Edited version of your private ruling

Authorisation Number: 1012428951897

Ruling

Subject: Employee Incentive Plans

Question 1

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

Answer

Yes.

Question 2

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 Employee Share Scheme interests deductible to the Company at a time determined by section 83A-210 of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes.

Question 3

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 Employee Share Scheme 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 in the same or subsequent income year to the acquisition of the relevant ESS interests?

Answer

Yes.

This ruling for questions 1 to 3 applies for the following periods:

1 January 2012 to 31 December 2012

1 January 2013 to 31 December 2013

1 January 2014 to 31 December 2014

1 January 2015 to 31 December 2015

1 January 2016 to 31 December 2016

Question 4

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable contributions made by the Company, or any subsidiary member of the Company's income tax consolidated group, 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 for question 4 applies for the following periods:

1 January 2012 to 31 December 2012

1 January 2013 to 31 December 2013

Question 5

Is the provision of Rights and Shares by the Company to the Company's employees or subsidiary member employees under the Company's Equity Incentive Plan a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 6

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

Answer

No.

This ruling for questions 5 and 6 applies 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 commenced on:

The establishment of the Employee Share Trust

Relevant facts and circumstances

The Company is the parent entity of several wholly owned subsidiaries. The Company and these wholly owned subsidiaries (referred to as the Group) together with other entities form the Company's income tax consolidated group (the Consolidated Group).

Establishing the Employee Share Trust (EST)

The Company entered into the Trust Deed for the Company's Equity Incentive Plans (Trust Deed) to establish an EST to facilitate the provision of shares in the Company to employees of the Company and its subsidiaries in the Group under the Company's Equity Incentive Plan Administration Rules (the Plan).

The Trustee of the EST is not a related entity of the Company, and is not a subsidiary member of the Group or the Consolidated Group. It is an external trustee acting in an independent capacity on behalf of the beneficiaries of the EST in accordance with the Trust Deed.

The EST was established to allow the Trustee to acquire, hold, and allocate the Company's shares (Shares) to employees participating in the Plan. The EST was also established to assist the Company with capital management for the Plan, to more easily facilitate forfeited Rights, and to facilitate the acquisition of new issue or market purchased shares to satisfy Rights granted under the Plan.

Operation of the Plan Rules

The Company held an annual general meeting and obtained shareholder approval for establishment of the Plan.

The Plan adopted allows the Company to offer Performance Rights (Rights), Options & Restricted Shares.

A Right is an entitlement to a fully paid ordinary share in the capital of the Company (Share) subject to satisfaction of applicable conditions (including any Vesting Condition). The Company will offer Rights to Australian resident and foreign resident employees of the Group.

The Trust Deed allows the Trustee to acquire, hold and allocate Shares to employees participating in the Plan. The Company (or a subsidiary member of the Consolidated Group) will make irretrievable contributions in the form of cash to the Trust, and the Trustee has agreed to use the money to acquire Shares (new issue or through market purchase) to satisfy the grant of Rights made by the Company to the Group's employees, in accordance with the terms of the Trust Deed and the Plan rules.

The employee becomes a participant (Participant) of the Plan once Rights have been granted to that employee.

There are vesting conditions that must be satisfied before the Rights can vest. The Plan provides the Company with the flexibility to grant different awards with various terms and conditions. The Company intends to grant three types of awards under the Plan, as follows:

· Long-term incentive awards (LTI awards);

· Short-term incentive deferral awards (STI deferral awards); and

· One-off awards (One-off awards).

When the specific vesting conditions are met, Rights vest and Rights may be settled in Shares or cash of equivalent value, at the discretion of the Company, through the Board or a sub-committee of the Board. The Board or sub-committee will generally determine whether to settle Rights in cash or Shares immediately prior to vesting of the Rights.

Common terms under the LTI awards, STI deferral awards and One-off awards

Rights held by Participants lapse upon the Participant ceasing to be a group employee prior to vesting due to leaving because of resignation, termination or any other circumstances determined by the relevant committee.

If a Participant ceases employment other than by resignation, termination or any other circumstances determined by the relevant committee (including genuine retirement) prior to vesting, different treatments will apply.

The Company retains the discretion to make a cash payment to Participants in lieu of an allocation of Shares on vesting. Participants are not entitled to any voting or dividend rights prior to vesting.

Common terms under the STI deferral awards and One-off awards

The vesting date for STI deferral awards will generally be two years after the grant of the Rights. The vesting date for One-off awards will depend on the specific vesting period determined for the relevant Participant but will normally range from one to three years after the grant of Rights.

The minimum employment period in the service condition applied to STI deferral awards and the One-off award is six months. Participants holding STI deferral or One-off awards are entitled to receive notional accrued dividends at vesting representing the dividends the Participants would have received if they held the Shares during the vesting period. If the Participant ceases employment with the Group prior to vesting, due to resignation, termination or any other circumstances determined by the relevant committee, Rights granted as STI deferral awards or One-off awards are forfeited.

Terms of the LTI awards

The vesting date for LTI awards will generally be three years after the grant of the Rights. The Rights will be divided into two parcels with separate performance hurdles applying to each parcel. All rights that do not vest following the performance conditions will lapse immediately.

Vesting of shares under the Plan- payment of cash or transfer of share

When the Board or sub-committee determines to cash-settle Rights, the amount of the cash payment will be determined based on the Company's Share price on the relevant vesting date.

The cash payment will be made to the Participant by the appropriate Group employment entity, through payroll, on the next available pay run following vesting. The EST will not be involved in the payments to be made in respect of cash-settled Rights. If the Company decides to settle Rights in Shares, the Company (via the EST) can satisfy Rights using newly issued Shares, buying Shares on-market or both.

Contributions to the EST

The Trust Deed allows the Company and the Group to make contributions to the EST to allow the Trustee to acquire Shares for the Plan. The Company and the Group may make contributions to the EST to acquire Shares for employees that are employed by foreign entities within the Group.

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 the relevant Group company that is the Participant's employer. Cash accrued in the EST in relation to dividends paid on Shares may, however, be used to fund the distribution of notional dividend amounts to Participants who hold STI deferral awards or One-off awards.

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 of Rights;

· where Shares are to be newly issued, contributions will typically be made around the time Rights vest.

The Company or any Group member cannot be a beneficiary of the EST and cannot receive any balance of capital or income of the EST on termination 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. The Company may direct the Trustee to acquire Shares in a particular manner, provided sufficient funds have been provided.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Section 83A-200

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 177D

Income Tax Assessment Act 1936 Section 177F

Fringe Benefits Tax Assessment Act 1986 Section 66

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Question 1

Summary

When the Company makes irretrievable cash contributions to the Trustee of the EST to fund the acquisition of Shares in accordance with the Trust Deed, those contributions will be an allowable deduction to the Company under section 8-1 of the ITAA 1997.

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.

Losses or outgoings

Pursuant to the Trust Deed, the Company will provide the Trustee with all the funds (cash contributions) required to enable the Trustee to subscribe for, or acquire Shares in the Company. These contributions that the Company makes to the Trustee are irretrievable and non-refundable to the Company.

The Trustee will, in accordance with instructions received pursuant to the relevant Plan, acquire, deliver and allocate Shares for the benefit of Participants provided that the Trustee receives sufficient payment to subscribe for or purchase Shares and / or has sufficient General Trust Property available.

It can be concluded that the irretrievable contributions made by the Company are part of the overall employee remuneration arrangements of the employer and considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997.

Relevant nexus

The purpose of the Company in establishing and making irretrievable contributions to the Trustee of the EST is to provide benefits to certain eligible employees in the form of Shares.

The contributions are made to the Trustee of the EST solely to enable the Trustee to acquire Shares for eligible employees of the business.

Accordingly, there is a sufficient nexus between the outgoings (being the Company's contributions to the Trustee of the EST) and the derivation of the Company's 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 Company's contributions will be recurring and will be made from time to time as and when Shares are to be subscribed for or acquired pursuant to the Trust Deed. Therefore, 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; 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.

This confirms the earlier view expressed in ATO Interpretative Decision ATO ID 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 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.

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 ITAA 1936.

Conclusion

When the Company or a member of the Consolidated Group makes irretrievable contributions to the Trustee of the EST to fund the acquisition of Shares in accordance with the Trust Deed, those contributions will be an allowable deduction to the Company under section 8-1 of the ITAA 1997.

Question 2

Summary

The Right given to the Participant under the Plan becomes an Employee Share Scheme interest subject to Division 83A of the ITAA 1997 once the Company determines to settle the Right in Shares. The Participant will be treated as if it acquired its ESS interest at the time the Right was granted (section 83A-340 of the ITAA 1997).

When the Company makes a cash contribution to the Trustee of the EST to fund the acquisition of Shares in relation to the grant of ESS interests in an income year before the acquisition time for the ESS interests occurs, the timing of the deduction allowable under section 8-1 of the ITAA 1997 will be determined by section 83A-210 of the ITAA 1997.

The Company will be entitled to a deduction in the income year in which the acquisition of the ESS interest occurs. This is when the Right is granted to the Participant, provided that the Company has determined to settle the Right in Shares (and only to the extent that the cash contribution is not in excess of the amount necessary to acquire sufficient Shares to satisfy the Right determined to be settled in Shares).

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.

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 the ESS interests (directly or indirectly) by the Company under the Plan in relation to the employee's employment.

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

The adoption of the Plan and the associated EST constitutes an arrangement 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.

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).

The deductibility of money provided to employee share trusts is considered in ATO Interpretative Decision ATO ID 2010/103 Income Tax Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust (ATO ID 2010/103).

The facts described in ATO ID 2010/103 are comparable to the present Plan. Therefore, the reasoning in it is relevant, as explained immediately below.

Rights granted to a Participant under the Plan will become ESS interests when the Company determines to settle the Rights in Shares, as at this time the Rights become rights to acquire a beneficial interest in shares in the Company. Participants will be treated as if they acquired their ESS interests at the time their Rights were granted (section 83A-340 of the ITAA 1997).

The ESS interests will also be granted under an employee share scheme as they are granted in relation to the employee's employment. A Share acquired by the Trustee to satisfy a right to acquire a Share granted under the employee share scheme to an employee in relation to the employee's employment is itself provided under the same scheme.

The granting of the Rights, the provision of the money to the Trustee under the arrangement, the acquisition and holding of Shares by the Trustee and the allocation of Shares to the participating employees are all interrelated components under the Plan. 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.

Accordingly, the provision of money to the Trustee to acquire Shares is considered to be for the purpose of enabling the participating employees, indirectly as part the Plan, to acquire Rights (that is, ESS interests).

Contribution made in an income year prior to the income year that ESS interests are acquired by the Participant

When the Company makes a cash contribution to the Trustee in an income year prior to the grant of Rights (i.e. if Rights are granted to employees in a later income year to that in which the contribution is made), the acquisition time for the purposes of paragraph 83A-210(b) of the ITAA 1997 will apply. A deduction for the cash contribution is not allowable until the financial year in respect of which the Rights are granted to participants, and only to the extent those Rights are determined to be settled in Shares (and also only to the extent that the cash contribution is not in excess of the amount necessary to acquire sufficient Shares to satisfy Rights determined to be settled in Shares).

Conclusion

A Right granted to a Participant under the Plan will become an ESS interest subject to Division 83A of the ITAA 1997 once the Company determines to settle the Right in Shares. Participants will be treated as if they acquired their ESS interests at the time their Rights were granted (section 83A-340 of the ITAA 1997).

When the Company makes a cash contribution to the Trustee of the EST in an income year before the income year in which the acquisition time for the ESS interests occurs, the timing of the deduction allowable under section 8-1 of the ITAA 1997 will be determined by section 83A-210 of the ITAA 1997.

The Company will be entitled to a deduction in the income year in which the acquisition of the ESS interest occurs. This is when the Right is granted to the Participant, provided that the Company has determined to settle the Right in Shares (and only to the extent that the cash contribution is not in excess of the amount necessary to acquire sufficient Shares to satisfy the Right determined to be settled in Shares).

Question 3

Detailed Reasoning

Contribution made after the income year in which ESS interests are acquired by the Participant

Section 83A-210 of the ITAA 1997 will not apply if the Company makes irretrievable cash contributions to reimburse the Trustee in an income year that is later than the income year in which the Rights are granted, provided that the Company has determined to settle the Rights in Shares by the time the contribution is made (and the cash contribution is not in excess of the amount necessary to acquire sufficient Shares to satisfy the Rights determined to be settled in Shares).

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 the loss or outgoing is properly incurred.

Contribution made in the same income year in which ESS interests are acquired by the Participant

Similarly, if the Company makes irretrievable cash contributions to the Trustee in the same income year that the Rights are granted, the contributions will be deductible under section 8-1 of the ITAA 1997 in the income year in which the contributions are made, provided that the Company has determined to settle the Rights in Shares during the income year that the contributions are made.

Question 4

Summary

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 or by a member of the Group for the irretrievable contributions made to the Trustee of the EST.

While the Company receives a tax benefit by making the contributions under the Plan, the Company did not enter the Plan for the dominant purpose of obtaining a tax benefit.

Detailed Reasoning

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (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 of the ITAA 1936 and

· having regard to the matters in paragraph 177D(b) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 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 cash contributions to the Trustee, the acquisition of Shares by the Trustee, and the transfer of Shares to the Participants.

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 the Company 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.

Alternative 1:

The Company could fund the purchase of Shares on-market (for example, via a broker) to be transferred to the name of the Participant at vesting. Under this alternative, a tax deduction would be available to the Company for the purchase price of the Shares.

Alternative 2:

The Company could renumerate employees via payments of salary bonuses or superannuation contributions rather that the awards. Under this alternative, payments of the additional cash amounts would be deductible to the Company.

Alternative 3:

The Company could issue new Shares directly to the relevant employees. The Company would be entitled to a tax deduction for costs incurred in issuing and transferring the Shares (but is unlikely to receive a deduction for the cost/value of the Shares issued).

A tax benefit is created through the deduction the Company will receive under section 8-1 of the ITAA 1997 for the irretrievable cash contributions they make to the Trustee.

A comparison between these counterfactuals / alternative forms of remuneration (Alternative 1 and 2) and the proposed scheme would likely reveal no tax benefit because the deductible amounts under both of them would be the same or similar from the Company's tax perspective.

However, a tax benefit (for the purposes of subsection 177A(1) of the ITAA 1936) may be available where the Scheme is compared to Alternative 3. Under Alternative 3, a deduction would be limited to the costs incurred in issuing and transferring Shares to the Participants. As the amount of this deduction is likely to be lower than that available under the Scheme, a tax benefit may be considered to have been obtained.

In the event that Alternative 3 is considered to be a reasonable counterfactual, the 'dominant purpose' test of entering into a scheme to obtain a tax benefit should be considered.

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:

a) The Trust is used as a vehicle enabling the Company to acquire and hold its own Shares for the purposes of fulfilling its obligations resulting from new and existing grants under the Plan.

b) The Trust will facilitate the acquisition of Shares on market or through a new issue of Shares.

c) 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.

d) The Trust will be an efficient structure for giving effect to disposal of restrictions/vesting. As the Trustee is the legal owner, employees will have no ability to deal in the Shares.

e) Contributing to the Trust may enable the Company to hedge against the Share price growth.

f) The Trust provides the flexibility to acquire and hold Shares that will be allocated to employees under the Plan. When vesting conditions are not met, awards are forfeited and the trust enables Shares held for such forfeited awards to be 'recycled' to satisfy other grants of awards.

g) The Trust establishes independent records and accounts for participating employees.

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. It takes the form of payments by the Company to the Trustee who acquires the Shares and transfers them to Participants.

While existence of the EST confers a tax benefit (when compared to Alternative 3), it cannot be concluded that it is the only benefit provided as outlined above. The Company 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

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 the Company 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, the Company 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 an 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 the Company's expenditure.

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

The contributions by the Company 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.

The financial position of Participants in the Plan will change as a result of participating in the scheme. However this will be the case regardless of whether the Shares are acquired through the Trust or provided directly by the Company.

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 the Company 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. There is nothing to suggest that the parties to the employee share schemes are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit.

Conclusion

The 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 or by a member of the Group for the irretrievable contributions made to the Trustee of the EST.

While the Company receives a tax benefit by making the contributions under the Plan, the Company did not enter the Plan for the dominant purpose of obtaining a tax benefit.

Question 5

Summary

The provision of Rights or Shares by the Company to its employees or subsidiary employees are not fringe benefits within the meaning of subsection 136(1) of the FBTAA.

Detailed Reasoning

The provision of Rights

An employer's liability to fringe benefits 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' states that a fringe benefit does not include:

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

The Company will grant ESS interests (being the Rights, which are rights to acquire a beneficial interest in the Company) to Participants of the Plan. The ESS interests offered to Participants under the Plan are offered in connection with a Participant's employment by the Company.

The acquisition of ESS interests pursuant to the Plan will not be subject to fringe benefits tax on the basis that they are acquired under an employee share scheme (to which Subdivision 83A-B or 83A-C of the ITAA 1997 will apply). The ESS interest is thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

The provision of Shares

As stated above, 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.

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.

The situation is similar to that which existed in FC of T 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.

When an employee accepts to participate in the 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, any benefit received will be in respect of the exercise of the right, and not in respect of employment.

Therefore, the benefit that arises to an employee upon the exercise of a Right in respect of the Plan, which in this case may be the receipt of a Share or a cash settlement, will not give rise to a fringe benefit, as a benefit has not been provided in respect of the employment of the employee.

Conclusion

The provision of Rights or Shares by the Company to its employees or subsidiary employees are not fringe benefits within the meaning of subsection 136(1) of the FBTAA.

Question 6

Summary

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 Shares in accordance with the Trust Deed.

This is because paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes contributions to the Trustee of the EST from being a fringe benefit.

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:

(ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the ITAA 1997);

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).

A payment of money by the Company to the Trustee of the EST will therefore not be subject to FBT provided that the sole activities of the EST are those listed above in paragraphs 130-85(4)(a), (b) and (c) of the ITAA 1997.

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

Under the Plan, the Company has established the EST to acquire Shares in the Company and to allocate those Shares to employees to satisfy the Rights acquired under the employee share scheme. The beneficial interest in the Share is itself provided under an ESS 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, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

· the EST acquires Shares in a company (the Company); and

· 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 ESS, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those Shares to the employees in accordance with the governing documents of the scheme.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require a trustee to undertake incidental activities that are a function of managing the ESS and administering the trust.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental, as set out in ATO Interpretative Decision ATO ID 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, 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 being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental.

For the purposes of the EST, the powers of the Trustee are set out in the Trust Deed. The Trust Deed ensures that the powers of the Trustee under the Trust Deed are exercised in accordance with the purpose of the Trust Deed.

The Trustee of the EST can only use the contributions received exclusively for the acquisition of Shares for eligible employees in accordance with the Plan. To this end, the receipt of dividends by the Trustee in respect of Shares held by the EST on behalf of employees and the distribution of notional accrued dividends to an employee upon an allocation of Shares are considered to be merely incidental to the functions of the Trustee in relation to obtaining Shares and providing those Shares to employees in accordance with the Plan.

Therefore, the Trust is an EST as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997. The distribution of dividends and the distribution of notional accrued dividends to employees are merely incidental activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Conclusion

Accordingly, as 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, 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 Shares in accordance with the Trust Deed.

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