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Ruling

Subject: Equity Incentive Plan

Question 1

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

Answer

Yes

Question 2

Will Company A 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?

Answer

Yes

Question 3

Are irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares by the EST, deductible to Company A at the time determined by section 83A-210 of the ITAA 1997?

Answer

Yes

Question 4

If the EST satisfies the relevant Equity Incentive Plan obligations by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A 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?

Answer

No

Question 5

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

Answer

No

This ruling applies for the following periods:

Income tax year ending 30 June 2012

Income tax year ending 30 June 2013

Income tax year ending 30 June 2014

Income tax year ending 30 June 2015

Income tax year ending 30 June 2016

The scheme commences on:

1 July 2011

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The following documents form part of the relevant facts:

§ Application for Private Ruling

§ Incentive Plan Rules (Rules)

§ Employee Share Plan Trust Deed and Deed of Amendment of Employee Share Plan Trust Deed (together referred to below as the Trust Deed).

Relevant facts and circumstances

Employee share plans have been established by Company A to allow employees to share in the ownership of the company and to promote its long term success as a goal shared by all employees.

Company A is offering an Equity Incentive Plan (Plan) comprised of both options (Options) and performance rights (Rights) which provide eligible executives with an opportunity to acquire an ownership interest or exposure to an ownership interest in the company.

Operation of the Plan

Company A may, at the discretion of the board, offer or issue Options or Rights which are rights to be issued, transferred or allocated a share upon the satisfaction of specified vesting conditions.

Specific clauses of the Rules require that any offer and corresponding acceptance must be made in writing to the employee and Company A respectively prior to the offer closing date stipulating the key terms and conditions of the offer.

Further, the awards held by a Participant (as defined in the Trust Deed) will vest in and become exercisable by that Participant upon the satisfaction of any vesting conditions specified in the offer or the Rules.

Options also require the payment of an exercise price; rights have a nil exercise price. The Options or Rights are Restricted Awards until they are exercised or expire and an offer may specify a restriction period for shares issued, transferred or allocated on the exercise of the Options or Rights.

Operation of the EST

The applicant has noted the following commercial benefits of using an EST:

§ Greater flexibility for Company A to accommodate the long term incentive arrangements both now and into the future as the group continues to expand operations and therefore employee numbers.

§ Capital management flexibility for Company A, in that the EST can use the contributions made by Company A either to acquire shares in Company A on market, or alternatively to subscribe for new shares in Company A.

§ Providing an arm's-length vehicle through which shares in Company A can be acquired and held in the company on behalf of the relevant employee. This assists Company A to satisfy corporate law requirements relating to a company dealing in their own shares.

The EST has been established with the sole purpose to subscribe, acquire, allocate, hold and deliver shares under the Plan for the benefit of eligible Company A employees, as outlined in the Trust Deed.

As per a specific clause of the Trust Deed, Company A may direct the Trustee to purchase shares to be held on behalf of a Participant, or subscribe for shares in Company A.

How the EST will facilitate the provision of Options and Rights under the Plan is summarised as follows:

Step 1 - Company A grants an award of Options or Rights to eligible employees.

Step 2 - Company A will, following validation that the vesting criteria have been satisfied:

§ contribute the required funds to the EST to enable the EST to either purchase shares on-market, or subscribe for shares, at market value, in Company A, and

§ send a written notice to the Trustee giving directions as to how shares are to be acquired (ie on-market or new subscription).

Step 3 - The Trustee will then use the cash and act upon the written instructions to acquire the shares. Where the Trustee subscribes for new shares, Company A will receive cash consideration equal to the market value of the shares. Where the Trustee acquires shares on-market, the Trustee will disperse the funds for the shares acquired to the vendor shareholder, such that Company A will not receive any cash.

Step 4 - On exercise of the Option or vesting date of the Rights or Shares, the eligible employees contribute the exercise price, if any to Company A.

Step 5 - The shares acquired will be allocated to the Participant concerned. The shares can continue to be held in the name of the Trustee albeit that the Participant will have a beneficial interest in the shares with rights to vote and receive dividends, etc. At the same time restrictions can be imposed on sale of the shares through the requirements of the participant to provide Company A with a withdrawal notice.

Further, the applicant has stated that it is not intended that the Trustee will buy shares in advance of exercise however the Rules provide that shares may be acquired by the Trustee on behalf of Participants by purchasing shares on the ASX or by the company issuing shares to the Trustee.

Further, the company will issue or cause to be transferred to the Trustee the number of shares required as soon as practical after the exercise of the Option or Right.

Trust Deed

Additional key features of the Trust Deed relevant to the current Plan are:

§ the Trust Deed provides that Company A may direct the Trustee to acquire, hold and allocate shares for Participants.

§ the Trust Deed, Company A may provide the EST with funds for the purpose of acquiring shares in Company A in accordance with a specific clause of the EST Deed.

§ the Trust Deed provides that funds provided to the EST pursuant to a specific clause of the Trust Deed will not be refundable to Company A, a Group Company or a Participant.

§ the Trust Deed provides that shares allocated by the Trustee for a Participant will be held by the Trustee on behalf of the relevant Participant, who is the beneficial owner of the shares and all interests and benefits are strictly personal to that Participant.

§ As per the Trust Deed, all contributions by Company A to the EST for the purpose of acquiring Company A shares constitute accretions to the corpus of the EST.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 20-20

Income Tax Assessment Act 1997 Section 20-25

Income Tax Assessment Act 1997 Section 20-30

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 104-155

Income Tax Assessment Act 1997 Section 974-75

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

Reasons for decision

Question 1

Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. It states that:

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.

Subsection 8-1(2) of the ITAA 1997 then states:

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; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

Losses or outgoings

Pursuant to the Trust Deed, Company A may provide the EST with funds (contributions) for the purpose of acquiring shares in Company A in accordance with the Trust Deed.

The Trustee will, in accordance with directions received by Company A, acquire, hold or allocate shares for the benefit of Participants provided that the Trustee receives sufficient payment to subscribe for or purchase shares and/or has sufficient shares available.

These contributions made to the EST by Company A will be irretrievable and non-refundable to Company A (the Trust Deed provides that funds provided to the EST pursuant to a specific clause of the Trust Deed will not be refundable to Company A, a Group Company or a Participant). On this basis, it is concluded that the irretrievable contributions made by Company A 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 Company A in establishing and making irretrievable contributions to the EST is to provide benefits to certain eligible employees initially in the form of Options or Rights, but which will subsequently be issued, transferred or allocated as shares.

All the documentation provided indicates that the contributions are made to the Trustee of the EST solely to enable the Trustee to acquire shares for eligible employees of the company. As stated by the applicant, the Plan rules have been established to encourage employees to share in the ownership of Company A and the long term success of Company A as a goal shared by all participating employees. This is ultimately designed to boost Company A's operating performance and therefore its assessable income.

Accordingly, there is a sufficient nexus between the outgoings (Company A's contributions to the EST) and the derivation of its assessable income (Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay's) Ltd v FCT (1935) 54 CLR 295;(1935) 3 ATD 288, W Nevill & Co Ltd v FC of T (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin NL v FCT (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147).

Capital or Revenue?

The contributions by Company A will be recurring and made from time to time as and when Company A 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 Court held in Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210 and FC of T v Spotlight Stores Pty Ltd [2004] FCA 650;2004 ATC 4674; 55 ATR 745 that payments by an employer company to an EST established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature.

This confirms the view expressed in ATO Interpretative Decision ATO ID 2002/1074 that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made to the Trustee of its employee share scheme.

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).

Question 2

As discussed in question 1 above, section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income 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.

Company A will incur costs associated with the services provided by the Trustee of the EST and has incurred various implementation costs. These costs are part of the ordinary recurring cost to Company A of remunerating its employees and are therefore deductible under section 8-1 of the ITAA 1997. This agrees with the ATO view expressed in ATO Interpretative Decision ATO ID 2002/961.

However, it is noted that, unlike the irretrievable contributions made to the EST to acquire shares, these payments do not form part of the corpus of the EST, but are assessable income of the Trustee.

Question 3

Section 83A-210 of the ITAA 1997 determines when a deduction is allowable under the circumstances set out in Question 1.

Section 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.

An employee share scheme is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2) of the ITAA 1997). An ESS interest is a beneficial interest in a share in a company or a right to acquire a beneficial interest in a share in a company (subsection 83A-10(1) of the ITAA 1997). The Plan is an employee share scheme and the Rights and Options are ESS interests, being rights to acquire a beneficial interest in the share of a company (i.e. rights to acquire Company A shares).

The adoption of the Rules and the creation of the EST constitute the arrangement in these circumstances for the purposes of paragraph 83A-210(a)(i) of the ITAA 1997 and the provision of money to the Trustee necessarily allows the scheme to proceed.

Company A will provide money to the Trustee of the EST to enable the Trustee to acquire Company A shares for the purposes of satisfying the grant of Rights or Options under the Rules. As noted above, both the Rights and the Options are ESS interests which Participants will acquire upon being granted them by Company A. The acquisition time for the purposes of section 83A-210 of the ITAA 1997 occurs when the Rights or the Options to the Company A shares are granted to Plan Participants.

Accordingly, in accordance with section 83A-210 of the ITAA 1997, the cash contributions that Company A makes to the Trustee will be deductible in the income year in which the acquisition time falls for the Rights or Options. This accords with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103.

Therefore, when Company A makes a cash contribution to the Trustee in an income year before the income year in which the acquisition time for the Rights or Options occurs, it will be allowed a deduction under section 83A-210 of the ITAA 1997 in the income year in which the ESS interests (Rights or Options) are granted (acquired).

However, section 83A-210 of the ITAA 1997 will not apply if Company A makes a cash contribution in an income year that is later than the income year in which the Rights or Options are granted. In this case, the cash contribution will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is incurred i.e. in the later income year.

Finally, it should be noted that if any amount of money is used by the Trustee to purchase excess shares intended to meet a future obligation arising from a future grant of Options or Rights, the excess payment will occur before the employees acquire the relevant Options or Rights (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 Company A in the year of income when the relevant Options or Rights are subsequently granted to Plan participants.

Question 4

Ordinary Income

Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. The classic definition in Australian law was given by Jordan CJ in Scott v DCT (NSW) (1935) 35 SR (NSW) 215. It states that:

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts.

The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that:

The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; … that is income derived from property. Nothing else answers the description.

In GP International Pipecoaters Pty Ltd v FCT (1990) 170 CLR 124 the High Court held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. They further state:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In accordance with an employee share scheme, the Trustee subscribes to the company for an issue of shares, it pays the full subscription price for the shares and the company receives a contribution of share capital from the Trustee.

The character of the contribution of share capital received by Company A from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, Company A is issuing the Trustee new shares in itself. The character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of the share capital, and accordingly, is of a capital nature.

Accordingly, when Company A receives the subscription proceeds from the Trustee of the EST where the EST subscribes for new shares in Company A to satisfy its obligations to the Option or Rights holders, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account, and not ordinary income under section 6-5 of the ITAA 1997.

Section 20-20

Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year.

Company A will receive an amount for the subscription of shares by the EST. There is no insurance contract in this case, so the amount is not received by way of insurance.

Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation.

Subsection 20-20(3) of the ITAA 1997 makes assessable a recoupment of a loss or outgoing that is deductible, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30 of the ITAA 1997.

Recoupment is defined to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of a loss or outgoing.

The explanatory memorandum to the Tax Law Improvement Act 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing.

So far as a deduction under section 8-1 of the ITAA 1997 is allowed for rates or taxes, section 20-30 of the ITAA 1997 will apply such that if there was a recoupment of that deduction, that amount would be assessable. However, it can be argued that in subscribing for new shares in Company A, the EST is acquiring new shares in Company A. This cannot be said to be a recoupment under subsection 20-25(1) of the ITAA 1997.

The receipt by Company A is made in return for issuing shares to the EST, not as a recoupment of previously deducted expenditure under section 8-1 regarding to rates and taxes to which section 20-30 of the ITAA 1997 will apply.

Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20 of the ITAA 1997.

Capital Gains Tax

Section 102-20 of the ITAA 1997 states that you make a capital gain or loss, if and only if a CGT event happens. No CGT events occur when the EST satisfies its obligations under the Plan by subscribing for new shares in Company A.

The relevant CGT events that may be applicable when the subscription proceeds are received by Company A are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset).

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 or non-equity shares in the company. In this case, Company A is issuing shares, being equity interests as defined in section 974-75 of the ITAA 1997, to the Trustee, therefore CGT event D1 does not happen.

In relation to CGT event H2, paragraph 104-155(5)(c) of the ITAA 1997 also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Therefore, CGT event H2 does not occur.

Since no CGT event occurs, then there is no amount that will be assessable as a capital gain to Company A.

Therefore, when the EST satisfies its obligations under the Plan by subscribing for new shares in Company A, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20-20 ITAA 1997, nor trigger a CGT event under Division 104 of the ITAA 1997.

Question 5

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 exercise the discretion 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

A scheme is defined in subsection 177A(1) of the ITAA 1936 which states:

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

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

It is considered that this definition is sufficiently wide to cover the proposed employee arrangement under the Plan, which consists of the creation of the EST, including the Trust Deed, and the payment of the irretrievable contributions to the Trustee.

Tax Benefit

'Tax benefit' is defined in subsection 177C(1) 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 Company A 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 considers that if the scheme were not entered into (i.e. the EST was not used) and Company A simply chose to issue new shares, Company A may not receive a tax deduction for this amount. However, Company A would still be entitled to a deduction if it simply bought shares for employees on market via a broker (subject to company law requirements) or alternatively remunerated the employees via an entirely different method such as cash bonuses.

If Company A issued new shares directly to employees they may not receive a deduction for the amount incurred in issuing the shares. Therefore by using an EST, a tax benefit is created through the deduction they will receive under section 8-1 of the ITAA 1997 for the irretrievable cash contributions they make to the Trustee.

The applicant concurs with this in their application where they provide that the relevant tax benefit in the present case is where Company A receives an income tax deduction arising from the payment of an amount to the Trustee.

Dominant purpose

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

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

(i) The Manner of the Scheme

The inclusion of the EST in the scheme does give rise to a tax benefit, but the company contends that the presence of the EST provides other commercial benefits, in particular, capital management flexibility and administrative efficiency.

The application also provides that the establishment of the EST will assist Company A to meet Corporations Act requirements in relation to dealing in its own shares and insider trading.

Further, it is noted that the arrangement is not deliberately and intentionally established close to the end of the company's income year nor with a large up-front payment intended to provide for the EST's operations for several years into the future, as happened in Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210. Rather, as the applicant states, Company A 'will fund the EST on a recurring basis as the need arises'.

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 the company as 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 Plan (as well as any employees who participate in future employee share equity plans). It takes the form of payments by Company A to the Trustee who acquires the shares and transfers them to participants.

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

(iii) The Timing of the Scheme

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

(iv) The Result of the Scheme

The result of the scheme is to provide Company A with allowable deductions for the contributions it makes to the EST. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of the company 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 the Company

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

(vi) Any Change in the Financial Position of other Entities or Persons

The contributions by Company A to the EST will form part of the corpus of the EST and must be dealt with by the Trustee in accordance with the terms of the Trust Deed i.e. for the acquisition of shares to provide to participants in employee share schemes. The company is not a beneficiary of the EST and its contributions cannot be returned to it in any form except where the Trustee acquires shares from the company by subscribing for new issues at market value.

Therefore, the contributions made by the company 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 the Company and any Other Persons

The relationship between Company A and the participants in the scheme is one of employer/employee. The Trustee is independent of the company and is under a fiduciary obligation to act in the interests of the employees who participate in employee share schemes and in particular, in this case, the Plan. The contributions made by the company to the Trustee are commensurate with the company's stated aim of encouraging employees to share in the ownership and the long-term success of the company. 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

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 Company A in relation to irretrievable contributions made to the EST in accordance with the scheme as outlined above.

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