ATO issues Taxation Determination 2022/8.

Offering shares or rights to shares as part of the remuneration package of employees is routine within the market, but there are a range of costs that are incurred in establishing and operating these arrangements. Furthermore, the use of an Employee Share Trust (EST) to assist in the administration of an employee equity arrangement is common practice (especially for listed companies). 

There has been debate as to what associated costs can be deductible to the employer and whether some of the expenses are more capital in nature.

The Australian Taxation Office (ATO) has recently provided guidance on the deductibility of costs associated with the establishment and ongoing administration of an EST or Employee Share Scheme (ESS), by issuing Taxation Determination 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an 'employee share scheme' (TD 2022/8).

Establishment expenses

Expenses incurred in establishing an ESS or EST are not deductible to the employer under the general deductibility provisions on the basis they are capital in nature.

However, the establishment expenses may qualify as “blackhole expenditure”. This means they are deductible in equal proportions over 5 years to the extent that the business is carried on for a taxable purpose.

Establishment expenses include:

• Legal fees incurred in establishing the EST and ESS plan rules;

• Start-up costs; for example, trustee company commencement charges, and;

• Registration fees with various authorities; for example, stamp duty and ASIC fees.

Amendment expenses

Similarly, one-off expenses incurred in amending an ESS or EST are considered capital in nature and may qualify as blackhole expenditure. These include:

• Legal fees paid to amend the EST and ESS plan rules, and

• Regulatory fees and stamp duty paid to authorities.

Ongoing expenses

Ongoing and recurring expenses associated with the administration of an EST or ESS are not considered capital in nature and will remain deductible under the general deductibility provisions in section 8-1. 

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.

Date of effect

This determination applies both before and after its date of issue (6 April 2022).  This may result in a need for companies to review their past practices in terms of deduction claims for ESTs and ESS, which in some cases could require amendments to income tax returns where past practices differ from technical positions set out by the ATO.

If you have any questions about this new ATO guidance please contact one of our PwC Reward Advisory Services specialists.