Edited version of your private ruling

Authorisation Number: 1012395330055

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Ruling

Subject: Employee share scheme

Question 1

Will the head company obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by it or a subsidiary member of its income tax consolidated group to the trustee of the Employee Share Trust (EST) to fund the subscription for, or acquisition on-market, of its shares?

Answer

Yes.

Question 2a

Are irretrievable contributions made by the company to the Trustee of the EST, to fund the subscription for or acquisition on-market of its shares by the Trust to satisfy ESS interests, deductible to it at a time determined by section 83A-210 of the ITAA 1997, in respect to those ESS interests which are subject to Division 83A of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes.

Question 2b

Are irretrievable 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 to satisfy ESS interests, deductible to the company under section 8-1 of the ITAA 1997 in the income year when the contributions are made, where the contribution is made after the acquisition of the relevant ESS interests?

Answer

Yes.

Issue 2 Part IVA

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the arrangement where irretrievable contributions are made to the EST to fund the acquisition of the company's shares, where a share is a fully paid ordinary share in the capital of the company?

Answer

No.

Issue 3 Fringe benefit tax

Question 4

Is the provision of rights, options and shares by the company to employees or subsidiary member employees a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

Will the irretrievable cash contributions made by the company or any other subsidiary member of its group to the Trustee of the EST, to fund the subscription for, or acquisition on-market, of its shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

Relevant facts and circumstances

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 company is the parent entity of wholly-owned subsidiaries based in Australia and overseas that comprise the Group.

The company's (ordinary) shares are listed on the Australian Securities Exchange (ASX).

Several years ago the company established a plan (the Plan) with shareholder approval to allow it to grant Performance Shares, Performance Options (Options) and Performance Rights (Rights) over its fully paid ordinary shares to employees of the Group (collectively referred to as Awards). To date no Performance Shares have been granted under the Plan.

The company is seeking a private binding ruling on tax issues concerning these arrangements. In support of its application, it has submitted:

the Plan Rules

· various templates used in the scheme; and

· the Trust Deed.

In prior years the company has granted Options and Rights to employees within its Group. The terms of these grants are governed by the Plan Rules (as recently revised).

Under the original Plan Rules, the company had an obligation to provide Shares to participants on the vesting/exercise date, providing all conditions for vesting or exercise had been met.

While some participants continue to hold unexercised Options and Rights granted under the original Plan Rules, the company has discontinued the grant of Options under the Plan.

As a result of the decision not to grant any further Options, the company revised the Plan Rules.

The main difference between the original Plan Rules and the new Plan Rules is the removal of all references to Options. Other amendments to the Plan Rules have been made to insert a Change of Control provision, to clarify how shares may be sourced under the Plan and to the Plan amendment provisions.

Grants of Rights to employees within the Group under the new Plan Rules are scheduled to be made soon, whereas approval to grant Rights to selected executive directors of the company was obtained at an Annual General Meeting.

Collectively the original and new plans are referred to as the Plan Rules.

The Company has established an employee share trust (the EST) under the terms of the Trust Deed, with an independent trustee (Trustee).

The establishment of the EST was approved at a Board meeting of the company and the Trust Deed was executed.

The Trust Deed allows the Trustee to acquire, hold, and allocate Shares to Participants (as defined in the Plan). The EST is established to assist the company with capital management for the Plan, to facilitate the acquisition of newly issued or market purchased Shares to satisfy Awards granted under the Plan.

The company has made a determination to provide irretrievable contributions in the form of cash to the EST, and the Trustee has agreed to use this money to acquire Shares (either through subscription for newly issued shares or through market purchase) to satisfy grants of Awards made by the company to the Group's employees, in accordance with the terms of the Trust Deed and the Plan Rules.

Another Australian entity within the Group is the Employing Entity of the Group and employs staff in Australia and may make contributions to the EST in relation to employees who participate in the Plan.

The Plan

Under the Plan, the following types of Award are offered to employees by the company's board of directors (Board) with an invitation:

an option to acquire a Share (the employee must pay the option exercise price to exercise the option); or

a right to acquire a Share (nil consideration is payable to exercise the Right).

Awards granted are subject to vesting conditions (including service condition and performance condition).

An employee becomes a Participant of the Plan by accepting the Awards through completing the application which accompanies the letter of invitation.

Common terms under grant of Options and Rights

Vesting conditions which must be satisfied before the Awards can vest to participants are specified by the Board on grant of the Awards.

Awards held by Participants generally lapse upon the Participant ceasing to be a Group employee (service condition) prior to vesting due to leaving for any reason.

Under the terms of the Plan Rules, no disposal restrictions will normally apply to the Shares allocated on vesting of Awards and the Participant acquiring the Shares can dispose of them at any time, subject to the Group's securities trading policy.

Participants are not entitled to any voting or dividend rights whilst they hold Awards during the vesting/performance and exercise period.

Performance vesting conditions

In addition to continuing to be an employee of the Group until the Awards vest, performance conditions must also be satisfied. The performance conditions that apply to the grant of Options (under the original Plan Rules) and Rights (under the Plan Rules) are detailed in the application.

Awards granted under the Plan generally vest on the third anniversary of the commencement of the financial year in which the Award was granted (the extent that service and performance conditions are met).

Rights

The performance conditions for the grant of Rights under the Plan Rules include:

· Absolute Earnings Per Share (EPS) growth; and

· Relative Total Shareholder Return (TSR)

Options

The performance conditions that apply to the grant of Options under the Plan Rules include:

· Absolute EPS growth.

Vesting of Rights under the Plan

The Trustee will allocate Shares to a Participant when Rights vest. Participants are not required to pay any consideration for the grant of Rights or on vesting of the Rights to acquire Shares.

Exercise of Options under the Plan Rules

A Participant may exercise vested Options (meaning a right to subscribe for one Share subject to the terms of the Plan) which have become exercisable until the fourth anniversary of the date of grant after the completion of a performance period.

Options may be exercised by sending the company a notice of exercise specifying the number of Options which the Participant wishes to exercise and a cheque for the amount which represents the aggregate of the exercise price of the Options.

The exercise price for the Options is defined as the market value of the share on the date the Option is granted.

Transfer of Shares under the Plan

Under Plan Rules, Shares can be acquired by the company on behalf of Participants to satisfy Options and Rights through the subscription for newly issued Shares, by way of purchase of Shares already on issue, or by a combination of the two methods.

The company intends to use the EST to facilitate the acquisition of Shares on behalf of Participants for all future vesting of Rights and exercised Options under the Plan.

Acquiring Shares on-market to satisfy Awards, and specifically acquiring Shares before they are to be allocated to employees (e.g., before the Awards vest/are exercised and Shares are transferred) would (without the EST) create administrative difficulties for the company, as it is legally unable to acquire its own Shares.

Lapse of Options

Unless otherwise specified in the invitation in relation to the relevant Options, an Option will lapse on the first to occur of:

a. the end of the "Performance Options Exercise Period" (meaning the period during which Options may be exercised) which is generally on the fourth anniversary of the date of grant;

b. the termination of the employment or directorship of the eligible participant who holds the Option for any other reason.

Employee Share Trust

The company established the EST to facilitate the acquisition, holding of and allocation of Shares to Participants in accordance with the Plan Rules. The Plan operates in accordance with Division 83A of ITAA 1997.

The EST is an independent legal entity and is not part of the tax consolidated group. The object of the EST is solely the acquiring and holding of Shares and cash or other property on behalf of beneficiaries (including Plan Participants).

The company has confirmed that the EST will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4) of the ITAA 1997.

Reasons for establishing the Trust

As a company is unable to hold its own Shares under Australian corporations law, using the EST allows the company to:

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

· hedge the cost of satisfying Awards by funding the acquisition of Shares via the EST at the time Awards are granted or at any appropriate time during the vesting period;

· "recycle" Shares that are no longer required for Awards that are forfeited under the Plan, to satisfy other Awards;

· subject Shares to a restriction on dealing (for example, to enforce the Company's share trading policy), for a specified period of time after vesting / exercise of Awards, during which time they will be held in the EST (should the company decide to impose such restrictions);

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

Shares can be acquired in such manner as the company considers appropriate, consistent with its capital management strategy at the particular time.

Contributions to the EST

Clauses of the Trust Deed allow the company (and its subsidiaries) to make contributions to the EST to allow the Trustee to acquire Shares for the Plan.

In relation to the timing of contributions to the EST:

· where Shares are to be acquired on-market, contributions may be made to the EST at any time to satisfy existing or future grants;

· 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 company (or other Group companies) cannot be beneficiaries of the EST.

Allocating Shares for the Plan

With respect to the Plan, the Trust Deed does not specify when the Trustee must acquire shares to satisfy Rights granted under the Plan. However, clauses provide that the company may request that the Trustee acquire Shares in a particular manner, provided sufficient funds have been provided.

Obligations on the Trustee

A clause of the Trust Deed requires the Trustee to have the trust accounts audited annually.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Subsection 177F(1)

Fringe Benefits Tax Assessment Act 1986 Section 66

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

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

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

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

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

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 130-85(4)

Income Tax Assessment Act 1997 Paragraph 130-85(4)(a)

Income Tax Assessment Act 1997 Paragraph 130-85(4)(b)

Income Tax Assessment Act 1997 Paragraph 130-85(4)(c)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-10

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

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

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subsection 83A-20(2)

Income Tax Assessment Act 1997 Subdivision 83A-C

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

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 995-1

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

Reasons for decision

Issue 1 Question 1

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. Broadly, the provision provides an entitlement to a deduction from assessable income for any loss or outgoing, to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, subsection 8-1(2) of the ITAA 1997 prevents such a deduction to the extent that it is a loss or outgoing of capital or of a capital nature, is a loss or outgoing of a private or a domestic nature, is incurred in gaining or producing exempt income, or is prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

The stated purpose of the company in establishing and funding its employee share plans is to provide an employee equity incentive plan to further align the interests of staff and shareholders, through employees earning significant rewards by the acquisition of equity in the company. The company has advised that it will make irretrievable cash contributions to the EST to provide eligible employees with shares.

In Pridecraft Pty Ltd v. FC of T; FC of T v. Spotlight Stores Pty Ltd [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 209, 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 irretrievable contributions made to the trustee of its employee share scheme

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

Accordingly, the irretrievable contributions the company makes to the EST, to acquire shares, whether by on-market purchase or subscription, are allowable deductions.

Issue 1 Question 2a

Detailed reasoning

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

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

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

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

(i) under an arrangement; and

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

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

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

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

The Plan, described in this ruling, has facts comparable to those set out in ATO Interpretative Decision ATO ID 2010/103 which considers the timing of deductions allowable to an employer in respect of money provided to the trustee of an employee share trust.

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.

An option granted to an employee under the scheme will also be an ESS interest as it is a right to acquire a beneficial interest in a share in a company. A share purchased by the trustee to satisfy the right to acquire shares under the scheme, for an employee in relation to the employee's employment, is itself provided under the same scheme.

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

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

Consequently, the provision of money by the company to the Trustee is considered to be for the purpose of enabling the participating employees, indirectly as part of the employee share scheme, to acquire the ESS interests. A deduction for the purchase of shares to satisfy the obligation arising from the grant of ESS interests is therefore allowable to the employer in the year in which the money was paid to the trustee, under section 8-1 of the ITAA 1997.

However, the amount of money used by the trustee to purchase excess shares is intended to meet obligations arising from a future grant of ESS interests. The excess payment therefore occurs before the employees acquire the relevant ESS interests under the Plan. Section 83A-210 of the ITAA 1997 will apply and the excess payment will be deductible to the employer in the year of income when the relevant ESS interests are subsequently granted to the employees.

Issue 1 Question 2b

Detailed reasoning

As discussed in the previous answers to questions 1 and 2a, the Plan, described in this ruling, has facts comparable to those set out in ATO Interpretative Decision ATO ID 2010/103 which considers the timing of deductions allowable to an employer in respect of money provided to the trustee of an employee share trust.

Section 83A-210 of the ITAA 1997 will not apply if the company makes irretrievable cash contributions to the EST to fund the acquisition of its shares by the Trustee to satisfy ESS interests in an income year that is later than the income year in which the ESS interests are granted.

In this situation, the irretrievable cash contribution by the company to the Trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which irretrievable cash contributions are made.

Issue 2 Question 3

Detailed reasoning

Part IVA ITAA 1936 contains a number of anti-avoidance provisions which give the Commissioner discretion to cancel a tax benefit, however before the Commissioner can exercise the discretion under subsection 177F(1) ITAA 1936, three requirements must be met, as follows:

· there is a scheme

· a tax benefit was obtained or would be obtained in connection with it; and

· the scheme is one to which Part IVA applies.

As stated in reply to the previous issue (Issue 1) the facts described in ATO ID 2010/103 are comparable to the facts relating to the Plan, namely that an employer has established an ESS which complies with the provisions of Division 83A of the ITAA 1997.

The Plan was established to provide an employee equity incentive plan to further align the interests of staff and shareholders and the structure of the employee share scheme, including the use of an EST have a range of commercial benefits for the company.

The characteristics of the scheme, as described in the Facts establish that the substance of the scheme is the provision of remuneration in the form of shares to participants in the company's employee share scheme.

There is nothing in this arrangement to suggest a dominant purpose of seeking to obtain a tax benefit in relation to a scheme. Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by the company in relation to the irretrievable contributions made to the EST under the scheme.

Issue 3 Question 4

Detailed reasoning

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

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

In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee.

However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

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

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

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

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

Therefore, the granting of performance rights or options under the Plan to employees will not be subject to FBT because they are specifically not included in the definition of fringe benefits.

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

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

Under the Plan, the benefit (beneficial interest in a share) that arises upon the exercise of an option or right is considered to be provided as a result of the employee exercising rights (previously obtained). This issue is considered to be analogous to that stated in ATO Interpretative Decision ATO ID 2003/316 which refers to the case of FC of T v. McArdle 89 ATC 4051;(1988) 19ATR 1901. In that case an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.

In the present circumstances, when an employee receives a performance right or option under the Plan, they obtain a right to acquire a beneficial interest in a share in the company. When these rights are subsequently exercised, any benefit received would be in respect of the exercise of these rights, and not in respect of employment.

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

Issue 3 Question 2

Detailed reasoning

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

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

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

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

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

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

(i) the company; or

(ii) a subsidiary of the company; and

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

The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests 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 Plan is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because they are schemes under which rights to acquire beneficial interests in shares in the company are provided to employees in relation to the employee's employment.

The company has established the EST to acquire Shares and to allocate those Shares to employees to satisfy the rights acquired by the employees under the Plan. The beneficial interest in the Share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights to acquire the Shares are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997.

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

· the EST acquires Shares,

· the EST ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, are provided under an employee share scheme, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the EST Deed and relevant Plan Rules.

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 relevant Plan and administering the EST.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental include:

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

· the receipt of dividends in respect of shares held by the EST 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 being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental.

Therefore, 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 excludes the contributions to the Trustee of the EST from being a fringe benefit.

Accordingly, the company will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the EST to fund the acquisition of its shares in accordance with the Trust Deed.

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