Trust Deed.
70. The Trustee must not charge any fees or charges for administering the Trust unless they are reasonable disbursements charged to the Trust, or amounts charged to Company X (clause 2.3 of the Amended Trust Deed). 71. The activities of the Trustee are limited to managing the employee share schemes (as defined in the Corporations Act 2001 (Cth)) of Company X and the Group (clause 2.4 of the Amended Trust Deed). 72. Upon termination of the Trust, the Trustee must apply the trust assets in whole or part towards the full repayment of any outstanding loan from a Group company, any other trust established for the purposes of the relevant Plan, any trust established for the benefit of Employees or Participants, a superannuation fund or similar established or maintained by Company X, or a charity nominated by Company X (clause 12(b) of the Amended Trust Deed). 73. The Trust Fund comprises of the Settlement Sum and all other property (including but not limited to, money or Shares) that may be paid, transferred or credited (whether by way of income or capital) to the Trust from time to time (clause 1.1 of the Amended Trust Deed).
74. The Trustee will hold the Trust Fund on trust for all the Participants as beneficiaries in accordance with the relevant Plan Rules and the Amended Trust Deed (clause 3.1(a) of the Amended Trust Deed). 75. The Trustee must comply with any direction of the Board to acquire Shares in accordance with the Plan Rules and must apply any amount paid to it by Company X pursuant to the Plan Rules in accordance with any direction of the Board (clause 3.1(c) of the Amended Trust Deed). 76. At the request of the Board, the Trustee will set aside and hold Shares allocated to identified Beneficiaries (i.e. Participants) in accordance with the Plan Rules (each an Allocated Trust Property Beneficiary) or for all the Beneficiaries of the Trust generally (General Trust Property) (clauses 3.1(a) and 3.2(a) of the Amended Trust Deed). 77. Subject to the terms and conditions imposed by the Board and the Plan Rules, the Trustee must transfer the allocated Shares into the name of the Participant (i.e. legal title) (clause 3.2(d) of the Amended Trust Deed).
78. Company X acknowledges that neither it, nor each Group company, is a beneficiary of the Trust, has entitlement to any Shares forming part of the Trust Fund, and has no entitlement to any return of contributions made to the Trust (clause 13 of the Amended Trust Deed). 79. Participants who are Allocated Trust Property Beneficiaries are entitled to receive all distributions, bonus issues and other benefits in relation to the Shares allocated to them (clause 5.1(a)(1) of the Amended Trust Deed). 80. The Trustee may direct Company X to pay dividends and other benefits directly to the Allocated Trust Property Beneficiaries in relation to the Shares allocated to them (clause 5.1(a)(2) of the Amended Trust Deed). 81. Any dividends payable on allocated Shares may be reinvested under Company X's dividend reinvestment plan (if any) where the Trustee is requested to do so by the Allocated Trust Property Beneficiary (clause 5.1(a)(3) of the Amended Trust Deed).
82. If rights arise under a rights issue with respect to Shares held as part of the Allocated Trust Property, the Allocated Trust Property Beneficiary's rights and any new Shares acquired by the Trustee on exercise of the rights, and any proceeds from the sale of those rights will be held by the Trustee on a separate trust as bare trustee for the benefit of that beneficiary (Participant's Bare Trust) (clause 5.1(b) of the Amended Trust Deed). The relevant Allocated Trust Property Beneficiary is the sole beneficiary of the Participant's Bare Trust and is absolutely entitled to the rights and any new Shares acquired as against the Trustee. 83. The balance of any Distributable Income of the Trust to which no Beneficiary is presently entitled immediately prior to the end of that Year of Income will be accumulated by the Trustee and form part of the Trust Fund (clause 5.2(c) of the Amended Trust Deed). 84. The Amended Trust Deed amended clauses 4(d), 4(i) and 4(o) of the Trust Deed. 85. The Trustee did not exercise any of the broad discretionary powers contained in clauses 4(d), 4(i) and 4(o) of the Trust Deed.
Income Tax Assessment Act 1936 Part IVA Income Tax Assessment Act 1936 subsection 170(10AA) Income Tax Assessment Act 1936 section 177D Income Tax Assessment Act 1936 subsection 177D(2) Income Tax Assessment Act 1936 section 177F Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 subsection 8-1(1) Income Tax Assessment Act 1997 subsection 8-1(2) Income Tax Assessment Act 1997 paragraph 8-1(2)(a) Income Tax Assessment Act 1997 Division 83A 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 83A-340 Income Tax Assessment Act 1997 subsection 130-85(4) Income Tax Assessment Act 1997 paragraph 130-85(4)(a) Income Tax Assessment Act 1997
All legislative references are to provisions of the ITAA 1936 or to provisions of the ITAA 1997, unless otherwise indicated. Question 1 Is Company X entitled to claim deductions under section 8-1 of the ITAA 1997 for irretrievable cash contributions made by Company X to the Trustee to acquire shares to satisfy granting ESS interests made under the Plans? 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. The Plans facilitate opportunities to align the interests of employees with, and to enable employees to be involved and participate in, the future growth and profitability of Company X. Upon vesting, the employees will typically receive Shares in Company X. 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 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 Plans. Question 2
Will irretrievable contributions made by Company X to the Trustee to fund the acquisition of ESS interests issued pursuant to the Plans, which are made at a time before Eligible Employees acquire the relevant ESS interests, be deductible to Company X at a time determined by section 83A-210 of the ITAA 1997? 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 (paragraph 15 of Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7)). 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 (see also 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, and subsequently granted to Company X Participants pursuant to the Plans, are ESS interests for the purposes of section 83A-210. Company X's ESS satisfies the definition of an 'employee share scheme' in subsection 83A-10(2) as it is a scheme under which ESS interests are provided to the Participants 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 Company X's 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 intends to only make irretrievable contributions to the Trust to fund the acquisition of Shares once Plan Securities have been granted to a Participant. A Right or Option provided under the Plans is an indeterminate right because that Right or Option entitles the employee to acquire either a Share or cash, to be determined at a future time at the discretion of Company X. Although the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with Shares instead of cash (or when the number of Shares the employee is entitled to receive is determined), the indeterminate right will, pursuant to section 83A-340, be treated as if it had always been an ESS interest.
Section 83A-210 applies equally to contributions made in respect of ESS interests and indeterminate rights. Therefore, an irretrievable cash contribution in respect of an indeterminate right is taken to have been paid at the acquisition time of the ESS interest. If an indeterminate right becomes an ESS interest, deductible contributions made in respect of those rights can be claimed in the income year when the ESS interest is deemed to have been acquired under section 83A-340 (this will be the year in which the indeterminate right was granted to the employee). Once this has been established, such contributions can be matched to ESS interests issued to the employee and where necessary the relevant earlier income year assessments can be amended to allow the deduction (Item 28 of subsection 170(10AA) of the ITAA 1936).
It is important to note that an indeterminate right which is satisfied by the provision of cash never becomes an ESS interest and the deduction in relation to the contribution to the Trust in respect of the provision of that right is permanently deferred. However, where that ESS interest is subsequently issued to another participating employee, this employee becomes the 'ultimate beneficiary', and the deduction is available in the income year that this participating employee acquired this ESS interest. 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 Plans, as provided by section 83A-210 of the ITAA 1997. Question 3
Will irretrievable contributions made by Company X to the Trustee, to fund the acquisition of ESS interests issued pursuant to the Plans, made at a time on or after the Participant acquires the relevant ESS interest, be deductible to Company X in the income year in which the contribution is made under section 8-1 of the ITAA 1997? Detailed reasoning Consistent with the analysis in Question 2 (above), where the contribution is made on or after the acquisition of the relevant ESS interests, irretrievable contributions made by Company X to the Trustee of the Trust to fund the acquisition of ESS interests issued pursuant to the Plans, will be deductible in the income year in which the contribution is made by Company X pursuant to section 8-1. This is because section 83A-210 does not apply to such contributions to modify the timing of the deduction. Question 4
Will the Commissioner make a determination under section 177F of the ITAA 1936 because there is a scheme which satisfies the requirements of section 177D of the ITAA 1936 to deny, in any part or in full, any deduction claimed by Company X for irretrievable contributions made by Company X to the Trustee for the purpose of acquiring shares to satisfy grants of ESS interests under the Plans? 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 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 5 Will the provision of Plan Securities and Share Rights by Company X to the Participants under the Plans constitute a "fringe benefit" under subsection 136(1) of the FBTAA? Detailed reasoning An employer's liability to fringe benefits tax 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 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 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 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 6
Will the irretrievable contributions made by Company X to the Trustee to fund the acquisition of shares issued pursuant to the Plans be a "fringe benefit" within the meaning of that term in subsection 136(1) of the FBTAA? Detailed reasoning An employer's liability to fringe benefits tax 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 Plans are an ESS as a share granted under the 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 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 Plans. Therefore, the irretrievable cash contributions made by Company X to the Trustee of the Trust, to fund the acquisition of shares issued pursuant to the Plans, will not be a fringe benefit. Question 7 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 by the amount of the fringe benefit gained from irretrievable cash contributions made by Company X to the Trustee to fund the acquisition of shares by the Trustee pursuant to the Plans? 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 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 acquisition of shares by the Trustee pursuant to the Plans.