ATO Interpretative Decision
ATO ID 2010/219
Fringe Benefits Tax
Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share schemeFOI status: may be released/
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Issue
Will a share provided by a company to an employee to satisfy the exercise of a right, being a right to acquire a share of the company granted under an employee share scheme, be a 'fringe benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?
Decision
No. The provision of a share to satisfy the exercise of a right granted under an employee share scheme is not a fringe benefit within the meaning of the definition in subsection 136(1) of the FBTAA.
Facts
A company grants rights to its employees under an employee share scheme for nil consideration. The rights entitle the employees to acquire shares in the company.
The rights are subject to vesting conditions.
When the vesting conditions are satisfied, employees can exercise their rights to acquire the shares at no cost. Upon exercise, the company allocates the shares to the employees.
Rights acquired by the employees under the employee share scheme are assessed under Division 83A of the Income Tax Assessment Act 1997.
Reasons for Decision
In order for a benefit to be a 'fringe benefit' in accordance with the definition in subsection 136(1) of the FBTAA, the benefit must be provided to an employee or an associate of the employee in respect of the employment of the employee.
Thus in order for the shares issued in respect of the rights to be treated as a fringe benefit they must be provided 'in respect of' the employee's employment. Whilst the expression 'in respect of' has no fixed meaning, it has been considered by the courts in various statutory contexts.
In J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22, the full Federal Court in examining its meaning in relation to Fringe Benefits Tax (FBT) noted that:
... what must be established is whether there is a sufficient or material, rather than a causal connection or relationship between the benefit and the employment...
The Court also suggested that it would be useful to ask 'whether the benefit is a product or incident of the employment'.
In FC of T v. McArdle (1988) 89 ATC 4051; (1988) 19 ATR 1901, an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The Court ruled that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.
When rights granted under an employee share scheme are exercised, and shares are allocated by the employer, it is considered that the benefit that arises comes as a consequence of the employee exercising the rights previously obtained under the scheme, and not in respect of employment.
Therefore, the benefit gained by the employee upon the exercise of rights granted under the employee share scheme does not give rise to a fringe benefit, as no benefit has been provided to the employee in respect of an employment relationship.
Date of decision: 23 November 2010Year of income: Year ended 30 June 2010
Legislative References:
Fringe Benefits Tax Assessment Act 1986
subsection 136(1)
Division 83A
Case References:
J & G Knowles & Associates Pty Ltd v Federal Commissoner of Taxation
(2000) 96 FCR 402
2000 ATC 4151
(2000) 44 ATR 22
(1988) 89 ATC 4051
(1988) 19ATR 1901
Keywords
Fringe benefits tax
Fringe benefits
In respect of employment
Employee share schemes & options
Date reviewed: 3 October 2017
ISSN: 1445-2782
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