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ATO Looks At Discretionary Option Plan Arrangements

by Mary Swire,, Hong Kong

10 December 2009

The Australian Taxation Office (ATO) has warned taxpayers to be wary of arrangements that attempt to artificially create up-front deductions for employment costs through discretionary option arrangements.

Under these arrangements, it was explained, an employer usually makes an extra cash contribution to a trustee of a trust, in respect of the acquisition of several discretionary options for employees, and claims this amount as a tax deduction.

The trust then pays the cash contribution back to the employer as consideration for acquiring several such options from the employer. The acquisition price of the option is determined in accordance with a valuation methodology adopted by the employer.

In that way, the employer attempts to artificially create an up-front tax deduction by issuing a discretionary option to employees utilizing the trust and the round robin cash-flows. The employer has discretion as to whether the employees will receive shares or cash from the arrangement and any tax for employees will be deferred until a later income year.

The Tax Commissioner, Michael D’Ascenzo, said the ATO is looking closely at these arrangements. “These transactions may not comply with tax laws and anti avoidance rules may apply,” he said.

“Employers involved in these arrangements use a trust and round robin cash-flows to artificially create up-front tax deductions, while also allowing employees to defer tax to a later income year,” he continued. “People involved in or considering these arrangements should be aware that they face close examination by the Tax Office.”

The ATO announced that those taxpayers who have participated in these types of arrangements, and who contact the ATO before they are contacted for an audit, will be entitled to a reduction in any penalties that may apply.

A comprehensive report in our Intelligence Report series devoted to a study of the ways in which expatriate executives and employees can optimise their remuneration and taxation situations in a number of the main English-speaking countries is available in the Lowtax Library at and a description of the report can be seen at

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