Edited version of private ruling

Authorisation Number: 1011826357761

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Ruling

Subject: Employee share plan

Question 1

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the non-refundable cash contributions made by the Company to the Trustee of the Employee Share Trust (EST) to fund the subscription for or acquisition on-market of the Company shares by the EST?

Advice/Answers

Yes

Question 2

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the EST?

Advice/Answers

Yes

Question 3

Are non-refundable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company shares by the EST, deductible to the Company at a time determined by section 83A-210 of the ITAA 1997 in respect of Employee Share Scheme (ESS) interests that have a deferred taxing point arising after 30 June 2009?

Advice/Answers

Yes

Question 4

Are non-refundable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company shares by the EST, deductible to the Company at a time determined by section 139DB of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of ESS interests that have a deferred taxing point arising before 1 July 2009?

Advice/Answers

Yes

Question 5

If the EST satisfies its obligations under the Employee Share Option Plan (ESOP) by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997?

Advice/Answers

No.

Question 6

Will the Commissioner seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company to the Trustee of the EST to fund the subscription for or acquisition on-market of the Company's shares by the EST?

Advice/Answers

No

Question 7

Is the provision of Options by the Company to Participants under the ESOP a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessments Act 1986 (FBTAA)?

Advice/Answers

No

Question 8

Will the non-refundable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Advice/Answers

No

Question 9

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to the Company, by the amount of tax benefit gained from non-refundable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company shares?

Advice/Answers

No

This ruling applies for the following period

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Fringe Benefits Tax:

Year ending 31 March 2012

Year ending 31 March 2013

Year ending 31 March 2014

Year ending 31 March 2015

Year ending 31 March 2016

The scheme commenced on

1 July 2010

Relevant facts

The scheme the subject of this Ruling has been ascertained from the following documents:

· Application for Private Ruling

· The ESOP Rules

· The Trust Deed of the EST

· Annual Report of the Company

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Section 20-20 of the Income Tax Assessment Act 1997

Section 83A-10 of the Income Tax Assessment Act 1997

Section 83A-35 of the Income Tax Assessment Act 1997

Section 83A-205 of the Income Tax Assessment Act 1997

Section 83A-210 of the Income Tax Assessment Act 1997

Section 102-5 of the Income Tax Assessment Act 1997

Section 102-25 of the Income Tax Assessment Act 1997

Section 104-35 of the Income Tax Assessment Act 1997

Section 104-155 of the Income Tax Assessment Act 1997

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

Section 995-1 of the Income Tax Assessment Act 1997

Section 139DB of the Income Tax Assessment Act 1936

Section 139E of the Income Tax Assessment Act 1936

Section 177A of the Income Tax Assessment Act 1936

Section 177C of the Income Tax Assessment Act 1936

Section 177D of the Income Tax Assessment Act 1936

Section 177F of the Income Tax Assessment Act 1936

Section 83A-5 of the Income Tax (Transitional Provisions) Act 1997

Section 83A-10 of the Income Tax (Transitional Provisions) Act 1997

Section 67 of the Fringe Benefits Tax Assessment Act 1986

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Question 1

Summary

The Company can claim an income tax deduction pursuant to 8-1 of the ITAA 1997 in respect of the non-refundable cash contributions made by the Company to the Trustee of the EST to fund the subscription for or acquisition on-market of the Company shares by the EST.

Detailed reasoning

Section 8-1 of the ITAA 1997, insofar as it is relevant, states:

8-1(1)

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a ^*business for the purpose of gaining or producing your assessable income.

8-1(2)

However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature;

The Company has established its employee share plans as part of its remuneration policy with the intention of attracting and retaining suitable employees in its business.

The cash contributions made by the Company to the Trustee of the EST to fund the subscription for or acquisition on-market of the Company shares by the EST are irretrievable and non-refundable under the Trust Deed.

The Company's purpose in establishing and funding its employee share plan is to encourage Eligible Employees to participate in the future growth of the Company and, upon becoming shareholders, to participate in the Company's profits and development. The Company's remuneration policy relates individual remuneration to individual performance, the individual's position in the relevant salary market and the need for the organisation to retain and motivate the individual.

Therefore, the non-refundable cash contributions it makes to the Trustee under the rules of the plans are directed to enhancing the profitability of its business and producing assessable income.

In Pridecraft Pty Ltd v. FC of T [2004] FCAFC 339; 2005 ATC 4001; FC of T v. Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55ATR 745, 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 is consistent with the opinion expressed in ATO Interpretative Decision ATO ID 2002/1074 that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for non-refundable cash contributions made to the trustee of its employee share scheme.

Accordingly, the conditions of paragraph 8-1(1)(b) of the ITAA 1997 are satisfied.

The Company has advised that the company will make non-refundable cash contributions to the EST to provide benefits to eligible employees in the form of shares. Such contributions will be made if and when the rights or options vest. And, on vesting, the Company's shares will then be acquired by the EST either on-market or via a new issue of shares by the Company.

Accordingly the Company will not be pre-funding the EST with a lump sum payment but will be making contributions on a regular basis as required.

The non-refundable cash contributions are an on-going expense of conducting its business to which the Company has committed itself by establishing the share plans and entering into the EST Trust Deed with the Trustee. Therefore, they are not capital in nature and paragraph 8-1(2)(a) is satisfied.

Accordingly, the non-refundable cash contributions the Company makes to the Trustee to enable it to acquire shares, whether by on-market purchase or subscription, are allowable deductions.

Question 2

Summary

The Company will obtain an income tax deduction pursuant to section 8-1 of the ITAA 1997 in respect of costs incurred in relation to the implementation and on-going administration of the Trust.

Detailed reasoning

As provided in question 1 above, you can deduct an amount under section 8-1 of the ITAA 1997 if the expense is incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

In respect of costs in administering an employee share trust, ATO Interpretative Decision ATO ID 2002/961 provides that costs incurred in implementing and administering an employee share scheme will be deductible under section 8-1 of the ITAA 1997 as they are part of the ordinary employee remuneration costs.

As outlined in the facts, the Company incurs various expenses in respect of the implementation and on-going administration of the Trust. These expenses form part of the ordinary employee remuneration costs.

Consistent with the analysis in question one, the 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 in the year they are incurred.

Question 3

Summary

The provision of money to the Trustee of the EST to acquire the Company shares is considered to be for the purpose of enabling the participating employees, indirectly as part of the ESOP, to acquire the options. If that money is provided before the options are acquired then section 83A-210 of the ITAA 1997 will apply. However, section 83A-210 of the ITAA 1997 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from options already granted, and that deduction is accordingly allowable to the Company in the year in which the money was paid to the Trustee of the EST, under section 8-1 of the ITAA 1997.

However, if any amount of money is used by the Trustee of the EST to purchase excess shares intended to meet a future obligation arising from a future grant of options, the excess payment occurs before the employees acquire the relevant options (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the Company in the year of income when the relevant options are subsequently granted to the employees.

Detailed reasoning

As discussed in question 1, the provision of money to the trustee of the EST by the employer for the purpose of remunerating its employees under an ESS 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.

With effect from 1 July 2009, section 83A-210 of the ITAA 1997 determines the timing of a deduction for contributions, as follows:

83A-210 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 Company under the ESOP, in relation to the employee's employment.

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.

Under the ESOP an option granted to an employee will be an ESS interest as it is a right to acquire a beneficial interest in a share in the Company. This ESS interest is granted under an ESS in relation to the employee's employment. The share acquired by the Trustee of the EST to satisfy such an option is granted under the ESS to an employee, in relation to the employee's employment.

The granting of the beneficial interests in the options, the provision of the money to the Trustee of the EST under the arrangement, the acquisition and holding of the shares by the Trustee of the EST and the allocation of shares to the participating employees are all interrelated components of the ESOP. 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 of the EST necessarily allows the scheme to proceed. Consequently, the provision of money to the Trustee of the EST to acquire the Company shares is considered to be for the purpose of enabling the participating employees, indirectly as part of the ESOP, to acquire the options. If that money is provided before the options are acquired then section 83A-210 of the ITAA 1997 will apply. However, section 83A-210 of the ITAA 1997 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from options already granted, and that deduction is accordingly allowable to the Company in the year in which the money was paid to the Trustee of the EST, under section 8-1 of the ITAA 1997.

However, if any amount of money is used by the Trustee of the EST to purchase excess shares intended to meet a future obligation arising from a future grant of options, the excess payment occurs before the employees acquire the relevant options (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the Company in the year of income when the relevant options are subsequently granted to the employees.

Question 4

Summary

In circumstances where former Division 13A of ITAA 1936 applies, former section 139DB of the ITAA 1936 determines the time when a deduction is allowable to the Company in respect to the provision of money to the Trustee of the EST. Therefore a deduction is allowable at the time the options are acquired by participating employees but only to the extent money is provided before the options are acquired. Section 139DB of ITAA 1936 will not apply to a deduction for the purchase of shares to satisfy an obligation arising from options already granted. As in question 3, a deduction for the purchase of shares to satisfy an obligation arising from options already granted is deductible in the year in which the money is paid to the trustee of the EST under section 8-1 of the ITAA 1997.

Therefore, the Company will be allowed a deduction for contributions made to the Trustee of the EST in the year of income in which they are made, provided and to the extent that they are in respect of the funding of the acquisition of shares to satisfy the obligations in relation to rights to acquire shares granted to participants in that income year or earlier income years.

Detailed reasoning

Former section 139DB of the ITAA 1936 was repealed effective 1 July 2009, but still has application in limited circumstances, by virtue of Division 83A of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997).

Former section 139DB of the ITAA 1936 provides:

If, at a particular time, a person (the provider) provides another person with money or other property:

(a) under an arrangement

(b) for the purpose of enabling another person (the ultimate beneficiary) to acquire, directly or indirectly, a share or right, under an employee share scheme;

then, for the purpose of determining when any deduction is allowable to the provider in respect of provision of the money or other property, the provider is taken to have provided it not before the time when the ultimate beneficiary acquires the share or right.

ATO Interpretative Decision ATO ID 2005/181 considered whether former section 139DB of the ITAA 1936 determines when a deduction is allowable to the taxpayer under section 8-1 of the ITAA 1936 in respect of the provision of money to the trustee of an employee share trust to purchase shares to satisfy obligations arising from share rights.

ATO ID 2005/181 provides:

Subsection 139C(4) of the ITAA 1936 provides that a taxpayer does not acquire a share under an employee share scheme if the taxpayer acquires the share as the result of exercising a right that the taxpayer acquired under an employee share scheme.

By the operation of subsection 139C(4) of the ITAA 1936 the shares transferred when the vesting conditions have been satisfied are not acquired by the participating employees under an employee share scheme. Therefore, section 139DB of the ITAA 1936 will only apply if there is the relevant connection between the money provided by the taxpayer to the trustee under the arrangement and the acquisition of the rights by the participating employees (the ultimate beneficiaries) under the plan.

The granting of the rights, the providing of the money to the trustee, the acquisition and holding of the shares by the trustee and the allocating of shares to the participating employees are all interrelated components of the plan. All the components of the plan must be carried out so that the plan can operate as intended. As one of those components, the providing of money to the trustee necessarily allows the plan to proceed. Consequently, the providing of money to the trustee is considered to be for the purpose of enabling the participating employees, indirectly as part of the plan, to acquire the rights available under the plan.

Accordingly, section 139DB of the ITAA 1936 determines the time when a deduction is allowable to the taxpayer under section 8-1 of the ITAA 1997 in respect of the provision of money to the trustee of the employee share trust. Therefore, pursuant to section 139DB of the ITAA 1936, a deduction is allowable at the time the rights are acquired by participating employees and only to the extent of that amount of the money provided to acquire shares to satisfy the obligations in relation to the rights acquired.

We have already established, see question 3, that:

· The granting of the beneficial interests in the options, the provision of the money to the Trustee of the EST under the arrangement, the acquisition and holding of the shares by the Trustee of the EST and the allocation of shares to the participating employees are all interrelated components of the ESOP. 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 of the EST necessarily allows the scheme to proceed.

Consequently, the provision of money to the Trustee of the EST to acquire the Company shares is considered to be for the purpose of enabling the participating employees, indirectly as part of the ESOP, to acquire the options.

As provided in ATO ID 2005/181, in the above circumstances former section 139DB of the ITAA 1936 determines the time when a deduction is allowable to the Company in respect to the provision of money to the Trustee of the EST. Therefore a deduction is allowable at the time the options are acquired by participating employees but only to the extent money is provided before the options are acquired. Section 139DB of ITAA 1936 will not apply to a deduction for the purchase of shares to satisfy an obligation arising from options already granted. As in question 3, a deduction for the purchase of shares to satisfy an obligation arising from options already granted is deductible in the year in which the money is paid to the trustee of the EST under section 8-1 of the ITAA 1997.

Question 5

Summary

If the EST satisfies its obligations under the ESOP by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax event under Division 104 of the ITAA 1997.

Detailed reasoning

Section 6-5 Income according to ordinary concepts

Under subsection 6-5(1) of the ITAA 1997, a payment or other benefit received by a taxpayer is included in assessable income if it is income according to ordinary concepts. Income according to ordinary concepts is not defined in the income tax legislation. However, principles to determine whether a receipt is income according to ordinary concepts have been developed by case law. In determining whether a receipt is income according to ordinary concepts, it is necessary to apply the relevant principles developed by case law to the facts of the particular case.

Dixon J in Sun Newspapers Limited and Associated Newspapers Limited v. FCT (1938) 61 CLR 337; (1938) 5 ATD 23; 1 AITR 403 (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 Company has established its employee share plans as part of its remuneration policy with the intention of attracting and retaining suitable employees in its business. 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 receipt of the subscription will be accounted for as an addition to the share capital of the Company in its books and records. While this treatment of the subscription proceeds is not decisive in itself, it is indicative of the Company's treatment of the receipt and consistent with accounting principles.

The payment is an outlay to secure shares in the Company as a means to structure the business to secure and enhance its long-term profitability.

Based on these three factors, the subscriptions proceeds are held on capital account.

Section 20-20 Assessable recoupments

Under Subdivision 20-A of the ITAA 1997, certain amounts received by way of insurance, indemnity or other recoupment are assessable income if the amounts are not income under ordinary concepts or otherwise assessable.

Under subsection 20-20(2) of the ITAA 1997, an amount you have received as recoupment of a loss or outgoing is an assessable recoupment if:

(a) you received the amount by way of insurance or indemnity; and

(b) you can deduct an amount for the loss or outgoing for the *current year, or you have deducted or can deduct an amount for the loss or outgoing for an earlier income year under any provision of this Act.

The subscriptions received by the Company from 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 employee share plans. The character of the subscriptions paid to the Company for shares is not one of 'insurance, indemnity or other recoupment'.

Division 104 CGT events

Subsection 102-5(1) of the ITAA 1997 provides that your assessable income includes your net capital gain for the income year. Given that a capital gain or capital loss is made only if a CGT event happens, the initial step is to ascertain whether such an event has occurred. As the transaction is the payment of subscription proceeds by the EST to the Company for shares, the possible CGT events are:

D1 Creating contractual or other rights; or

H2 Receipt for event relating to a CGT asset.

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

Subsection 104-35(1) states that CGT event D1 'happens if you create a contractual right or other legal or equitable right in another entity'. However, the legal or equitable right has been created at the time of the issuance of the options and not upon the payment of the subscription proceeds to the Company.

As no legal or equitable right is created CGT event D1 does not happen, further paragraph 104-35(5)(c) of the ITAA 1997 states that event D1 does not happen where a company issues or allots equity interests in the company.

As CGT event D1 is excluded, CGT event H2 is to be considered. CGT event H2 happens if an act, transaction or event occurs to a CGT asset owned by a taxpayer and the occurrence does not result in an adjustment to the cost base or reduced cost base (subsection 104-155(1) of the ITAA 1997).

Consideration of the subscription proceeds received by the Company from the EST establishes that they 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 ESOP. As part of the ESOP contractual rights of employees are exercised on their behalf to acquire shares in the Company, rather than an act, transaction or event relating to a CGT asset owned by the Company.

Paragraph 104-155(5)(c) of the ITAA 1997 provides that CGT event H2 does not happen where a company issues or allots equity interests in the company, which is applicable here.

Accordingly, a CGT event under Division 104 of the ITAA 1997 does not arise when the Trustee subscribes for shares in the capital of the Company.

Question 6

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 Company'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 the Company in relation to irretrievable contributions made by the Company to the EST to fund the acquisition of Employer shares in accordance with the scheme.

Question 7

Summary

The provision of options by the Company to its employees under the ESOP are not fringe benefits within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

A fringe benefit is defined in subsection 136(1) of the FBTAA as follows:

"fringe benefit", in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the "arranger") other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, of the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:…

Paragraphs (f) to (r) of the definition of fringe benefit contain a number of exclusions from this definition. Paragraph (h) of the definition of a fringe benefit contained in subsection 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;

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

A Participant's beneficial interest in an option will constitute an ESS interest as it constitutes a right to acquire a beneficial interest in an Employer Share to be held on their behalf by the Trustee.

The term 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as:

...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 ….

in relation to the employees' employment.

For the purposes of subsection 83A-10(2) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 defines the term 'scheme' as follows:

(a)  any ^*arrangement; or

(b)  any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The ESOP is an employee share scheme as it constitutes an arrangement that is operated in accordance with the ESOP Rules and incorporates the use of the EST operated in accordance with the Trust Deed.

Under the ESOP, an ESS interest (being a beneficial interest in an option) is provided to Participants - being employees of the Company in relation to their employment.

The ESS interests will be acquired at a discount as the Participants will acquire the options for no consideration.

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.

The Commissioner accepts that the ESOP described in the private ruling application is an employee share scheme under which relevant ESS interests (being options) are acquired by employees of the Employer (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 ESOP to satisfy options to acquire shares are also provided to employees under that same employee share scheme.

Therefore, the granting of options under the ESOP to Participants will not be subject to FBT because they are specifically excluded from the definition of fringe benefits.

Question 8

Summary

The EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as 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 and 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 1986 excludes the contributions to the Trustee of the EST from being a fringe benefit.

Accordingly, the Employer will not be required to pay FBT in respect of the non-refundable cash contributions it makes to the Trustee of the EST to fund the acquisition of the Company shares.

Detailed reasoning

Subsection 136(1) of the FBTAA 1986 defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, and paragraph (ha) of that definition 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:

Meaning of employee share trust

130-85(4) an employee share trust, for an employee share scheme, is a trust whose sole activities are:

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

(b). (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

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

The right to acquire a beneficial interest in an Employer Share is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997.

An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment.

The ESOP is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which either rights to acquire beneficial interests in shares in the Company are provided to employees in relation to the employee's employment or beneficial interests in shares in the Company are provided to employees in relation to the employee's employment.

Under the ESOP, the Company has also established the EST to acquire shares in the Company and to allocate those shares to employees. Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

· the EST acquires shares in the Company; and

· the EST ensures that the ESS interests, being beneficial interests in those shares, are provided under an employee share scheme, to the employees in accordance with the Trust Deed and relevant Rules of the ESOP.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require that the Trustee undertake incidental activities that are a function of managing the ESOP and administering the EST. The trust deed does not provide for any additional benefits to be made available to employees (such as the provision of financial assistance to acquire the shares). The incidental activities are covered by paragraph 130-85(4)(c) of ITAA 1997.

The EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as 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 and 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 1986 excludes the contributions to the Trustee of the EST from being a fringe benefit.

Accordingly, the Employer will not be required to pay FBT in respect of the non-refundable cash contributions it makes to the Trustee of the EST to fund the acquisition of the Company shares in accordance with the Trust Deed.

Question 9

The benefits provided to the Trustee by way of non-refundable cash contributions to the EST, and to Participants by way of the provision of options and shares under the ESOP are excluded from the definition of a fringe benefit as explained in questions 7 and 8. Therefore, as these benefits have been excluded from the definition of a fringe benefit and as there is also no FBT currently payable under the ESOP, 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 the Company in relation to a tax benefit obtained under the ESOP from non-refundable cash contributions made by the Company to the Trustee of the EST to fund the acquisition of the Company's shares under this scheme.

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