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Ruling

Subject: Implementation of employee share trust

Question 1

Can the Taxpayer deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made by the Taxpayer or a subsidiary member of the Taxpayer's income tax consolidated group (the Group), to the Trustee of the Employee Share Trust (EST) to fund the subscription for, or acquisition on-market of, the Taxpayers shares?

Answer

Yes

Question 2

Are the irretrievable cash contributions made by the Group to the Trustee of the EST deductible to the Taxpayer under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes

Question 3

Are the irretrievable cash contributions made the Group to the Trustee of the EST deductible to the Taxpayer under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the acquisition of the relevant ESS interests?

Answer

Yes

Question 4

Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, a deduction claimed by the Taxpayer for the irretrievable cash contributions made by the Group, to fund the subscription for, or acquisition on-market of, the Taxpayer's shares by the Trustee of the EST?

Answer

No

Ruling questions 1 to 4 each apply for the following periods:

1 April 2012 to 31 March 2013

1 April 2013 to 31 March 2014

1 April 2014 to 31 March 2015

1 April 2015 to 31 March 2016

1 April 2016 to 31 March 2017

Question 5

Will the provision of Options under the Option Plan or Rights under the Rights Plan by the Taxpayer to employees of the Group be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No

Question 6

Will the irretrievable cash contributions made by the Taxpayer or Employing Entities within the Group to the Trustee of the EST to fund the subscription for, or acquisition on-market of, the Taxpayer's shares be a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No

Ruling questions 5 and 6 each apply for the following periods:

1 April 2012 to 31 March 2013

1 April 2013 to 31 March 2014

1 April 2014 to 31 March 2015

1 April 2015 to 31 March 2016

1 April 2016 to 31 March 2017

The scheme commences on:

Establishment of the employee share trust

Relevant facts and circumstances

The Taxpayer is the head company of an income tax consolidated group comprising itself, the Employing Entities and other wholly owned Australian resident subsidiaries (collectively referred to as the Group).

The Taxpayer has one class of shares on issue being ordinary shares.

Rights Plan

The Taxpayer will establish a Rights Plan which is governed by the Rights Plan Rules.

The Rights Plan allows the Board of the Taxpayer (Board) to offer Rights to specified classes of employees of the Group.

A 'Right' is defined in the Rights Plan Rules to mean a right to acquire a Share (upon payment of the Exercise Price, if applicable), on the terms and conditions determined by the Board.

A 'Share' is defined in the Rights Plan Rules to mean a fully paid ordinary share in the capital of the Taxpayer.

The Rights Plan will operate in accordance with Division 83A of the ITAA 1997.

Vesting of the Rights

Under the Rights Plan Rules, the Rights will vest if the Conditions attached to the Rights have been satisfied.

The vesting conditions attaching to each grant of Rights will vary depending upon how the Taxpayer decides to reward / motivate employees.

Upon vesting, the Rights may be settled in Shares, or cash of equivalent value, at the discretion of Board (unless the terms of the specific Rights specifically exclude the ability to make a cash equivalent payment in lieu of Shares).

The Board will generally determine whether to settle Rights in cash or Shares immediately prior to vesting of the Rights.

Rights will generally lapse upon the Participant ceasing to be an employee of the Group prior to vesting.

If a Participant ceases employment as a 'Good Leaver' prior to vesting ('Good Leaver' circumstances being death, disability or otherwise in circumstances approved by the Board), special treatment of Rights can apply such that the Board can determine to allow the Rights to vest early or to allow the Participant to retain the Rights in ceasing employment such that the Rights may vest at the normal vesting time, provided any other vesting conditions are satisfied.

Share settlement of Rights

Under the Rights Plan Rules, the Taxpayer is required to allocate Shares to a Participant when a Right vests unless the Board has determined to cash-settle the Rights.

When Rights vest and are to be settled in Shares, the Participant will be allocated Shares held by an employee share trust (the EST, explained below).

Cash settlement of Rights

If the Board determines to settle Rights in cash, the amount of the cash payment will be determined by the Board in full satisfaction of the Shares that would otherwise be allocated.

The EST will not be involved in the payments to be made in respect of cash-settled Rights.

Option Plan

The Option Plan allows the Board to grant Options to Eligible Participants.

An 'Option' is defined in the Option Plan to mean a right to subscribe for, or to receive by transfer, one Share, subject to the terms of the Option Plan.

A 'Share' is defined in the Option Plan to mean a fully paid ordinary share in the Taxpayer.

An 'Eligible Participant' is defined to mean an employee of the Group.

An Eligible Participant may exercise Options which have become exercisable by sending to the Taxpayer a notice of exercise specifying the number of Options which the Eligible Participant wishes to exercise and a cheque for the amount which represents the aggregate of the exercise price for each of the Options to be exercised.

There are no performance conditions attached to the Options.

The Options may lapse in accordance with terms specified in the invitation for Options or in accordance with the Option Plan rules.

The Option Plan operates in accordance with Division 83A of the ITAA 1997.

The Option Plan will allow existing Options to be satisfied using Shares acquired by the EST.

Employee share trust (the EST)

The Taxpayer established an employee share trust (the EST) which is governed by the terms of the Trust Deed.

Company A is the Trustee of the EST (the Trustee).

The EST will be operated so that it meets the definition of 'employee share trust' under subsection 130-85(4) of the ITAA 1997.

The Trust Deed states that neither the Taxpayer nor any entity in the Group is a beneficiary of the EST.

The EST will facilitate the allocation of full paid ordinary shares in the Taxpayer (Shares) to Eligible Participants under the Option Plan and to Participants under the Rights Plan (collectively referred to as Participants).

The Option Plan Rules and Rights Plan Rules contemplate that an employee share trust will be used to satisfy awards made under the Rights Plan and Option Plan.

The Trust Deed contemplates the Group making contributions to the EST. The Group will make irretrievable cash contributions to the Trustee of the EST, and the Trustee will use this money to acquire Shares, either through subscription for newly issued shares or through on-market purchase, to satisfy awards made under the Rights Plan or the Option Plan.

The Trust Deed does not specify when the Trustee must purchase the required Shares.

Under the terms of the Trust Deed, the Taxpayer may request that the Trustee acquire the Shares in a particular manner provided sufficient funds have been provided.

In relation to the timing of contributions by the Group to the EST:

where Shares are to be acquired on-market, contributions may be made to the Trust at any time to satisfy existing or future grants of Options and Rights;

where Shares are to be newly issued, contributions will typically be made around the time Rights vest, or are expected to vest, and Options are exercised.

The EST will not be used to make cash payments in connection with the vesting of cash-settled Rights. Such cash payments will be made by either the Taxpayer or a relevant Group entity that is the employee's employer.

The EST may also be used in conjunction with any future employee equity plan that the Taxpayer decides to implement.

Reasons for establishing the EST

The Taxpayer is unable to hold its own Shares under Australian corporations law.

Using the EST allows the Taxpayer to:

· warehouse Shares in the EST (that is, acquire and hold Shares before they are to be allocated to Participants);

· hedge the cost of satisfying the rights by funding the acquisition of Shares via the EST at the time rights are granted;

· 'recycle' Shares that are no longer required for rights that are forfeited under the Rights Plan Rules and Option Plan, to satisfy other rights;

· subject Shares to a restriction on dealing, for a specified period of time after the allocation date, during which time they will be held in the EST;

· have greater choice in the source of the Shares used to satisfy rights, e.g., market purchase, new issue or other transfer.

Relevant legislative provisions

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 subsection 83A-10(1).

Income Tax Assessment Act 1997 subsection 83A-10(2).

Income Tax Assessment Act 1997 section 83A-25.

Income Tax Assessment Act 1997 section 83A-35.

Income Tax Assessment Act 1997 section 83A-205.

Income Tax Assessment Act 1997 section 83A-210.

Income Tax Assessment Act 1997 section 83A-340.

Income Tax Assessment Act 1997 subsection 130-85(4).

Income Tax Assessment Act 1936 section 177A.

Income Tax Assessment Act 1936 section 177C.

Income Tax Assessment Act 1936 section 177F.

Income Tax Assessment Act 1936 section 177D.

Income Tax Assessment Act 1936 paragraph 177D(b).

Fringe Benefits Tax Assessment Act 1986 subsection 136(1).

Reasons for decision

Question 1

Summary

The Taxpayer can deduct an amount under section 8-1 of the ITAA 1997 for the irretrievable cash contributions made by the Group to the Trustee of the EST to fund the subscription for, or acquisition on-market of, Shares.

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 provides 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.

The Trust Deed contemplates the Group making cash contributions to the EST to enable it to subscribe for or acquire shares in the Taxpayer to satisfy grants made under the Rights Plan or Option Plan. These contributions will be irretrievable and are considered a loss or outgoing of the Group for the purpose of subsection 8-1(1) of the ITAA 1997. The purpose of the Taxpayer in establishing the Rights Plan or Option Plan, establishing the EST and making irretrievable cash contributions to the EST is to provide benefits to eligible employees of the Group in the form of Shares, as part of the Group's remuneration and reward program.

There is a sufficient nexus between the outgoing (the Group's contributions to the EST) and the derivation of the Taxpayer's assessable income for the amounts to be considered prima facie deductible.

However, subsection 8-1(2) of the ITAA 1997 provides that you cannot deduct a loss or outgoing 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.

The first exclusion in paragraph 8-1(2)(a) of the ITAA 1997 prevents an amount from being deducted if it is capital or of a capital nature. The established principles on the distinction between capital and income are well known; see for example, Dixon J's judgement in Sun Newspapers Ltd & Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87, and the Full Federal Court decision in FC of T v Email (1999) 99 ATC 4868 at 4873; 42 ATR 698 at 704). The character of the advantage sought provides the best guidance as to the nature of the expenditure as it says most about the essential character of the expenditure itself. The nature or character of the expenditure follows the advantage that is sought to be gained by incurring the expense. If the advantage to be gained is of a capital nature, then the loss or outgoing incurred in gaining the advantage will also be of a capital nature.

The nature of the Group's irretrievable cash contributions, and the advantage sought in incurring the expense, is employee remuneration and reward. Employee remuneration is part of the day-to-day operation of the Group's business. The Group's contributions will be recurring, made as and when Shares are to be subscribed for or acquired pursuant to the Trust Deed. As the cash contributions will be a recurring expense relating to the Group's day-to-day business activities the cash contributions are appropriately characterised as revenue rather than capital expenses. 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; FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745 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.

Nothing in the facts suggests that the cash 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 ITAA 1936.

Conclusion

Therefore, when the Group incurs the irretrievable cash contributions to the Trustee of the EST to fund the subscription for or acquisition of the Taxpayer shares in accordance with the Trust Deed, those contributions will be an allowable deduction to the Taxpayer under section 8-1 of the ITAA 1997.

In reaching this conclusion we have taken into account ATO Interpretative Decision 2002/1074 Income Tax - deductibility - irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme.

Question 2

Summary reasoning

The irretrievable cash contributions made by the Group to the Trustee of the EST are deductible to the Taxpayer under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997 if the contributions are made at a time before the relevant ESS interests are acquired. Essentially, the deduction is deferred until the income year in which the ESS interests are acquired by the Participants.

Detailed reasoning

Section 83A-210 of the ITAA 1997 states:

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.

Arrangement

The adoption of the Rights Plan and the Option Plan, associated Rules and the EST, constitutes an arrangement for the purposes of paragraph 83A-210(a)(i) of the ITAA 1997. The provision of money from the Group to the Trustee of the EST necessarily allows the arrangment to proceed.

Acquiring an ESS interest '…directly or indirectly...'

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.

Options granted to Group employees under the Option Plan will be ESS interests at the time they are granted, as they represent a right to acquire a beneficial interest in a share in a company. Rights granted to Group employees under the Rights Plan will be ESS interests provided they are determined to be share-settled on vesting. Rights determined to be share-settled on vesting will be taken to have always been ESS interests: section 83A-340 of the ITAA 1997.

Because the Option Plan and Rights Plan are both schemes under which ESS interests are provided to employees in relation to their employment, the Option Plan and Rights Plan are both employee share schemes under subsection 83A-10(2) of the ITAA 1997.

Granting the ESS interests, the provision of money to the EST from the Group under the arrangement, the acquisition and holding of Shares by the EST and the allocation of those Shares to Participants by the EST are all interrelated components of the Taxpayer's employee share schemes. All the components of these schemes must be carried out so that the schemes can operate as intended. The provision of money to the EST to acquire Shares is considered to be for the purpose of enabling the participating employees, indirectly under the Option Plan or Rights Plan, to acquire ESS interests for the purpose of subsection 83A-210(a) of the ITAA 1997.

Acquisition time

With respect to the Options, the 'acquisition time' for the purposes of paragraph 83A-210(b) of the ITAA 1997 will be the time the Options are granted to participants.

With respect to Rights the 'acquisition time' is determined in light of section 83A-340 of the ITAA 1997. This is because the Rights are indeterminate rights, meaning they may be settled by cash or shares. At the time of the initial grant of the Rights, the indeterminate nature of the right means that the employee cannot be said to have a right to acquire a beneficial interest in a Share (that is, they have no ESS interest). However, once the Rights are determined to be share-settled the employee then has the right to acquire the beneficial interest in a share which amounts to an ESS interest. Further, section 83A-340 of the ITAA 1997 provides that where an indeterminate right later becomes an ESS interest, Division 83A of the ITAA 1997 applies as if the right had always been a right to acquire the beneficial interest in the share. Therefore, where a Right is determined to be share-settled the Participant will be taken to have acquired their ESS interest at the time the Right was granted.

Conclusion - timing of the deduction

If the irretrievable cash contributions are made by the Group in a financial year that is before the financial year the relevant ESS interests are acquired, the deduction available to the Taxpayer under section 8-1 of the ITAA 1997 will be deferred by the operation of section 83A-210 of the ITAA 1997 until the financial year the relevant ESS interests are acquired by Participants.

If the irretrievable cash contributions are made by the Group at a time before the relevant ESS interests have been acquired but the ESS interests are subsequently acquired in the same financial year the contributions are made, the deduction available to the Taxpayer under section 8-1 of the ITAA 1997 will arise in that financial year. Although section 83A-210 of the ITAA 1997 will operate to defer the time at which the contribution is taken to have occurred, that deferral is within the same financial year as the actual payment of the contribution resulting in no practical impact on the timing of the deduction.

Question 3

Section 83A-210 of the ITAA 1997 will not apply if the Taxpayer makes an irretrievable cash contribution at a time after the relevant ESS interest is acquired. If the irretrievable cash contribution is made after the relevant ESS interest has been acquired, the irretrievable 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, being the income year in which the cash contribution is made.

Question 4

Summary

The Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, a deduction claimed by the Taxpayer for the irretrievable cash contributions made by the Group to fund the subscription for, or acquisition on-market of, the Taxpayer shares by the Trustee of the EST.

Detailed reasoning

Part IVA is a general anti-avoidance provision. Under subsection 177F(1) of the ITAA 1936 the Commissioner may make a determination to cancel a tax benefit that has been obtained, or would but for section 177F be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

Broadly, before the Commissioner can exercise the discretion in section 177F of the ITAA 1936, the following requirements must be satisfied:

· a scheme, as defined in section 177A of the ITAA 1936, is entered into or carried out by a taxpayer;

· a taxpayer obtains or would obtain a tax benefit in connection with the scheme as identified in section 177C of the ITAA 1936; and

· having regard to section 177D of the ITAA 1936, it is reasonable to conclude that the sole or dominant purpose of a person who entered into or carried out the scheme was to obtain the tax benefit in connection with the scheme.

In considering how Part IVA of the ITAA 1936 applies to the Taxpayer, we have taken into account Law Administration Practice Statement 2005/24 Application of General Anti-Avoidance Rules.

The scheme

Subsection 177A(1) of the ITAA 1936 provides that 'scheme' means:

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;

This definition is sufficiently wide to cover the arrangement described in this ruling which consists of the creation of the EST and payment of the irretrievable cash contributions by the Group to the EST.

Tax benefit

Tax benefit is defined in subsection 177C(1) of the ITAA 1936 to include:

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

In order to determine the tax benefit that would be derived by the Taxpayer from the scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the Taxpayer might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration.

The applicant, on behalf of the Taxpayer, identified three possible counterfactuals, the first two being:

1. Alternative 1: the Taxpayer could fund the purchase of Shares on-market in the name of the Participant at the time the Rights vest or the Options are exercised.

2. Alternative 2: the Taxpayer could remunerate employees via payments of salary, bonuses or superannuation contributions (that is, cash equivalent amounts based on the value of Shares) rather than through the grant of Rights or Options and delivery of Shares.

A comparison between the scheme and these counterfactuals reveals no tax benefit. This is because the deduction the Taxpayer would be entitled to under the counterfactuals is the same or similar to the deduction available to the Taxpayer under the scheme.

The third counterfactual identified is:

3. Alternative 3: the Taxpayer could issue new Shares directly to Participants when the Rights vest or the Options are exercised.

Under this counterfactual, the Taxpayer may be entitled to a deduction for the cost of issuing and transferring the Shares under section 83A-205 of the ITAA 1997. That section requires that the following conditions be satisfied:

· the Taxpayer must have provided an ESS interest to an individual under an employee share scheme

· the Taxpayer must have done this as the individual's employer (or as the holding company of the employer), and

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

The deduction under section 83A-205 is to be contrasted with the deduction the Taxpayer would receive under the scheme. That is, a deduction limited to the cost of issuing and transferring the Shares compared to a deduction for the amount of irretrievable cash contributions (which are equivalent to the value or cost of the Shares).

The deduction the Taxpayer may receive under section 83A-205 of the ITAA 1997 is likely to be lower than the deductions the Taxpayer would receive under the scheme. Therefore, after comparing the third counterfactual with the scheme it may be possible to identify a tax benefit, being that the scheme allows the Taxpayer to access larger deductions than the counterfactual.

It is arguable whether the Taxpayer would adopt a remuneration strategy that did not give rise to a higher allowable deduction, if all other matters were equal. Therefore it is arguable whether the Taxpayer might reasonably have entered into Alternative 3 to achieve its aims in relation to employee remuneration. However, the analysis below proceeds on the assumption that the Commissioner would in fact be able to identify a tax benefit from the scheme.

Sole or dominant purpose

Section 177D of the ITAA 1936 provides that Part IVA applies to a scheme in connection with which the taxpayer has obtained a tax benefit if, after having regard to eight specified factors, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling the taxpayer to obtain the tax benefit.

Paragraph 177D(b) of the ITAA 1936 sets out the eight specified 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),

(i) The manner of the scheme

Consideration of the manner in which the scheme is to be implemented allows the Commissioner to identify contrivance and artificiality. In this case, it is necessary to consider whether utilising an employee share trust is a step within the Group's remuneration policy which was selected for the dominate purpose of obtaining a tax benefit.

The applicant, on behalf of the Taxpayer, has provided the following commercial reasons for the use of an employee share trust in the operation of the Option Plan and Rights Plan:

· The EST is a vehicle which will enable the Taxpayer to effectively acquire and hold its own Shares for the purposes of fulfilling its obligations resulting from new and existing grants under the Option Plan and Rights Plan.

· The EST will facilitate the acquisition of Shares either on-market or though new issue of Shares by the Taxpayer.

· The EST will allow the Taxpayer to place a disposal restriction on the Shares, requiring that Shares allocated to a Participant on the vesting of Rights are held by the EST for a specified period after the vesting date (which is envisaged for the initial grant of Rights under the Rights Plan). As the EST will be the legal owner of the Shares, the Participants will not be able to deal with the Shares until they are transferred out of the EST into the Participant's name. The Option Plan rules do not provide for a holding period.

· The Trust provides an arm's length vehicle for acquiring and holding Shares in the company either by way of new issue or acquiring on market thereby providing flexibility relating to capital management.

· Contributing to the EST may enable the Taxpayer to hedge against the share price growth (i.e. by acquiring Shares before they are required to be allocated to Participants).

· The EST provides the flexibility to acquire and hold Shares that will be allocated to employees under the Option Plan or Rights Plan. If vesting conditions are not met, the Options or Rights are forfeited and the EST enables Shares held for such forfeited awards to be 'recycled' to satisfy other grants of Options or Rights.

· The EST establishes independent records and accounts for participating employees.

It is accepted that the EST provides non-tax benefits to the operation of the scheme that would not be available if the shares were provided directly by the Taxpayer as in the 'Alternative 3' counterfactual. Further, utilising an employee share trust is a common feature of employee share schemes and part of the ordinary manner in which employee share schemes may be administered.

In light of these factors it is considered that the manner in which the scheme is to be carried out does not suggest the scheme will be entered into or carried out for the dominant purpose of obtaining a tax benefit in connection with the scheme.

(ii) The form and substance

This factor considers whether there is a discrepancy between the form of the scheme and its substance.

The outgoings to be incurred by the Group under the scheme (i.e. the irretrievable cash contributions to the EST) are, in form, a remuneration expense. Those outgoings will be used by the EST to provide Shares to Participants under the Option Plan or Rights Plan as part of the Group's remuneration policy. The practical and commercial effect of the scheme aligns with its legal form.

The substance of the scheme could also be achieved through the form of transaction proposed in the 'Alternative 3' counterfactual. That is, both proposals would provide remuneration benefits to employees of the Group but through different forms. Importantly however there is nothing artificial or contrived about the form of the scheme that has been proposed. The difference in form between the scheme and the 'Alternative 3' counterfactual can be explained by the commercial factors noted above.

Therefore, the Commissioner considers that the form and substance of the scheme do not suggest the scheme will be entered into or carried out for the dominant purpose of obtaining a tax benefit in connection with the scheme.

(iii) The timing of the scheme

The scheme commenced on the date the EST was executed. The irretrievable cash contributions made by the Group to the EST to enable the Trustee to acquire the Shares will be made on a recurring basis, as the need arises. The scheme has not been established to provide a substantial year-end deduction to the Taxpayer. Nothing about the timing of the scheme suggests the scheme will be entered into or carried out for the dominant purpose of obtaining a tax benefit in connection with the scheme.

(iv) The result of the scheme

As a result of the scheme, the Taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the irretrievable cash contributions made by the Group to the EST (as outlined in ruling question 1). The timing of that deduction is governed by the principles discussed in ruling questions 2 and 3. The irretrievable cash contributions are considered genuine, non-capital outgoings relating to a normal business expense of employee remuneration. Therefore, it is expected that a deduction would normally be allowable in these circumstances.

As the effect of the scheme is consistent with the intended operation of the tax laws, the results of the scheme do not suggest the scheme will be entered into or carried out for the dominant purpose of obtaining a tax benefit in connection with the scheme.

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

The irretrievable cash contributions made by the Group to the EST constitute a real monetary loss or outgoing of the Group. The fact that there is a real and practical change to the financial position of the Group supports a lack of contrivance or artificiality in the way the scheme is proposed.

Further, while it is arguable that the amount of the deduction is higher with an employee share trust as part of the scheme than would be the case if the Taxpayer provided Shares to Participants directly, there is nothing artificial or contrived about the use of an employee share trust or the amount of the irretrievable cash contributions.

The change in the financial position of the Taxpayer does not suggest the scheme will be entered into or carried out for the dominant purpose of obtaining a tax benefit in connection with the scheme.

(vi) Any change in the financial position of any person who has a connection with the Taxpayer, as a result of the scheme

The contributions made by the Group 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 EST Deed, that is, for the acquisition of Shares to ultimately be provided to Participants in the Option Plan and Rights Plan. The contributions made by the Group will improve the financial position of the Trustee, however this improvement is then offset by the obligation assumed by the Trustee to provide shares to Participants under the scheme. The change to the Trustee's financial position is not of a nature or type which suggests the scheme will be entered into or carried out for the dominant purpose of obtaining a tax benefit in connection with the scheme.

The contributions made by the Group are irretrievable, meaning they cannot be returned to the Group in any form except where the Trustee acquires shares from the Taxpayer by subscribing for new shares at market value. Making contributions to the EST under the scheme will result in a real change in the financial position of the Group entities. However, this change will be equivalent to the change in financial position that would have occurred had the Taxpayer issued new Shares directly to employees when the Rights vest or the Options are exercised. The change to the Group's financial position is not of a nature or type which suggests the scheme will be entered into or carried out for the dominant purpose of obtaining a tax benefit in connection with the scheme.

Finally it is noted that the financial position of Participants in the scheme will also change, given that they will receive the value of the Shares obtained as a result of Rights vesting or Options being exercised. Again, this change will be equivalent to the change in financial position that would have occurred had the Participants received the allocated Shares directly from the Taxpayer rather than the EST. The change to the Participant's financial position is not of a nature or type which suggests the scheme will be entered into or carried out for the dominant purpose of obtaining a tax benefit in connection with the scheme.

(vii) Any other consequence

No other relevant consequences of the scheme have been identified for the Taxpayer, the Group, the EST or the Participants.

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

The relationship between the Group and the Eligible Participants in the Option Plan and the Participants in the Rights Plan is one of employer/employee. The Taxpayer, the Group, the Trustee of the EST and the Participants all deal at arm's length. There is nothing in the nature or type of relationship between the relevant parties which suggests that the scheme will be entered into or carried out for the dominant purpose of obtaining a tax benefit in connection with the scheme.

Conclusion

A consideration of the factors in paragraph 177D(b) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is not to obtain a tax benefit but rather is to provide remuneration benefits to the Group's employees in a manner which promotes its business objectives.

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 Taxpayer in relation to the irretrievable contributions made by the Group to the Trustee of the EST to fund the subscription for or acquisition on-market of the Taxpayer shares in accordance with the scheme.

Question 5

Summary

The provision of Options under the Option Plan or Rights under the Rights Plan by the Taxpayer to employees of the Group will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA. Further, the subsequent allocation of Shares from the EST upon the exercise of Options or vesting of Rights will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

The definition of 'fringe benefit' is contained in subsection 136(1) of the FBTAA. Broadly, a fringe benefit is a benefit provided to an employee by an employer (or associate) in respect of the employment of the employee, unless that benefit is of the type specifically excluded from the definition in subsection 136(1) of the FBTAA.

Options

Options granted under the Option Plan are benefits provided to an employee by an employer (or associate) in respect of employment. However, an exclusion to the definition of fringe benefit, provided for in paragraph (h) of the definition, is:

· 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 Options are ESS interests as they are a right to acquire a beneficial interest in a share in a company: subsection 83A-10(1) of the ITAA 1997. The Option Plan is an employee share scheme (to which Subdivision 83A-B or 83A-C of the ITAA 1997 will apply) as it is an arrangement by which the ESS interests (Options) are granted to employees of the Group in relation to their employment: subsection 83A-10(2) of the ITAA 1997.

The provision of Options under the Option Plan is the provision of a benefit that is the acquisition of an ESS interest under an employee share scheme. Therefore, the provision of Options to employees of the Group will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Rights

The Rights are indeterminate rights because they may be settled by cash or shares at the discretion of the Taxpayer at the time they vest. Notwithstanding their indeterminate nature, the Rights are a 'benefit' provided to employees in respect of employment. However, the definition of 'fringe benefit' does not include:

· a payment of 'salary or wages' (paragraph (f) of the definition); or

· 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 (paragraph (h) of the definition).

At the time the Rights are granted it is unclear if paragraph (f) or (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA applies because:

· at that time, the employee has not acquired rights that are ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997; and

· if they are rights to shares or cash, it is also unclear if the employee will ultimately receive cash that would on payment be considered salary or wages.

Although the Rights are not ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997 at the time they are granted, if they are ultimately satisfied with shares instead of cash:

· the Rights will, pursuant to section 83A-340 of the ITAA 1997, be treated as if they had always been ESS interests; and

· as they will constitute the acquisition of ESS interests acquired under an employee share scheme (within the meaning of the ITAA 1997) to which Subdivision 83A-B or Subdivision 83A-C of the ITAA 1997 applies, they will be excluded from the definition of fringe benefit by paragraph 136(1)(h) of the FBTAA.

Alternatively, where an employee's Rights are ultimately satisfied with cash instead of shares, the granting of the rights:

· will be viewed as one of a series of steps in the payment of salary or wages; and

· will not be viewed as a separate benefit to the payment of salary or wages which are excluded from the definition of fringe benefit by paragraph 136(1)(f) of the FBTAA.

Therefore, the grant of Rights to employees of the Group in relation to their employment will be excluded from the definition of fringe benefit by either paragraph 136(1)(f) or (h) of the FBTAA.

Provision of Shares from the EST

For completeness, it is necessary to consider the fringe benefit implications of the allocation of Shares from the EST to Participants. The Shares allocated from the EST are also benefits provided to employees of the Group. However, to be a fringe benefit within the meaning of that term in subsection 136(1) of the FBTAA the benefit must be provided 'in respect of' the employment of the employee.

The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. The Court at ATC 4158 said:

Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, casual connection or relationship between the benefit and the employment.

When an employee becomes an Eligible Participant under the Option Plan or Participant under the Rights Plan they obtain a right to acquire a beneficial interest in a Share and this right constitutes an ESS interest. When this right is subsequently exercised, the benefit received (i.e. the Shares from the EST) would be in respect of the exercise of the right, and not in respect of employment. Therefore, the Shares allocated from the EST to employees upon the exercise of Options or vesting of Rights will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee.

In reaching this conclusion we have taken into account ATO Interpretative Decision 2003/316 Fringe benefit: benefit arising upon discharge of a limited recourse loan. This Interpretative Decision discussed the case of Federal Commissioner of Taxation v McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The Full Federal 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

Question 6

Summary

The irretrievable cash contributions made by the Taxpayer and the Employing Entities to the Trustee of the EST to fund the subscription for, or acquisition on-market of Shares, will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

The definition of 'fringe benefit' is contained in subsection 136(1) of the FBTAA. Broadly, a fringe benefit is a benefit provided to an employee by an employer (or associate) in respect of the employment of the employee, unless that benefit is of the type specifically excluded from the definition in subsection 136(1) of the FBTAA. One such exclusion provided for in paragraph (ha) of the definition of 'fringe benefit' is:

· 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)

In this case, the EST will received money (the irretrievable cash contributions) from the Taxpayer and the Employing Entities in respect of the Option Plan or Rights Plan. For the purpose of this fringe benefit exception it is necessary to determine whether the EST is an 'employee share trust'.

Subsection 130-85(4) of the ITAA 1997 states:

An employee share trust, for an employee share scheme, 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).

The Trust Deed deals with Trust Purposes and provides that the sole purpose of the EST is to

…acquire Shares so that they can be provided to Participants who are Beneficiaries as nominated by the Company and to carry out any other activities incidental to achieving that purpose.

The Trust Deed also provides for the provision of Shares to employees who are beneficiaries of the EST.

The Beneficiaries/Participants of the EST are employees of the Group holding Options under the Option Plan or Rights under the Rights Plan. The Options and the share-settled Rights are 'ESS interests' as they are a right to acquire a beneficial interest in a share in the Taxpayer: subsection 83A-10(1) of the ITAA 1997. The Option Plan and Rights Plan are both 'employee share schemes' as they are an arrangement by which the ESS interests (Options and the share-settled Rights) are granted to employees of the Group in relation to their employment: subsection 83A-10(2) of the ITAA 1997.

Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

· the EST acquires shares in the Taxpayer, and

· the EST ensures that ESS interests are provided under an employee share scheme by allocating those the Taxpayer shares to the employees in accordance with the Option Plan Rules and Rights Plan Rules.

While undertaking these activities, the Trust Deed permits the Trustee to carry out any other activities incidental to achieving the Trust Purposes. For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, permitted incidental activities include:

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

· the receipt of dividends in respect of shares held by the 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

· receiving and immediately distributing shares under a demerger.

Activities that result in employees of the Group being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental. The provision of such benefits would result in the EST not being considered an 'employee share trust'.

In this case, the EST will be operated so that it meets the definition of 'employee share trust' under subsection 130-85(4) of the ITAA 1997.

As the EST is an 'employee share trust' within the meaning of that term in subsection 130-85(4) of the ITAA 1997, the irretrievable cash contributions made by the Taxpayer and the Employing Entities to the Trustee of the EST to fund the subscription for, or acquisition on-market of, Shares will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

In coming to this decision we have taken into account ATO Interpretative Decision 2010/108 Income Tax: Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities.

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