Employee Share Schemes: Deductibility of expenses
While draft ATO determination rules out immediate tax deductions for fees incurred to establish an employee share scheme, ongoing associated expenses may remain deductible.
On 23 February 2022, the Commissioner released Draft Determination TD 2022/D2, addressing the deductibility of expenses incurred when establishing and administering an Employee Share Scheme (ESS).
The Commissioner has stated expenses incurred from the establishment and/or amendment of an Employee Share Scheme (ESS) are not deductible under section 8-1 of the ITAA 1997 as they are viewed as capital in nature. This may be seen as a departure from a general view that employee costs are more typically revenue in nature.
Expenses not deductible
Establishment fees can include:
- Legal fees incurred from establishing an Employee Share Trust (EST) or ESS plan rules
- Start-up costs, such as commencement charges for a trustee company, or
- Registration fees with authorities such as stamp duty or ASIC fees.
Amendment fees can include:
- Legal fees paid to amend either the EST or ESS plan rules, or
- Regulatory fees and stamp duty paid to authorities.
To the extent that the business is carried on for a taxable purpose, both establishment and amendment fees would be deductible to the employer company in equal proportions over 5 years under section 40-880 of the ITAA 1997.
Section 40-880; commonly referred to as ‘black-hole expenditure’ provides a deduction for certain capital expenditure of a business on a straight-line basis over a 5-year period. Section 40-880 only applies to capital costs incurred in relation to a past, present, or proposed business that is not otherwise dealt with under other income tax provisions.
The Commissioner did confirm however, that the ongoing expenses associated with the administration of an ESS should be deductible under section 8-1 of the ITAA 1997.
Ongoing expenses include:
- brokerage fees
- audit fees
- bank charges
- making new offers to employees under an existing ESS, or
- other ongoing administrative expenses.
Fees relating to annual ESS reporting should continue to be deductible, however questions must now be raised as to whether the ATO’s view will impact on broader issues such as the tax treatment of contributions to employee share trusts and expenses they incur.
How SW can assist
Once TD 2022/D2 is finalised by the ATO, it is important to note the determination will apply both prospectively and retrospectively.
If you want to discuss any of the aspects of this draft determination or concerns regarding your existing or future ESS, please contact your SW advisor or one of our experts.