Edited version of private ruling

Authorisation Number: 1011551099681

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Ruling

Subject: Employee Share Scheme

Issue 1:

Question:

Will X Co obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the cash contributions made by X Co (or any of the subsidiary members of the X Co tax consolidated group) to the trustee of the tax consolidated group's employee share plan trust (trustee ), in its capacity as trustee of the tax consolidated group's employee share plan trust (EST), to fund the acquisition of shares in X Co in satisfaction of X Co's obligations under the X Co equity plans?

Advice/Answers:

Yes.

Issue 2:

Question:

Will X Co obtain income tax deductions, pursuant to sections 8-1 or 25-5 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the EST?

Advice/Answers:

Yes.

Issue 3:

Question:

Are the irretrievable cash contributions made by a X Co (or any subsidiary member of the X Co tax consolidated group) to the trustee of the EST to fund the acquisition of X Co shares in satisfaction of its obligations under the X Co equity plans deductible to X Co when the contribution is made or at the time the relevant employee acquires an interest in X Co, whichever is later?

Advice/Answers:

Yes.

Issue 4:

Question:

If the trustee of the EST satisfies X Co's obligations under the relevant X Co equity plans by subscribing for new shares in X Co, will the subscription proceeds be included in the assessable income of X Co under section 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997?

Advice/Answers:

No.

Issue 5:

Question:

If X Co's obligations under the X Co equity plans are satisfied by the trustee of the EST subscribing for new shares in X Co, will the subscription proceeds be disregarded under subsection 707-325(5) of the ITAA 1997 because it is in association with the acquisition of a share in a company in relation to which the conditions in subsection 703-35(5) of the ITAA 1997 are met?

Advice/Answers:

Yes.

Issue 6:

Question:

If the trustee of the EST satisfies X Co's obligations under the X Co equity plans by subscribing for new shares in X Co or by acquiring shares on market, will the share capital account of X Co become tainted under Division 197 of the ITAA 1997?

Advice/Answers:

No.

Issue 7:

Question:

Will the Commissioner make a determination that Part IVA of the ITAA 1936 applies to any aspect of the arrangement(s) described in this ruling to deny, in part or in full, any deduction claimed by X Co in respect of the cash contributions made by X Co or any of its subsidiary members to the trustee of the EST to fund the subscription for or acquisition of X Co shares on-market by the EST?

Advice/Answers:

No.

Issue 8:

Question:

Is the provision of shares under the X Co equity plans to employees of X Co or any other subsidiary member of the X Co tax consolidated group a 'fringe benefit' within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Advice/Answers:

No.

Issue 9:

Question:

Will cash contributions made by X Co or a subsidiary member of the X Co tax consolidated group to the trustee of the EST to fund the subscription for, or acquisition on market of, X Co shares be a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA?

Advice/Answers:

No.

Issue 10:

Question:

Will the Commissioner seek to apply section 67 of the FBTAA to any of the X Co equity plans or the EST arrangement?

Advice/Answers:

No.

This ruling applies for the following periods:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

X Co is an Australian resident company.

To attract and retain high quality employees X Co provides employees with an opportunity to acquire an equity interest in X Co and earn significant rewards based on creating shareholder value.

X Co has implemented two equity based compensation plans which are currently in use, being the employee share plan (ESP) and the executive incentive plan (EIP), together the X Co equity plans.

The ESP

The key features of the ESP are as follows:

· All full time and permanent part-time employees (eligible employees) of the X Co group (which includes X Co and its wholly owned subsidiaries), excluding directors, are eligible to participate in the plan.

· Eligible employees are invited to apply to acquire $Y or $Z worth of shares per annum through a reduction to their salary and wages (that is, under a salary sacrifice arrangement).

· Shares with a market value up to the amount of the reduction in the salary or wages of the relevant employee will be issued to the relevant employee every three months. Under the ESP rules, each participant will have a legal and beneficial interest in the shares allocated to them. However the shares can not be disposed of until they vest.

· Vesting occurs in the following circumstances:

i. three years after the shares are issued to the employee;

ii. at the time the employee ceases employment; or

iii. where the board determines that there has been significant change to X Co's structure or control.

· Until the shares have vested, employees will be restricted from disposing of their shares. However, participants will have the same voting and dividend rights in respect of shares under the ESP as any other shareholder.

The EIP

The EIP was introduced to incentivise, retain and reward key employees.

X Co established the X Co executive incentive plan trust (the EST) to facilitate the provision of shares in X Co under the EIP to Australian employees and directors of X Co (and certain other entities that form part of the X Co tax consolidated group).

The trust deed appointed the trustee, an unrelated entity, as trustee of the EST.

Under the EIP, senior executives were entitled to an award calculated over a performance period (the performance period), subject to a maximum dollar limit.

At the end of the performance period, subject to certain performance conditions being satisfied, the award is calculated (the earned award).

The vesting of the earned award is subject to certain conditions and is payable in equal instalments over a X year period (the service period).

If the relevant conditions are satisfied during the service period, payments will be made on pre-determined dates (each a payment date). The vesting of the earned award is subject to:

· the participant's continuous employment with the X Co Group through to the end of the performance period and the service period except in certain situations as provided in the EIP; and

· meeting a minimum specified annual performance rating during the service period

The amount of a participant's earned award may be paid in (i) cash, (ii) ordinary shares (unrestricted shares) or (iii) restricted shares at the discretion of the remuneration committee of the X Co board of directors (committee).

If any portion of the amount payable on a payment date is to be paid in unrestricted shares, the number of whole shares issued shall be determined on the basis of the fair market value of ordinary shares on such payment date.

Assumptions

Each X Co equity plan and the EST are administered in accordance with their terms.

X Co has elected to form a tax consolidated group prior to the establishment of the EST.

At the 'pre-Division 83A time' (the time occurring just before Schedule 1 to the Tax Laws Amendment (2009 Budget Measures No 2) Act 2009 commenced), no participant under the EIP had made an election under the former section 139E of the Income Tax Assessment Act 1936 (ITAA 1936) (so that subsection 139B(3) of the ITAA 1936 applied in relation to the interest, being the rights of each participant under the EIP).

The cessation time mentioned in subsection 139B(3) of the ITAA 1936, as in force at the pre-Division 83A time, for the interest constituted by the rights of participants under the EIP did not occur before 1 July 2009.

Awards under the ESP that are contemplated in the ruling will all occur on or after 1 July 2009.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Subsection 51(1)

Income Tax Assessment Act 1936 Subsection 139B(3)

Income Tax Assessment Act 1936 Section 139E

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Subsection 177A(1)

Income Tax Assessment Act 1936 Paragraph 177D (b)

Income Tax Assessment Act 1936 Subsection 177A(5)

Income Tax Assessment Act 1936 Subsection 177F (1)

Income Tax Assessment Act 1936 Subsection 177C (1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 8-1(1)

Income Tax Assessment Act 1997 Subsection 8-1(2)

Income Tax Assessment Act 1997 Section 20-10

Income Tax Assessment Act 1997 Section 20-20

Income Tax Assessment Act 1997 Section 20-30

Income Tax Assessment Act 1997 Section 25-5

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Subsection 83A-10(1)

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Section 83A-20

Income Tax Assessment Act 1997 Subsection 83A-20(1)

Income Tax Assessment Act 1997 Subsection 83A-25(1)

Income Tax Assessment Act 1997 Section 83A-35

Income Tax Assessment Act 1997 Paragraph 83A-35(2)(b)

Income Tax Assessment Act 1997 Subsection 83A-35(3)

Income Tax Assessment Act 1997 Subsection 83A-35(4)

Income Tax Assessment Act 1997 Subsection 83A-35(5)

Income Tax Assessment Act 1997 Subsection 83A-35(9)

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Section 83A-105(1)

Income Tax Assessment Act 1997 Paragraph 83A-105(1)(a)

Income Tax Assessment Act 1997 Paragraph 83A-105(1)(b)

Income Tax Assessment Act 1997 Subsection 83A-105(2)

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Subsection 104-35(1)

Income Tax Assessment Act 1997 Subsection 104-35(5)

Income Tax Assessment Act 1997 Subsection 104-155(1)

Income Tax Assessment Act 1997 Subsection 104-155(5)

Income Tax Assessment Act 1997 Subsection 130-85(4)

Income Tax Assessment Act 1997 Paragraph130-85(4)(c)

Income Tax Assessment Act 1997 Section 130-90

Income Tax Assessment Act 1997 Division 197

Income Tax Assessment Act 1997 Subsection 701-1(1)

Income Tax Assessment Act 1997 Subsection 703-35(5)

Income Tax Assessment Act 1997 Division 707

Income Tax Assessment Act 1997 Subsection 707-325(5)

Income Tax Assessment Act 1997 Paragraph 707-325(5)(b)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Fringe Benefits Tax Assessment Act 1986 Section 40

Fringe Benefits Tax Assessment Act 1986 Section 66

Fringe Benefits Tax Assessment Act 1986 Section 67

Fringe Benefits Tax Assessment Act 1986 Subsection 67(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 67(2)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(ha)

Tax Laws Amendment (2009 Measures No. 2) Act 2009 Schedule 1

Tax Laws Amendment (2006 Measures No. 3) Act 2006

Reasons for decision

Question 1:

Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. Broadly, the provision provides an entitlement to a deduction from assessable income for any loss or outgoing, 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. However, subsection 8-1(2) of the ITAA 1997 (so far as it is relevant) prevents such a deduction to the extent that it is a loss or outgoing of capital, or of a capital nature.

Losses or outgoings

Pursuant to the trust deed, X Co must provide the trustee with all the funds (contributions) required to enable the trustee to subscribe for, or acquire, shares in X Co. The payments made by X Co, or a subsidiary member of the X Co tax consolidated group, are to be used to purchase shares in X Co for employees in order for X Co to meet its obligations under any of its employee equity plans. In addition, payments may also be used by the trustee of the EST to fund any other incidental costs associated with the cost of acquisition of shares and/or administration of the EST. The amounts are not refundable and are permanent in nature.

On this basis, it is concluded that the irretrievable contributions made by X Co are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997.

Relevant nexus

The purpose of X Co in establishing and making irretrievable contributions to the trustee of the EST is to provide benefits to certain eligible employees and executives in the form of shares. Contributions are made to the trustee of the EST solely to enable the trustee to acquire shares for eligible employees of the business.

Accordingly, there is a sufficient nexus between the outgoings (X Co's contributions to the trustee of the EST) and the derivation of its assessable income (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, W Nevill & Co Ltd v. Federal Commissioner of Taxation (1937) 56 CLR 290; (1937) 4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin NL v. FCT (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 6 AITR 379; (1956) 11 ATD 147).

Capital or Revenue

X Co's contributions will be recurring, made from time to time as and when X Co shares are to be subscribed for or acquired pursuant to the trust deed. Therefore, to this end, it is concluded that the contributions are not capital in nature, but rather outgoings incurred by the company in carrying on its business. In support of this conclusion, the Full Federal Court held in Pridecraft Pty Ltd v. FC of T; FC of T v Spotlight Stores Pty Ltd (2005) FCAFC 339; 2005 ATC 4001; (2005) 58 ATR 210 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 (it should be noted that although the Full Federal Court held that the payments were deductible under subsection 51(1) of the ITAA 1936, it found (for various reasons not relevant to this Ruling) that Part IVA of the ITAA 1936 applied to cancel the tax benefit arising from the deduction.). This decision is in accordance with the view expressed in ATO Interpretative Decision ATO ID 2002/1074 in which a company was entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made to the trustee of its employee share scheme.

This view is also consistent with ATOID 2010/103 where 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 was found to be an outgoing in carrying on the employer's business and was deductible under section 8-1 of the ITAA 1997.

Finally, nothing in the facts suggests that the contributions are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936).

Single entity rule

The single entity rule in subsection 701-1(1) of the ITAA 1997 does not affect the answer to the question of whether the contributions made by X Co to the trustee of the EST are deductible under section 8-1 of the ITAA 1997.

On the basis of the facts and circumstances that form part of this ruling, the operation of the single entity rule cannot affect the fundamental questions that will determine deductibility. Those questions are:

·were the amounts contributed held for the exclusive benefit of entities who are not members of the X Co consolidated group, and

·to what extent are the contributions incurred in gaining or producing X Co's assessable income not of a capital, private or domestic nature.

Therefore, when X Co makes irretrievable cash contributions to the trustee of the EST to fund the acquisition of X Co shares in accordance with the trust deed, those contributions will be an allowable deduction to X Co under section 8-1 of the ITAA 1997.

Question 2:

The trust deed will require X Co to fund the trustee of the EST for costs associated with the implementation and on-going administration of the EST.

Such costs are likely to also include brokerage costs incurred by the trustee of the EST (for example, where the trustee is directed by X Co to acquire shares on-market), as well as other expenses incurred by the trustee such as the annual audit of the financial statements of the EST.

The costs incurred by X Co in relation to the implementation and on-going administration of the EST are deductible under section 8-1 of the ITAA 1997 as either:

· costs incurred in gaining or producing the assessable income of X Co; or alternatively

· costs necessarily incurred in carrying on X Co's business for the purpose of gaining or producing the assessable income of X Co.

The decision that the costs incurred by X Co are deductible under section 8-1 of the ITAA 1997 is consistent with ATO Interpretative Decision ATO ID 2002/961 in which it was decided that similar costs were part of the ordinary employee remuneration costs of a taxpayer.

Consistent with the analysis in question 2 (above), the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses, and are therefore deductible under section 8-1 of the ITAA 1997.

Furthermore, costs incurred by X Co for the provision of tax advice are deductible under section 25-5 of the ITAA 1997.

Question 3:

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 purpose 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 purpose 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.

An 'ESS interest' and 'employee share scheme' are defined in section 83A-10 of the ITAA 1997 to mean:

(1) An ESS interest, in a company, is a beneficial interest in:

(a) a share in the company; or

(b) a right to acquire a beneficial interest in a share in the company.

(2) An employee share scheme is a scheme under which ESS interests in a company are provided to employees or associates of employees, (including past or prospective employees) of:

(a) the company; or

(b) subsidiaries of the company;

in relation to the employees' employment.

EIP

The earned award calculated under the EIP is payable in equal instalments over the service period. The instalments may be paid in cash, restricted shares or unrestricted shares. Where the instalment is paid in shares (restricted or unrestricted), the relevant employee will be taken to have acquired a right to acquire a beneficial interest in a share in X Co which will constitute an ESS interest acquired under an employee share scheme for the purposes of section 83A-10 of the ITAA 1997. Therefore, paragraph 83A-210(a) of the ITAA 1997 will be satisfied.

Therefore, pursuant to paragraph 83A-210(b) of the ITAA 1997, if the contribution to the trustee is made prior to the relevant employee acquiring a right to acquire a beneficial interest in a share in X Co, the deduction for the contribution will only be allowed in the income year in which the relevant employee acquired a right to acquire a beneficial interest in a share in X Co.

Where the contribution to the trustee is made after the time the relevant employee acquires a right to acquire a beneficial interest in a share in X Co, the contribution will be deductible at the time the contribution is made to the EST. In coming to our decision, we have taken into consideration ATO Interpretative Decision ATO ID 2010/103.

ESP

Under the ESP rules, each participant will have a legal and beneficial interest in the X Co shares when the relevant shares are allocated to them. At this point in time, the relevant employees will have acquired an ESS interest (being the shares) under an employee share scheme for the purposes of section 83A-10 of the ITAA 1997. They will not have any interest in those shares prior to the time of allocation.

Accordingly, where contributions are made to the EST in anticipation of shares being allocated to certain employees in the future, paragraph 83A-210(b) of the ITAA 1997 will apply. This means that X Co will only be able to claim a deduction for the contribution in the income year in which the relevant employees are allocated their shares under the ESP rules.

Question 4:

Section 6-5 of the ITAA 1997 Income according to ordinary concepts (ordinary income)

If you are an Australian resident, your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the ITAA 1997).

Income according to ordinary concepts is not defined in the ITAA 1997. However, there is a substantial body of case law which discusses factors which indicate whether an amount has the character of income according to ordinary concepts.

Dixon J in Sun Newspapers Limited and Associated Newspapers Limited v. Federal Commissioner of Taxation (1938) 61 CLR 337 (Sun Newspapers) outlined the three matters to be considered in determining whether a payment is on capital or revenue account, as follows:

· the character of the advantage sought by the payment

· the way it is to be used or enjoyed; and

· the means adopted to obtain it.

The character of the advantage sought by the payment

As stated previously in this ruling, the purpose of X Co in establishing and funding the X Co equity plans is to ensure they get the right people to join and stay committed to the group to ensure its future success. A general aim of X Co's employee share schemes is to align the economic interests of employees with those of X Co's shareholders. Therefore, the character of the advantage sought is one of reward and retention of the human resources of the business, as a contribution to its long term success, which distinguishes it as capital in nature.

The way it is to be used or enjoyed

The receipt of the subscription price will be accounted for as an addition to the share capital of X Co in its books and records. While this treatment of the subscription price is not decisive in itself, it is indicative of X Co's treatment of the receipt and consistent with accounting principles.

The means adopted to obtain it

The payment is a premium or outlay to secure a share(s) in the company as a means to structure the business to secure and enhance its long-term profitability, which when considered with the two preceding matters - the character of the advantage sought and the way it is to be used - makes a persuasive case for the subscriptions for the shares being on capital account, and not ordinary income under section 6-5 of the ITAA 1997.

Section 20-20 of the ITAA 1997 Assessable recoupments

Division 20 of the ITAA 1997 deals with amounts included to reverse the effect of past deductions and section 20-20 of the ITAA 1997 with assessable recoupments, which are described (at section 20-10 of the ITAA 1997) as 'an amount you receive by way of insurance, indemnity or other recoupment'.

The subscriptions received by X Co from the trustee of the EST are for shares and are integral to the arrangement whereby 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 X Co equity plans. The character of the subscriptions paid to X Co for shares is not one of 'insurance, indemnity or other recoupment'.

Also, the table at section 20-30 of the ITAA 1997 which shows the deductions for which recoupments are assessable does not include provision for subscriptions for funding an EST to acquire shares for employees.

Division 104 CGT events

Given that a capital gain or capital loss is made only if a CGT event happens (section 102-20 of the ITAA 1997), the initial step is to ascertain whether a CGT event has happened. As the transaction is the payment of money by the trustee of the EST to X Co to subscribe for shares, the possible events are:

· D1 Creating contractual or other rights; or

· H2 Receipt for event relating to a CGT asset.

CGT event D1 applies in preference to CGT event H2 (subsection 102-25(3) of the ITAA 1997).

Subsection 104-35(1) of the ITAA 1997 states that CGT event D1 'happens if you create a contractual right or other legal or equitable right in another entity'.

However, paragraph 104-35(5)(c) of the ITAA 1997 states that CGT event D1 does not happen if a company issues or allots equity interests in the company, which is the case with the X Co transactions under consideration.

As CGT event D1 does not happen, CGT event H2 must be considered. CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset that you own and the occurrence does not result in an adjustment to the asset's cost base or reduced cost base (section 104-155(1) of the ITAA 1997).

Receiving subscription proceeds from the trustee of the EST for new shares it has issued to the trustee does not constitute an act, transaction or event occurring in relation to a CGT asset owned by X Co.

Furthermore, paragraph 104-155(5)(c) of the ITAA 1997 states that CGT event H2 does not happen if a company issues or allots equity interests in the company, which is applicable to the trustee's payment of subscription proceeds to X Co.

In summary, if the trustee of the EST satisfies the relevant X Co equity plan obligations by subscribing for new shares in X Co, the subscription proceeds will not be included in the assessable income of X Co under sections 6-5 or 20-20 of the ITAA 1997, nor will their receipt trigger a CGT event for X Co under Division 104 of the ITAA 1997.

Question 5:

Where X Co has (1) elected to form a tax consolidated group prior to a subscription for new shares and (2) transferred tax losses into the tax consolidated group on consolidation for which an available fraction has been calculated under Division 707 of the ITAA 1997, a capital injection in X Co may cause the available fraction to reduce by the following factor:

Market value of X Co prior to the capital injection

Market value of X Co prior to the capital injection + Amount of increase in market value because of capital injection

A capital injection will include a subscription for shares. Subsection 707-325(5)(b) of the ITAA 1997 however provides that an injection of capital is disregarded if it is made 'in association with the acquisition of a share in a company in relation to which the conditions in subsection 703-35(5) of the ITAA 1997 are me'.

The conditions in subsection 703-35(5) of the ITAA 1997 are:

A share or membership interest in a company may be disregarded under subsection (4) if:

(a) the entity who holds the beneficial interest in the share or membership interest acquired that beneficial interest:

(i) under an employee share scheme; or

(ii) by exercising a right, a beneficial interest in which was acquired under an employee share scheme; and

(b) paragraphs 83A-105(1)(a) and (b) and subsection 83A-105(2) apply to the beneficial interest acquired under the scheme; and

(c) in the case of a membership interest - the interest is part of a stapled security.

Because X Co will only be issuing ordinary shares, paragraph 703-35(5)(c) of the ITAA 1997 is not relevant.

Condition 1 - Paragraph 703-35(5)(a) of the ITAA 1997

Pursuant to the trust deed, the trustee will allocate to each of the relevant employees the number of shares acquired by the trust as specified by X Co. Where the EST acquires shares and allocates those shares to the relevant employees in satisfaction of X Co's obligations under the EIP and ESP, each of the relevant employees will acquire a beneficial interest in those shares at that time. Therefore the first part of the condition in paragraph 703-35(5)(a) of the ITAA 1997 will be satisfied, that is there is an entity (i.e. the relevant employee) which will hold a beneficial interest in the share.

In relation to shares allocated to employees in satisfaction of X Co's obligations under the EIP award, such shares will be acquired as a result of those employees 'exercising a right, a beneficial interest in which was acquired under an employee share scheme'. Therefore, subparagraph 703-35(5)(a)(ii) of the ITAA 1997 will be satisfied.

In relation to shares allocated to employees in satisfaction of X Co's obligations under the ESP, such shares will be acquired 'under an employee share scheme'. Therefore, subparagraph 703-35(5)(a)(i) of the ITAA 1997 will be satisfied.

Accordingly, paragraph 703-35(5)(a) of the ITAA 1997 will be satisfied where shares are acquired by the trustee of the EST for the purposes of satisfying X Co's obligations under the EIP and /or ESP.

Condition 2 - Paragraph 703-35(5)(b) of the ITAA 1997

Within paragraph 703-35(5)(b) of the ITAA 1997, there are three further conditions that must be satisfied. That is, paragraphs 83A-105(1)(a) and 83A-105(1)(b) and subsection 83A105(2) of the ITAA 1997 must apply to the beneficial interest acquired under the scheme.

In relation to the EIP, the beneficial interest acquired under the scheme is the beneficial interest in a right to acquire a beneficial interest in X Co's shares.

In relation to the ESP, the beneficial interest acquired under the scheme is the beneficial interest in the X Co shares themselves.

Does paragraph 83A-105(1)(a) of the ITAA 1997 apply to the beneficial interest acquired under the scheme?

Paragraph 83A-105(1)(a) of the ITAA 1997 states that :

This Subdivision applies (83A-C), and Subdivision 83A-B does not apply, to an ESS interest in a company if:

(a) Subdivision 83A-B would, apart from this section, apply to the interest (see section 83A-20) and….

Subsection 83A-20(1) states that Subdivision 83A-B of the ITAA 1997 applies to an ESS interest if you acquire the interest under an employee share scheme at a discount.

In relation to the EIP, the relevant ESS interest acquired under the employee share scheme is a right to acquire a beneficial interest in a share in X Co. As the relevant participant does not provide any consideration for that ESS interest, that interest will be acquired at a discount. Therefore, subsection 83A-20(1) of the ITAA 1997 will be satisfied.

In relation to the ESP, the relevant ESS interest acquired under the employee share scheme is a beneficial interest in a share in X Co. Furthermore, because the shares are acquired as part of a salary sacrifice arrangement, that interest is acquired at a discount as consideration paid or given by an employee to acquire shares does not include amounts sacrificed under an effective salary sacrifice arrangement. Therefore, subsection 83A-20(1) of the ITAA 1997 will be satisfied.

Notwithstanding that subsection 83A-20(1) of the ITAA 1997 may be satisfied, subsection 83A-20(2) of the ITAA 1997 states that:

However, this subdivision (ie 83A-B) does not apply if the ESS interest is a beneficial interest in a share that you acquire as a result of exercising a right, if you acquired a beneficial interest in the right under an employee share scheme.

This exclusion however is not applicable to the ESS interests acquired under the EIP or ESP. This is because the ESS interest acquired under the EIP was a beneficial interest in a right to acquire a share in X Co and the ESS interest acquired under the ESP is a share in X Co itself.

Accordingly, paragraph 83A-105(1)(a) of the ITAA 1997 will apply to the shares acquired under the ESP and the right to acquire shares under the EIP (that is, the beneficial interests acquired under the scheme).

Does subsection 83A-105(1)(b) of the ITAA 1997 apply to the beneficial interest acquired under the scheme?

Paragraph 83A-105(1)(b) of the ITAA 1997 states that:

Subsections 83A-35(3), (4), (5) and (9) apply to the interest….

The relevant interests in this regard are:

· for EIP participants, the right to acquire a beneficial interest in a share in X Co; and

· for ESP participants, the shares in X Co.

Subsection 83A-35(3) of the ITAA 1997 states that:

This subsection applies to an ESS interest in a company if, when you acquire the interest, you are employed by:

(a) the company; or

(b) a subsidiary of the company.

This condition will be satisfied as all participants under the EIP and ESP must be employees of X Co or a subsidiary of X Co to be able to participate.

Subsection 83A-35(4) of the ITAA 1997 states that:

This subsection applies to an ESS interest you acquire under an employee share scheme if, when you acquire the interest, all the ESS interests available for acquisition under the scheme relate to ordinary shares.

This condition will also be satisfied as only ordinary shares can be issued in satisfaction of X Co's obligations under the EIP and/or ESP.

Subsection 83A-35(5) of the ITAA 1997 is an integrity rule that states that the subsection applies unless, amongst other things, the company is a share trader. Because X Co is not engaged in the business of trading in shares, this condition will be satisfied.

Subsection 83A-35(9) of the ITAA 1997 states that:

This subsection applies to an ESS interest in a company if, immediately after you acquire the interest:

(a) you do not hold a beneficial interest in more than 5% of the shares in the company; and

(b) you are not in a position to cast, or to control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the company.

Notwithstanding that X Co may settle its obligations under the EIP and/or ESP in full or in part by way of shares, at no time after acquiring their ESS interests will:

a) any employee hold a beneficial interest in more than 5% of the shares in X Co; or

b) be in a position to cast, or to control the casting of, more than 5%of the maximum number of votes that might be cast at a general meeting of the company.

The condition in subsection 83A-35(9) of the ITAA 1997 will be satisfied.

Accordingly, subsection 83A-105(1)(b) of the ITAA 1997 will apply to the shares acquired under the ESP and the right to acquire shares under the EIP (that is, the beneficial interests acquired under the scheme).

Does subsection 83A-105(2) of the ITAA 1997 apply to the beneficial interest acquired under the scheme?

Subsection 83A-105(2) of the ITAA 1997 states that:

This subsection applies to an ESS interest you acquire under an employee share scheme if, when you acquire the interest, at least 75% of the permanent employees of your employer who have completed at least 3 years of service (whether continuous or non continuous) with your employer and who are Australian residents are, or at some earlier time had been, entitled to acquire:

(a) ESS interests under the scheme; or

(b) ESS interests in:

(i) your employer; or

(ii) a holding company (within the meaning of the Corporations Act 2001) of your employer;

under another employee share scheme.

Therefore, notwithstanding that the EIP will not of itself satisfy the 75% requirement, because X Co has had in place its ESP for a number of years which is available to all permanent employees, the 75% requirement in this subsection will be satisfied in respect of the EIP and ESP.

Therefore, subsection 83A-105(2) of the ITAA 1997 will apply to the beneficial interest acquired under the scheme for the EIP and ESP.

Accordingly, all of the conditions in paragraph 703-35(5)(b) of the ITAA 1997 will be satisfied.

Therefore, if X Co's obligations under the EIP and / or ESP are satisfied by the trustee of the EST subscribing for new shares in X Co, the capital injection (as a result of the subscription) will be disregarded pursuant to paragraph 707-325(5)(b) of the ITAA 1997.

Question 6:

The rules in Division 197 of the ITAA 1997 are designed to prevent companies from capitalising profits by transferring amounts to their share capital account and subsequently making distributions in a tax-free or tax-preferred manner. This is broadly referred to as share capital tainting.

Generally, where a share capital account has been tainted, distributions to the shareholder will be treated as dividends, notwithstanding that they have been debited against the share capital account. Accordingly, the otherwise tax-free or tax-preferred distribution as described will be subject to tax.

Under Division 197 of the ITAA 1997, a share capital account becomes tainted when an amount (other than an excluded amount) is transferred to its share capital account from any of its other accounts. The Explanatory Memorandum to the Bill enacted as the Tax Laws Amendment (2006 Measures No. 3) Act states the following in relation to a transfer to the share capital account:

4.12 An amount is transferred from one account to another where that amount is moved from one account to another. This, in turn, requires the balance of the first account to be reduced, while the balance of the second account is increased by the same amount.

4.13 An amount is not transferred from one account to another where the particular accounting entries result in the balances of both accounts increasing in size. Accordingly, an accounting entry of the form 'debit asset, credit share capital account' does not represent a transfer in the relevant sense.

In relation to the above, what is relevant are the journal entries made to the accounts/general ledger of the individual company. This is reinforced by the fact sheet issued by the ATO in relation to share capital tainting. The fact sheet states:

In determining whether the transfer of an amount from one account to another has triggered the operation of the share capital tainting rules it is the entries which a company makes in its general ledger that will be determinative.

Accordingly, the consolidated accounts of the group are not relevant.

In the present case, the journal entry that will credit the share capital account of X Co on subscription of new shares is associated with an increase in a cash (asset) account. The accounting entries will result in the balance of both accounts increasing in size. Based on the comments in the Explanatory Memorandum and the ATO fact sheet, it is clear that the accounting entries arising on subscription will not result in a relevant transfer to the share capital account for the purposes of the share capital tainting rules. In coming to our decision, we have taken into consideration ATO Interpretative Decision ATO ID 2009/76 where the issue of shares to employees under an employee share scheme did not result in tainting of the share capital account.

Question 7:

Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can make a determination in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are:

· there must be a "scheme" within the meaning of section 177A of the ITAA 1936;

· a "tax benefit" arises that was obtained, or would be obtained, in connection with the scheme but for Part IVA; and

· having regard to the matters in paragraph 177D(b) of the ITAA 1936, the scheme is one to which Part IVA applies.

The Scheme

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

(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;

It is considered that this definition is sufficiently wide to cover the arrangement under the relevant X Co equity plans, which utilises a payment made by X Co to the trustee of the EST (in accordance with the trust deed), to fund the acquisition of X Co shares on behalf of participating employees by that trustee.

Tax Benefit

'Tax benefit' is defined in subsection 177C(1) of the ITAA 1936, of which 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 X Co from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the company might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration.

The applicant has provided several possible counterfactuals as follows:

If the scheme were not entered into (that is, funds were not paid into the EST to purchase shares on market or subscribe for new shares) but rather X Co purchased shares directly on market on behalf of the relevant employees then X Co should still receive a deduction for the purchase price of the shares. In addition, if instead X Co paid cash (as it already has in respect of its EIP), then X Co would also receive a deduction………

However, even where there is no EST, it is noted that X Co could have also chosen to simply buy shares for employees on market via a broker (subject to company law requirements) or alternatively remunerate the employees via an entirely different method such as cash bonuses, both of which would have entitled X Co to a deduction. Accordingly, a deduction would have been allowable to X Co, whether or not the scheme had been entered into… … … .

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

However, there is at least one other reasonable counterfactual (also referred to in the quoted paragraph above) to the scheme X Co proposes to establish. If X Co 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:

· X Co must have provided an ESS interest to an individual under an employee share scheme

· X Co 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 of the ITAA 1997 must have applied to reduce the amount included in that individual's assessable income under subsection 83A-25(1) of the ITAA 1997.

If the shares did meet these conditions, the company 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 EST arrangement permits X Co, 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 EST. 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 EST arrangement, X Co obtains a tax benefit.

While, for the reasons noted above by the applicant, it is unlikely that it 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 of the ITAA 1936 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 EST in the scheme does give rise to a tax benefit, but X Co contends that the presence of the EST provides other commercial benefits. In particular, the use of an EST will:

· provide X Co greater flexibility to accommodate the long term incentive arrangements of X Co whilst the business continues to expand in terms of operation and employee numbers in future years;

· provide X Co with the option of directing the relevant employer company to provide funds to the Trust to either subscribe for shares in X Co or acquire shares on-market. Further, the Trust will be able to hold these shares on behalf of the participants or transfer the shares to the participants directly in satisfaction of X Co's obligations under the relevant plan;

· where the EST is used to price-hedge, provide an arm's length vehicle for

acquiring and holding shares in X Co which will ensure that X Co does not breach the Corporations Act by dealing in its own shares;

· if shares are issued to employees that are subject to disposal restrictions or vesting conditions (for example, restricted shares under the EIP or shares under the ESP), provide an efficient structure to give effect to those restrictions. As the trustee is the legal owner, employees as beneficial owners have no ability to deal in the shares until the shares are released from the trust;

· in the case of restricted shares under the EIP, the use of a Trust will also mean that if shares are forfeited, those shares can be recycled. That is, the forfeited shares can be reused for future offers to employees under the plans administered by the trust;

· provide a single vehicle for the administration of existing and new plans, including the establishment of only one trust, one bank account etc;

· assist with managing any insider trading issues as the trustee, an independent party, is acquiring the shares in accordance with a set policy;

· provide a mechanism to assist X Co over time with the management of the 5% cap under ASIC Class Order 03/184 so as to avoid preparing a prospectus (for example, buying shares on market and not a new issue of shares); and

· allow X Co to manage the restriction on the issue of new shares imposed by the Australian Securities Exchange (ASX) Listing Rule 7.1. ASX Listing Rule 7.1 provides that X Co must obtain shareholder approval prior to issuing new shares that exceed 15% of total shareholder capital within a 12 month period.

It is accepted that the EST provides benefits to the operation of the scheme that would not be available if the shares were provided directly by X Co 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 employees who participate in the X Co equity plans. It takes the form of payments by X Co to the trustee which acquires the shares and transfers them to participants.

While existence of the trust confers a tax benefit, it cannot be concluded that is the only benefit provided as outlined above. X Co has argued that the form of the arrangement with the trust provides the scheme with non-tax benefits and this is accepted.

(iii) The timing of the scheme

The contributions will be made progressively over the future years in accordance with the terms of the EIP and ESP. Furthermore, the length of the scheme is not intended to be for a short period. The scheme is intended to remain in place indefinitely provided the commercial benefits outweigh the respective costs of administration.

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 scheme is to provide X Co with allowable deductions for the contributions it makes to the trustee of the EST. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of X Co to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances.

(v) Any change in the financial position of X Co

As noted above, X Co makes irretrievable contributions to the trustee of the EST and those contributions constitute a real expense with the result that X Co's financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with a trust as part of the scheme than would be the case if X Co provided shares to participants directly, there is nothing artificial, contrived or notional about X Co's expenditure.

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

The contributions by X Co 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 ultimately be provided to participants in an X Co equity plan. X Co is not a beneficiary of the trust and its contributions cannot be returned to it in any form except where the trustee acquires shares from X Co by subscribing for new issues at market value. Therefore, the contributions made by X Co 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. There is nothing artificial, contrived or notional about these changes.

(vii) Any other consequence

Not relevant to this scheme.

(viii) The nature of any connection between X Co and any other persons

In the present case the relevant parties are X Co, including other employer companies within the X Co tax consolidated group, the trustee of the EST, and the eligible employees who participate in the X Co equity plans. The eligible employees as a group are generally at arm's-length from X Co and the trustee. Moreover, their relationship is governed by the rules of each X Co Equity Plan and the trust deed which are at arm's-length.

The contributions made by X Co to the trustee are commensurate with the X Co's stated aim of providing the participants with remuneration in a form that aligns their personal financial rewards with the risks and returns of X Co's shareholders. There is nothing to suggest that the parties to the employee share schemes are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit.

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 X Co'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 full, any deduction claimed by X Co in relation to irretrievable contributions made by X Co to the trustee of the EST to fund the acquisition of X Co shares in accordance with the scheme as outlined above.

Question 8:

An employer's liability to fringe benefits tax arises under section 66 of the FBTAA which provides that tax is imposed in respect of the 'fringe benefits taxable amount' of the employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided.

No amount will be subject to FBT unless a fringe benefit is provided.

A fringe benefit will only arise under subsection 136(1) of the FBTAA where benefits are provided by employers to employees or associates of employees. Under the definition of 'fringe benefit', a benefit must also be provided 'in respect of the employment of the employee'. The FBTAA provides that fringe benefits are divided into various classes.

Paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include:

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;

The terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10 of the ITAA 1997.

An ESS interest in a company is a beneficial interest in a share in the company, or 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 the employees) of the company or subsidiaries of the company, in relation to the employee's employment.

It has been submitted that X Co's employees will acquire shares, or rights to acquire shares, in accordance with the X Co equity plans in respect of their employment. The Commissioner accepts that the EIP described in the applicant's private ruling application is an employee share scheme under which relevant ESS interests (being rights to acquire shares) are acquired by employees of X Co (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to those employees' employment. The shares acquired by the trustee under the EIP to satisfy rights to acquire shares are also provided to employees under that same employee share scheme.

The Commissioner also accepts that the ESP is an employee share scheme under which the relevant ESS interests (being the beneficial interests in the shares) are acquired by employees of X Co (or 'associates of those employees'), and the acquisition of those ESS interests is in relation to those employees' employment.

Therefore, the granting of rights to acquire shares under the EIP and the granting of shares under the ESP to employees will not be subject to FBT because they are specifically excluded from being a 'fringe benefit'.

However shares granted to employees under the EIP to satisfy rights to acquire 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 benefit' 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 EIP, the benefit (beneficial interest in a share) that arises upon the exercise of a right is considered to be provided as a result of the employee exercising rights (previously obtained).This situation is considered to be analogous to that stated in ATO Interpretative Decision ATO ID 2003/316 which refers to the case of FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 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 receives a right to acquire shares under the EIP, they obtain a right to acquire a beneficial interest in a share in X Co. When these rights are subsequently exercised, any benefit received would be in respect of the exercise of these rights, and not in respect of employment.

Therefore, the benefit (beneficial interest in a share) that arises to an employee upon the exercise of rights granted under the EIP does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of' the employment relationship.

Question 9:

Section 40 of the FBTAA provides that where a person (the provider) provides property to another person (the recipient), the provision of property shall be taken to constitute a benefit provided by the provider to the recipient.

Section 136(1) of the FBTAA defines 'property benefit' as a benefit referred to in section 40 of the FBTAA. The contribution by X Co or a subsidiary member of the X Co tax consolidated group to the trustee of the EST under the X Co equity plans will be a 'property fringe benefit' under sections 136 and 40 of the FBTAA because the trustee of the EST is set up to provide benefits to X Co employees and is an associate of each employee for the purposes of the FBTAA.

However, certain benefits are excluded from being fringe benefits within the meaning of the FBTAA. In particular, paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA excludes:

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 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).

In ATOID 2010/108, the ATO states the following:

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental 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 trust on behalf of an employee, and their distribution to the employee;

· the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme;

· dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme;

· the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares;

· 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; and

· receiving and immediately distributing shares under a demerger.

The trust deed outlines the anticipated activities of the EST.

The Commissioner accepts that these stated anticipated activities are merely incidental. Therefore, provided the trustee of the EST administers the EST in accordance with the trust deed, the EST will constitute an employee share trust for the purposes of subsection 130-85(4) of the ITAA 1997. Accordingly, contributions of money to the trustee of the EST will not be a 'fringe benefit', as they will fall within the exclusion contained in paragraph (ha) of the definition in subsection 136(1) of the FBTAA.

Question 10:

Law Administration Practice Statement PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 provide as follows:

145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

It is clear, therefore, that the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 under the heading 'Appendix, Question 18' where, on the application of section 67, the Commissioner states:

…As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement...

Further, paragraph 151 of Practice Statement 2005/24 provides:

151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

In the present case the benefits provided to the trustee of the EST by way of irretrievable contributions to the EST, and to eligible employees by way of the provision of shares and rights under the relevant X Co equity plan are excluded from the definition of a 'fringe benefit' for the reasons given in the response to questions 9 and 10 (above). Therefore, as these benefits have been excluded from the definition of a 'fringe benefit' and there is also no FBT currently payable under the existing X Co equity plans, nor likely to be payable under future alternative plans, the FBT liability is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of X Co in relation to a tax benefit obtained under either of the current X Co equity plans from irretrievable cash contributions made by X Co to the trustee of the EST to fund the acquisition of X Co shares in accordance with the trust deed.

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