Edited version of private ruling

Authorisation Number: 1011480183158

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Ruling

Subject: Employee Share Scheme (company aspects)

Question 1

This question was withdrawn

Question 2

Will the irretrievable contributions made by the taxpayer to the trustee of the share plan trust to fund the subscription for, or acquisition of shares in accordance with the relevant trust deed be an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2009

Question 3

Will the irretrievable contributions made by the taxpayer to the trustee of the share plan trust to fund costs incurred in relation to the implementation and on-going administration of the share plan be an allowable deduction under section 8-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2009

Question 4

Will the irretrievable contributions made by the taxpayer to the trustee of the share plan trust to fund the subscription for and/or acquisition of shares in accordance with the trust deed be deductible under section 8-1 of the ITAA 1997 at a time determined by section 83A-210 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2009

Question 5

Will the taxpayer be liable for fringe benefits tax (FBT) to be paid in respect of rights to acquire a beneficial interest in shares provided to employees under the share plan?

Answer

No

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2009

Question 6

Will the taxpayer be liable for FBT to be paid in respect of the irretrievable contributions it makes to the trustee to fund the acquisition of shares in accordance with the trust deed?

Answer

No

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2009

Question 7

Does the Commissioner agree that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) does not apply to deny, in part or in full, any deduction claimed by the taxpayer in relation to the irretrievable contributions made to the trustee of the share plan trust to fund the acquisition of shares in accordance with the trust deed?

Answer

Yes

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The taxpayer is an Australian resident company listed on the Australian Stock Exchange.

The taxpayer is the head company of an Australian tax consolidated group.

The taxpayer has a share plan in place operated via a trust. Participation is offered at the discretion of the board of directors to eligible employees.

A company acts as trustee for the share plan trust (the trustee).

The share plan is operated in accordance with the trust deed and plan rules.

Under the share plan, shares are issued at no cost to eligible employees subject to the satisfaction of certain performance criteria and the meeting of certain conditions.

At the beginning of the performance period the board of directors makes an offer to eligible employees to participate in the plan. Participation in the plan by eligible employees is upon acceptance of the offer. Upon acceptance, eligible employees obtain certain rights under the plan.

The employee performance conditions are measured over a plan cycle being the period over which an employee's performance is measured. If performance criteria are not met by the third anniversary of the plan cycle, the share-offer lapses. If the performance criteria are met by the third anniversary of the plan cycle, the performance shares vest but stay in the trust for another two years until such time that forfeiture conditions are satisfied, at which point the shares are transferred to employees. If the forfeiture conditions are not satisfied during the two year period, the shares are forfeited.

Performance shares are subscribed for off-market, or purchased on-market by the trustee. The trust will then hold those shares on trust on behalf of the participating employees until the forfeiture conditions are met.

During the forfeiture period, the participating employee holds a vested and indefeasible entitlement to income derived from the vested performance shares.

Having regard to offers made to eligible employees, the taxpayer makes contributions of funds to the trust for the purposes of purchasing shares on-market or to subscribe for new shares.

The trust incurs the costs of operating the share plan including on-going administrative expenses. The taxpayer also makes contributions to the trust to fund these expenses.

All funds received by the trust are treated as contributions of trust capital and are not repayable to the taxpayer

Reasons for Decision

Question 1

This question was withdrawn

Question 2

Will the irretrievable contributions made by the taxpayer to the trustee of the share plan trust to fund the subscription for, or acquisition of shares in accordance with the relevant trust deed be an allowable deduction under section 8-1 of the ITAA 1997?

Answer

Yes

Section 8-1 of the ITAA 1997 allows for a deduction from your assessable income to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Subsection 8-1(2) of the ITAA 1997 however, provides that you cannot deduct a loss or outgoing to the extent that it is:

· of capital or of a capital nature; or

· of a private or domestic nature; or

· incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

· a provision of the Act prevents you from deducting it.

Losses or outgoings

The taxpayer must provide the trustee with sufficient funds (contributions) required to enable it to subscribe for, or acquire the relevant shares. The trustee will, acquire, deliver and allocate shares for the benefit of participants provided that the trustee receives sufficient payment to subscribe for or purchase shares. These contributions made to the trustee by the taxpayer will be irretrievable and non-refundable. On this basis, it is concluded that the irretrievable contributions are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997.

Relevant nexus

The taxpayer has stated that the trust was established for the purposes of motivating and retaining key personnel and to create a better alignment between the financial benefits received by senior office holders and shareholders and ultimately increase financial performance.

The documentation provided indicates that the contributions are made to the trustee of the trust solely to enable the trustee to acquire shares for eligible employees of the business.

Accordingly, there is a sufficient nexus between the outgoings (contributions) and the derivation of its assessable income (refer to Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169, Amalgamated Zinc (De Bavay's) Ltd v. Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288).

Capital or revenue

The taxpayer has indicated that from time to time, having regard to offers made or to be made to eligible employees, contributions will be made for the purposes of purchasing performance shares on-market or to subscribe to new shares. The taxpayer has also stated that no large upfront payments were made or are to be made to the trust to provide for several years into the future.

Contributions will be recurring and will be made from time to time as and when shares are to be subscribed for or acquired pursuant to the trust deed. Under the circumstances, it is considered that the contributions are not capital in nature, but rather outgoings incurred by the company in carrying on its business.

In Pridecraft Pty Ltd v. FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; the Court held that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature. This confirms the view expressed in ATO Interpretative Decision ATO ID 2002/1074 and ATO ID 2010/103 that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made to the trustee of its employee share scheme.

Tax consolidation

As a consequence of the operation of the tax consolidation regime and the single entity rule in section 701-1 of the ITAA 1997, wholly owned companies in the taxpayer's tax consolidated group will be treated as part of the taxpayer itself as head company of the tax consolidated group.

Accordingly, any contributions which are made by wholly owned companies in the taxpayer's tax consolidated group to the trustee, will be treated as having been made by the taxpayer itself and accordingly, the taxpayer is entitled to claim a deduction for these amounts as head company of the tax consolidated group.

When the taxpayer makes irretrievable contributions to the trustee of the trust to fund the acquisition of shares in accordance with the trust deed, those contributions will be an allowable deduction to the taxpayer under section 8-1 of the ITAA 1997.

Question 3

Will the irretrievable contributions made by the taxpayer to the trustee of the share plan trust to fund costs incurred in relation to the implementation and on-going administration of the share plan be an allowable deduction under section 8-1 of the ITAA 1997?

Answer

Yes

The employee share scheme has been established as part of the taxpayer's employee remuneration structure. The trust incurs ongoing administrative expenses associated with the costs of operating the share plan. In accordance with the trust deed the taxpayer will pay amounts to the trustee for the meeting of these expenses.

There is sufficient nexus between the costs incurred by the taxpayer in relation to the implementation and on-going administration of the share plan and the carrying on of the taxpayer's business for the purpose of gaining or producing the assessable income.

This view is consistent with ATO ID 2002/961 in which it was decided that such operating costs associated with the administration and implementation of an employee share plan are part of the ordinary employee remuneration costs of a taxpayer.

These costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. Accordingly, the costs are deductible under section 8-1 of the ITAA 1997.

Question 4

Will the irretrievable contributions made by the taxpayer to the trustee of the share plan trust to fund the subscription for and/or acquisition of shares in accordance with the trust deed be deductible under section 8-1 of the ITAA 1997 at a time determined by section 83A-210 of the ITAA 1997?

Answer

Yes

The provision of money to the trustee of an employee share trust by the employer for the purpose of remunerating its employees under an employee share scheme is an outgoing in carrying on the employer's business and is deductible under section 8-1 of the ITAA 1997.

The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.

Section 83A-210 of the ITAA 1997 provides that if:

(a) at a particular time, you provide another entity with money or other property:

(i) under an *arrangement; and

(ii) for the purposes of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an *ESS interest under an *employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and

(b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the *ESS interest;

then, for the purposes of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time.

Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the trustee, and the acquisition of ESS interests (directly or indirectly) by the employee under the relevant share plan in relation to the employee's employment.

Under the share plan, participation in the plan by eligible employees is upon acceptance of an offer. Subject to the satisfaction of certain performance criteria and the meeting of certain conditions, a number of shares are issued at no cost to eligible employees.

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

It is the Commissioner's view that at the time that eligible employees accept the offer to participate in the share plan, the employees (as ultimate beneficiaries of the share trust) actually acquire rights to acquire beneficial interests in the taxpayer's shares. These rights are ESS interests for the purposes of subsection 83A-10(1) of the ITAA 1997 and are ESS interests to which 83A-210 of the ITAA 1997 would apply. This view concurs with the view found in ATO ID 2010/103.

The granting of the rights to acquire beneficial interests in the taxpayer's shares, the provision of the money to the trustee under the arrangement, the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees are all interrelated components of the employee share scheme. All the components of the scheme must be carried out so that the scheme can operate as intended.

As one of those components, the provision of money to the trustee necessarily allows the scheme to proceed.

Consequently, the provision of money to the trustee is considered to be for the purpose of enabling the participating employees, indirectly as part of the employee share scheme, to acquire a specific number of the taxpayer's shares. A deduction for the purchase of shares to satisfy the obligation arising from the rights granted is therefore allowable to the taxpayer in the year in which the money was paid to the trustee, under section 8-1 of the ITAA 1997.

However, if the amount of money provided to the trust is used by the trustee to purchase shares in excess of the ones required to satisfy the rights granted under the share plan in a given income year, Section 83A-210 of the ITAA 1997 will apply and the excess payment will be deductible to the taxpayer in the year of income when the relevant rights are granted to the employees.

Question 5

Will the taxpayer be liable for FBT to be paid in respect of rights to acquire a beneficial interest in shares provided to employees under the share plan?

Answer

No

A liability for FBT arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for a year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided.

A fringe benefit is defined under subsection 136(1) of the FBTAA as a benefit provided by an employer to an employee or associate of an employee in respect of the employment of the employee, unless the benefit is specifically excluded from the definition of a fringe benefit.

Paragraph (h) of section 136(1) of the FBTAA specifically excludes from the definition of a fringe benefit:

A benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which subdivision 83A-B or 83A-C of that Act applies;

An ESS interest in a company is a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company (subsection 83A-10(1) of the ITAA 1997). An employee share scheme is a scheme under which ESS interests in the company are provided to employees (or associates of employees) of the company or subsidiaries of the company, in relation to the employee's employment (subsection 83A-10(2) of the ITAA 1997).

It has been submitted that the taxpayer's employees will receive rights to acquire beneficial interests in shares in respect of their employment upon acceptance of participation in the plan.

The Commissioner accepts that the plan described is an employee share scheme under which relevant ESS interests (being rights to acquire beneficial interests in performance shares) are acquired by employees (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to the employment of those employees. Therefore, the provision of those rights will not be subject to FBT because they are specifically excluded from the definition of fringe benefit.

The shares acquired by the trustee under the share plan to satisfy the rights are also provided to employees under that same employee share scheme.

However, these shares are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 apply (see subsection 83A-20(2) of the ITAA 1997 and paragraph 83A-105(1)(a) of the ITAA 1997). Therefore the providing of these shares will not be specifically excluded from the definition of fringe benefits under paragraph (h) of the definition in subsection 136(1) of the FBTAA.

As stated above, a fringe benefit will only arise under subsection 136(1) of the FBTAA where the benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee.

Under the share plan, the benefit (beneficial interest in performance shares) that arises upon the end of the vesting period is considered to be provided as a result of the employee exercising rights (previously obtained upon acceptance to participate in the share plan).

The situation mentioned above is considered to be analogous to that stated in ATO ID 2003/316 which refers to the case of FC of T v. McArdle 89 ATC 4051;(1988) 19ATR 1901. In that case, an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The Court noted 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.

In the present circumstances, when an employee accepts to participate in the share plan, he or she obtains a right to acquire a beneficial interest in a share and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received, that is, beneficial interest in shares, would be in respect of the exercise of the right, and not in respect of employment.

Therefore, the benefit received does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of' the employment relationship.

Question 6

Will the taxpayer be liable for FBT to be paid in respect of the irretrievable contributions it makes to the trustee to fund the acquisition of shares in accordance with the trust deed?

Answer

No

Subsection 136(1) of the FBTAA defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, but does not include:

(ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997);

An 'employee share trust' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2) of the ITAA 1997) is a trust whose sole activities are:

(a) obtaining shares or rights in a company; and

(b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of:

(i) the company; or

(ii) a subsidiary of the company; and

(c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b).

A trust will satisfy the sole activities test where the activities of the trustee of the trust are limited to managing an employee share plan and the general administration of the trust. This view was expressed in ATO ID 2007/179 where the Commissioner considers that activities that are a necessary function of managing an employee share plan (ESP) and administering a trust will satisfy the sole activities test. Such activities include:

· the opening and operation of a bank account to facilitate the receipt and payment of money;

· the receipt of dividends in respect of shares held by the trustee, and the retention of those dividends or their distribution to employee beneficiaries of the trust (unless to a default beneficiary - see below);

· dealing with shares forfeited under an ESP including the sale of forfeited shares;

· the transfer of shares to employee beneficiaries or the transfer to them of the proceeds from the sale of those shares on their behalf, at the time an employee calls on the trustee to either transfer or sell the shares; and

· the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries.

Activities that the Commissioner considers will not satisfy the sole activities test include:

· any activities that are not a necessary function of managing an ESP or administering a trust; and

· any activities which result in employees being provided with additional benefits (for example, the provision of a loan to acquire shares).

The activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997. Its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the trustee of the share plan trust from being a fringe benefit.

Accordingly, the taxpayer will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the trustee of the share plan trust to fund the acquisition of shares in accordance with the trust deed.

Question 7

Does the Commissioner agree that Part IVA of the ITAA 1936 does not apply to deny, in part or in full, any deduction claimed by the taxpayer in relation to the irretrievable contributions made to the trustee of the share plan trust to fund the acquisition of shares in accordance with the trust deed?

Answer

Yes

Law Administration Practice Statement PS LA 2005/24 provides practical guidance on the application of Part IVA of the ITAA 1936 and other General Anti-Avoidance Rules. Before the Commissioner can exercise the discretion in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA must be satisfied. These requirements are:

(i) a 'tax benefit', as identified in section 177C, was or would, but for subsection 177F(1), have been obtained;

(ii) the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and

(iii) having regard to section 177D, the scheme is one to which Part IVA applies.

The scheme

The definition of scheme in subsection 177A(1) of the ITAA 1936 states:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct;

The above definition is sufficiently wide to cover the proposed arrangement under the relevant share plan.

Tax benefit

The definition of 'tax benefit' is found in subsection 177C(1) of the ITAA 1936. The relevant paragraph is:

Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: …

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out;

In order to determine the tax benefit that would be derived by the taxpayer, it is necessary to examine possible counterfactuals. This means, other schemes the taxpayer might reasonably have been expected to enter into to achieve its objectives in relation to employee remuneration.

Some possible counterfactuals are cash bonuses, superannuation contributions, the provision of fringe benefits or any other form of employee equity plan.

If the scheme were not entered into, that is, the trust was not used and the taxpayer simply chose to issue new shares, the taxpayer may not receive a tax deduction for this amount. However it is noted that the taxpayer could have chosen any of the abovementioned alternatives all of which would have entitled the taxpayer to a deduction.

A comparison between these counterfactuals or alternative forms of remuneration and the proposed scheme would likely reveal no tax benefit because the deductible amounts under all of them would be reasonably similar from the taxpayer's tax perspective.

However, there is at least one other reasonable counterfactual to the scheme proposed. If the taxpayer were to issue new shares, it would not be entitled to any deduction unless section 83A-205 of the ITAA 1997 was satisfied. This provision requires that:

· The taxpayer must have provided an ESS interest to an individual under an employee share scheme;

· The taxpayer must have done this as the individual's employer (or as the holding company of the employer);

· With the exception of paragraph 83A-35(2)(b) of the ITAA 1997, section 83A-35 must have applied to reduce the amount included in that individual's assessable income under subsection 83A-25(1).

If the shares did meet these conditions, the taxpayer would be entitled to a deduction equal to the amount of the reduction allowable to the individual under section 83A-35 of the ITAA 1997 (a maximum deduction of $1000).

By contrast, the use of the share plan trust arrangement allows the taxpayer, subject to the requirements of sections 8-1 and section 83A-210 of the ITAA 1997, to claim a deduction for the full amount of the contributions it makes to the employee share trust. It is probable that this amount would exceed that which would be allowable under section 83A-205 of the ITAA 1997 in the counterfactual above. Therefore, to the extent of any increased deductions because of the trust arrangement, the taxpayer obtains a tax benefit.

While, it is unlikely that the applicant would choose any other incentive plan that did not give rise to an allowable deduction (and therefore there would not be the necessary tax benefit), the analysis below proceeds on the assumption that the Commissioner would in fact be able to identify a relevant tax benefit.

Paragraph 177D(b) of the ITAA 1936

Paragraph 177D(b) of the ITAA 1936 sets out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit:

(i) the manner in which the scheme was entered into or carried out;

(ii) the form and substance of the scheme;

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),

Subsection 177A(5) of the ITAA 1936 requires the purpose to be the dominant purpose.

(i) The manner of the scheme

In considering whether Part IVA applies or not, the necessary comparison to be made in relation to the factors listed in paragraph 177D(b) of the ITAA 1936 is between the scheme as proposed and the relevant counterfactual.

The inclusion of the share trust in the scheme does give rise to a tax benefit in comparison to the other counterfactual scenarios. The taxpayer however, maintains that the use of the share trust provides other forms of benefits such as being the most practical way of acquiring and warehousing shares and accumulating dividend income. The trust has a fiduciary obligation to act in the best interest of the participating employees. Further, it is an accepted commercial practice to use a trust arrangement to administer an employee share scheme.

The taxpayer noted that the arrangement was not established close to the end of the financial year nor with a large cash upfront payment intended to provide for the trust's operations for several years into the future, as happened in Pridecraft Pty Ltd v. FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210.

The above submission suggests that the taxpayer intends to fund the share trust on a recurring basis, as required, to satisfy the provision of shares in accordance with the terms of the plan rules.

It is accepted that the share plan trust provides benefits to the operation of the scheme that would not be available if the shares were provided directly by the taxpayer in the relevant counterfactual.

(ii) The form and substance

The substance of the scheme is the provision of remuneration in the form of shares to eligible participants in the employee share scheme. It takes the form of payments by the taxpayer to the trustee of the share plan trust which acquires the shares and transfers them to participants subject to the satisfaction of certain criteria.

While existence of the share plan confers a tax benefit to the taxpayer, it cannot be concluded that it is the only way that a tax benefit could be ascertained by the taxpayer in relation to employee remuneration.

(iii) The timing of the scheme

As noted above, the scheme has not been established at a time to provide a substantial year-end deduction to the taxpayer nor with a contribution sufficiently large to fund the trust for several years, but by recurring contributions. There is nothing in this factor to suggest a dominant purpose of seeking to obtain a tax benefit in relation to the scheme.

(iv) The result of the scheme

The result of the share plan scheme is to provide the taxpayer with allowable income tax deductions for the contributions it makes to the share plan trust. It is noted though, that the contributions are irretrievable and reflect genuine revenue outgoing on the part of taxpayer to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances. However, when the trustee opts for subscription of shares, the irretrievable contribution goes in fact back to the taxpayer for the relevant issue of shares.

(v) Any change in the financial position of the taxpayer

As noted above, the taxpayer makes irretrievable contributions to the share plan trust and those contributions constitute a real expense with the result that the taxpayer's financial position is changed to that extent. It is arguable though, that the quantum of the deductions is higher with a trust as part of the scheme than would be the case if the taxpayer provided shares to participants directly. It is noted, that when shares are subscribed to by the trustee, the irretrievable contributions will actually go back to the company in exchange for the issue of shares and basically reverse the outgoing. In normal circumstances a company would not get an allowable deduction for the issue of shares.

(vi) Any change in the financial position of other entities or persons

The contributions by the taxpayer to the trustee will form part of the corpus of the trust and must be dealt with by the trustee in accordance with the terms of the trust deed, that is, for the acquisition of shares to provide to participants in the share plan. The taxpayer is not a beneficiary of the trust and its contributions cannot be returned to it in any form except where the trustee acquires shares directly from the taxpayer by subscribing for new shares at market value. Therefore, the contributions made by the taxpayer amount to a real change to the financial position of the trustee. The financial position of participants in the schemes will also undergo a real change.

(vii) Any other consequence

Not relevant to this scheme.

(viii) The nature of any connection between the taxpayer and any other persons

The relationship between the taxpayer and the participating employees in the scheme is one of employer / employee. The trustee is independent and is under a fiduciary obligation to act in the interests of the employees who participate in the share plan. The contributions made by the taxpayer to the trustee are commensurate with its stated aim of providing the participants with competitive remuneration amounts so as to retain them as employees.

Conclusion - the purpose of the scheme

A consideration of all the factors referred to in paragraph 177D(b) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the taxpayer's employees who participate in the scheme in a form that promotes the company's business objectives, rather than to obtain a tax benefit. Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by the taxpayer in relation to irretrievable contributions made to fund the acquisition of shares in accordance with the trust deed.

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