Employee share scheme establishment and amendment costs not tax deductible
07/03/2022
mail.png

Well, this will be a surprise to many boards and their management.

On 23 February, the Australian Commissioner of Taxation released a draft Tax Determination on the deductibility, or otherwise, of expenses incurred by an employer in establishing and operating an employee share scheme (ESS) for the benefit of its employees.

What will come as a surprise/shock to many businesses (and even their advisers!) is that the Commissioner is putting forward his view that:

  • Expenses incurred in establishing the ESS are not deductible to the employer company under section 8-1 of the ITAA 1997 because they are capital in nature.
  • Expenses incurred in amending an ESS are not deductible to the employer company under section 8-1 because they are capital in nature.
  • Ongoing expenses associated with the operation and administration of an ESS are deductible under section 8-1.

So, while the Commissioner maintains the capital expenditure is not immediately deductible, he does state that:

  • Establishment expenses are deductible to the employer company in equal proportions over five years under section 40-880 of the ITAA 1997.
  • Expenses incurred amending an ESS are deductible to the employer company in equal proportions over five years under section 40-880 of the ITAA 1997.

Establishment expenses are outgoings incurred in creating the ESS and include:

  • legal fees incurred in establishing the employee share trust (EST) and the ESS plan rules
  • start-up costs; e.g., trustee company commencement charges, and
  • registration fees with various authorities; e.g., stamp duty and ASIC fees.

Examples of expenses that would be incurred amending an ESS include:

  • legal fees paid amending the EST and ESS plan rules, and
  • regulatory fees and stamp duty paid to authorities.

Examples of ongoing expenses include brokerage fees, audit fees, bank charges, making new offers to employees under an existing ESS and other ongoing administrative expenses.

The Commissioner has provided his rationale supported by various case law citations. Despite this, some may say that he has overlooked the fact that an ESS is nothing more than one component of the total remuneration system established to remunerate employees in the course of carrying on the business. Why, they may say, is introducing an ESS any different to the introduction of a salary sacrifice arrangement for fringe benefits, a new leave policy to provide additional annual leave, a new superannuation trust, a new cash incentive structure to provide cash incentives over 1, 3 and 5 years; and the list can go on. They are all parts of the remuneration framework that compensates employees for the provision of their services.

The Commissioner has sought comments on the draft determination for submission no later than 25 March 2022.

© Guerdon Associates 2022
read more Back to all articles