Edited version of your private ruling

Authorisation Number: 1012443302434

Ruling

Subject: Employee Share Scheme

Question 1

Will Company A obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of the irretrievable cash contributions made by Company A to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A shares by the EST?

Answer

Yes

Question 2

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

Answer

Yes

Question 3

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

Answer

Yes

Question 4

If the EST satisfies the Equity Plan 1 (EP1); the Equity Plan 2 (EP2); and the Equity Plan 3 (EP3) obligations by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax event under Division 104 of the ITAA 1997?

Answer

No

Question 5

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

Answer

No

Question 6

Is the provision of performance rights or shares to Company A employees under a Company A Equity Plan a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer

No

Question 7

Will the irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA 1986?

Answer

No

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefit taxable amount to Company A by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares?

Answer

No

This ruling applies for the following periods:

Income tax year ending 30 June 2013 to year ending 30 June 2017

Fringe benefit tax year ending 31 March 2013 to year ending 31 March 2017

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Background

1. Company A is a listed Australian company and the head company of an income tax consolidated group.

2. Company A maintains a strong focus on the retention of staff to facilitate the expected growth of the company over the short to medium term. Fundamental to this growth strategy is the implementation of various Equity Plans.

3. The Equity Plans were established as part of its remuneration policy with the intention of attracting and retaining suitable employees.

4. The subscription for new shares is also part of Company A's capital management strategy.

5. Company A established an EST to facilitate the provisions of shares in Company A to employees and executives under each of Company A's Equity Plans. Company A appointed Company B as Trustee for the EST. Company B is an independent third party.

6. The Plans and the EST are administered in accordance with their terms.

EQUITY PLAN 1 (EP1)

7. The purpose of the Plan is to:

· To provide a long-term incentive for senior managers.

· Align employee reward with shareholder wealth and both individual performance and company performance.

8. EP1 operates as follows:

· It is at the Board's discretion to extend an invitation to eligible employees to apply for a number of performance rights and/or performance options specified on the invitation.

· The number of performance rights and performance options made available to the eligible employee will depend on various factors such as their position within the company.

· Performance rights are issued with no exercise price.

· Where eligible employees pay an exercise price to acquire shares under performance options, the exercise price will not exceed the share price paid by the EST to acquire those shares.

· If issued, the exercise price in respect of each performance option will be based on the weighted average market price of the shares in the 28 days prior to the issue.

· The performance rights and performance options will begin to vest if the eligible employee satisfies certain performance criteria and continue their service with Company A.

· Performance rights and performance options are not exercisable unless the participant receives at least a satisfactory individual performance rating at the end of the measurement period.

· Accordingly, where certain performance criteria are met, eligible employees will receive ordinary shares in Company A.

· The EST will acquire shares to satisfy performance rights and performance options at or about the same time that the awards vest.

· The participant will forfeit his/her performance right and performance options where, for example, an employee commits an act of gross misconduct, cease employment with Company A or failed to meet the exercise requirements.

· However the Board may in their absolute discretion, decide to allow an employee that is no longer employed by Company A to exercise part or all of the performance rights and performance options held by that employee that had not yet been exercised.

· Performance rights and performance options are not transferable without the written consent of the Board.

EQUITY PLAN 2 & EQUITY PLAN 3 (EP2 & EP3)

9. EP2 & EP3 operate as follows:

Both plans

· It is at the Board's discretion to extend an invitation to eligible employees to apply for a number of shares specified on the invitation under a salary sacrifice arrangement.

· The disposal restriction period, any vesting conditions, forfeiture conditions, the allocation price and the method of payment will be determined by the Board in its absolute discretion.

· Shares granted will be acquired at market value and held on behalf of participants by the trustee, using contributions from Company A that it has withheld from participants as part of the salary sacrifice arrangements.

· An allocation of shares may be made in one tranche or in several tranches through a financial year.

· The shares are subject to restrictions until the earlier of the expiry of the disposal restriction period or a disposal event or such other time as determined by the Board in its sole discretion.

· Restrictions may include the imposition of a holding lock on the shares which is currently used.

· Shares outstanding under all Equity Plans cannot exceed 10% of the issued shares in the company.

· The rights attaching to the shares under both plans will include rights provided for in the Constitution, the Corporations Act and Listing rules where applicable.

· Variation to the EP2 and EP3 plans can be made by the Committee subject to the approval of the Trustee of the EST. Where a proposed amendment or variation to EP2 and EP3 is likely to have a material adverse effect on the rights or interest of holders of the Shares, approval is required from the holders of more than 50% of the Shares in Company A.

EP2

· Employees can contribute up to a maximum of $X of pre-tax base salary in EP2.

· The employee will forfeit his/her EP2 Shares where an employee commits an act of gross misconduct or ceases employment with Company A.

· Where restrictions have lifted under the EP2, the EST will continue to hold the shares on behalf of the shareholder until the shareholder directs otherwise.

EP3

· Employees can contribute up to a maximum of $Y of their pre-tax base salary into the EP3 and between $Y.

Operation of the EST

10. The purpose of the EST is to acquire shares in Company A for delivery to Company A employees under Company A's Equity Plans.

11. The EST manages and administers EP1, EP2 and EP3.

Contributions made by the EST to Company A

12. Company A continues to make cash contributions to the EST on an ongoing basis. The EST must use these cash contributions exclusively to purchase shares in Company A for employees under the Equity Plans and, pending such an acquisition, form part of the EST's assets.

13. The amount of each cash contribution made by Company A to the EST is broadly equal to the market value of shares to be acquired by the EST.

14. The EST will then allocate shares to the relevant participants, having subscribed for or acquired on-market sufficient shares to fulfill the obligation as necessary.

15. The Trustee of the EST holds all Company A shares pursuant to each Equity Plan on capital account.

16. The Trustee accepts the shares as bare trustee and nominee for the Principal on the terms of the Plan and has and will acquire no beneficial interest whatever in the shares and the income and rights accruing from them.

Use of the EST to facilitate the Plan

17. The establishment of the EST provides Company A greater flexibility to accommodate the long term incentive arrangements of Company A. Similarly, it allows for a streamlined approach to the administration aspect of the Equity Plans. The EST can also be used to provide a range of incentives involving shares in Company A as circumstances change in the labour market that require different incentives to be provided in order to attract, reward and retain key executives and employees.

Costs incurred by Company A to administer the EST

18. Company A incurs various costs in relation to the implementation and on-going administration of the EST. Company A will incur costs associated with the services provided by the Trustee of the EST.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 section 67(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

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

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)(h)(a)

Income Tax Assessment Act 1936 section 139B(3) (repealed as of 14 December 2009)

Income Tax Assessment Act 1936 section 139CD (repealed as of 14 December 2009)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177A

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177C

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 paragraph 177D

Income Tax Assessment Act 1936 paragraph 177D(b)

Income Tax Assessment Act 1936 subsection 177F

Income Tax Assessment Act 1936 subsection 177F(1)

Income Tax Assessment Act 1997 section 6-5

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 8-1(2)(a)

Income Tax Assessment Act 1997 Division 20

Income Tax Assessment Act 1997 section 20-10

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 20-30

Income Tax Assessment Act 1997 Division 83A

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

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

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 102-5(1)

Income Tax Assessment Act 1997 subsection 102-25(3)

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 subsection 104-35(1)

Income Tax Assessment Act 1997 paragraph 104-35(5)(c)

Income Tax Assessment Act 1997 subsection 104-155(1)

Income Tax Assessment Act 1997 paragraph 104-155(5)(c)

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

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

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

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

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

Income Tax (Transitional Provisions) Act 1997 subsection 83A-5(1)

Income Tax (Transitional Provisions) Act 1997 subsection 83A-5(2)

Reasons for decision

All subsequent legislative references are to the ITAA 1997 unless otherwise indicated.

Question 1

Section 8-1

The irretrievable cash contributions will be deductible under section 8-1 if either of the positive limbs in subsection 8-1(1) are satisfied and it does not fall within any of the negative limbs in subsection 8-1(2). The relevant negative limb is paragraph 8-1(2)(a), which denies a deduction to the extent that the expenditure is capital, or of a capital nature.

Company A provides cash contributions to the Trustee to be used in accordance with the Trust Deed and Plan Rules for the sole purpose of subscribing for and/or acquiring Company A shares for the benefit of participants. Such contributions are irretrievable or non-refundable to Company A and therefore a loss or outgoing is incurred for the purpose of subsection 8-1(1).

The purpose of the contributions is to provide an incentive to employees linked to the operating performance of the Company A business.

Company A 's irretrievable cash contributions to the Trustee are part of the overall remunerations of its employees and deductible under section 8-1, It is concluded that the contributions are not capital or capital in nature.

Question 2

Company A incurs various costs in relation to the implementation and on-going administration of the EST. Furthermore, Company A will incur costs associated with the services provided by the Trustee of the EST.

The costs incurred by Company A in relation to the implementation and on-going administration of the EST are deductible under section 8-1. The view that the costs incurred by Company A are deductible under section 8-1 is consistent with ATO ID 2002/961 in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer.

Consistent with the analysis in Question 1, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses and therefore, are not excluded from being deductible under paragraph 8-1(2)(a).

Question 3

The deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which Company A incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210.

The provision of irretrievable cash contributions to the Trustee to acquire Company A shares is considered to be for the purpose of enabling the participants, indirectly as part of the Equity Plans, to acquire the performance rights, options and shares. If the irretrievable cash contributions are provided before the performance rights, options and shares are acquired by the participants, then section 83A-210 will apply to determine the timing of deduction of the cash contributions under section 8-1. This accords with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103. However, section 83A-210 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from performance rights, options or shares already granted.

Section 83A-210 will apply to any amount of money used by the Trustee to purchase excess shares intended to meet a future obligation arising from a future grant of performance rights, options or shares. Thus the excess payment occurs before the employees acquire the relevant performance rights, options or shares (ESS interests) under the scheme. In this instance, the excess payment will only be deductible to Company A in the income year when the relevant performance rights, options and shares are granted to the participants.

Question 4

Ordinary Income

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. The classic definition of 'income' in Australian law was given by Jordan CJ in Scott v DCT (NSW) (1935) 35 SR (NSW) 215, whereby it states that:

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

The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). According to Eisner v Macomber 252 US 189 (1919) :

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

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

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

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

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

The character of the contribution of share capital received by Company A from the Trustee can be determined by 'the character of the right or thing disposed of in exchange for the receipt'. Here, Company A is issuing the Trustee new shares in itself by either purchasing shares on-market or subscribing for new shares. The character of the newly issued share is one of capital. Consequently, the receipt of the subscription is treated as consideration for the issue of shares from Company A to the Trustee of the EST and accounted for as a contribution to the share capital of Company A in its books and records. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of the share capital, and accordingly, is of a capital nature.

Accordingly, when Company A receives the subscription proceeds from the Trustee of the EST where the EST subscribes for new shares in Company A to satisfy its obligations under the Equity Plans, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account and not ordinary income under section 6-5 and consistent with the view expressed in ATO Interpretative Decision ATO ID 2010/155.

Section 20-20

Division 20 deals with amounts included to reverse the effect of past deductions and section 20-20 deals with assessable recoupments, which are described at subsection 20-20(2) as 'an amount you receive by way of insurance, indemnity or other recoupment'.

The subscription proceeds received by Company A from the EST are for shares and are integral to the arrangement, whereby the acquisition and holding of the shares by the Trustee and the allocation of shares to the participating employees are all interrelated components of the Equity Plans. The character of the subscription proceeds paid to Company A for the shares is not one of 'insurance, indemnity or other recoupment'.

Also, the table at section 20-30 which shows the deductions for which recoupments are assessable, does not include provision for funding an EST to acquire shares for employees.

For the above reasons, the subscription proceeds received by Company A do not constitute assessable recoupments under section 20-20.

Capital Gains Tax

Section 102-5(1) provides that your assessable income includes your net capital gain for the income year.

Given that a capital gain or capital loss is made only if a CGT event happens, the initial step is to ascertain whether such an event has occurred. Also, given that the transaction is the payment of subscription proceeds by the EST to Company A for shares, the possible events are:

· D1 Creating contractual or other rights; or

· H2 Receipt for event relating to a CGT asset.

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

Subsection 104-35(1) states that CGT event D1 'happens if you create a contractual right or other legal or equitable right in another entity'.

Also, paragraph 104-35(5)(c) states that event D1 does not happen where a company issues or allots equity interests in the company, which is the case when the Trustee subscribes for Company A Shares.

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

Again, consideration of the subscription proceeds received by Company A from the EST establishes that they are for shares and are integral to the arrangement whereby the acquisition and holding of the shares by the Trustee and the allocation of shares to the participating employees are all interrelated components of the Equity Plans. As part of the Equity Plans contractual rights of employees are exercised on their behalf to acquire shares in Company A, rather than an act, transaction or event relating to a CGT asset owned by Company A.

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

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

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

Question 5

Part IVA of the ITAA 1936 is a general anti-avoidance provision. It applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA applies to a scheme, the Commissioner can make a determination under section 177F of the ITAA 1936 to cancel the tax benefit obtained under the scheme.

The scheme

The definition of scheme in subsection 177A(1) of the ITAA 1936 is sufficiently wide to cover the Equity Plans, which utilise payments made by Company A to the Trustee (in accordance with the Trust Deed) to fund the acquisition of Company A shares on behalf of participants by the Trustee.

Tax Benefit

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

(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 the present case, a potential tax benefit is created when Company A receives an income tax deduction under section 8-1 arising from the irretrievable cash contributions it makes to the Trustee.

In order to determine whether a tax benefit has been derived by Company A from the scheme, it is necessary to examine the alternative hypotheses or counterfactuals. That is, what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out - other schemes Company A might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration.

In deciding whether Part IVA of the ITAA 1936 applies to a scheme, it is necessary to consider whether, having regard to each of the factors set out in paragraph 177D(b) of the ITAA 1936, it would be concluded that the person, or one of the persons who entered into the scheme or any part of it, did so for the purpose of enabling a relevant taxpayer to obtain a tax benefit in connection with the scheme.

The Commissioner believes that comparison between the two alternatives/counterfactuals and the proposed scheme would likely reveal no tax benefit because the deductible amounts under both would be the same or similar to a tax deduction for irretrievable contributions made to the Trust.

The purpose of the scheme

In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the EST arrangement. Therefore, having regard to the eight factors set out in paragraph 177D(b) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling Company A to obtain any potential tax benefit.

Please note a legislative announcement was made on 1 March 2012 in respect to introducing amendments to Part IVA of the income tax law. The advice given is based on the existing law. However, the prospect of law change, which if enacted, may affect this advice.

Question 6

A fringe benefit will generally arise where benefits are provided to employees or associates of employees in respect of employment of the employee. Some benefits are expressly excluded as fringe benefits.

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;

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

The Equity Plans are employee share schemes for the purposes of Division 83A as they are arrangements under which an ESS interest (i.e. a beneficial interest in a right or option to acquire a beneficial interest in a share of Company A), is provided to eligible employees in relation to their employment in Company A in accordance with the Trust Deed.

Therefore, the granting of performance rights, options and shares under the Equity Plans to participants will not be subject to fringe benefits tax because they are specifically excluded under Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

Question 7

Subsection 136(1) of the FBTAA defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, but does not include:

(ha) 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) as having the meaning given by subsection 130-85(4).

Subsection 130-85(4) provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2)) 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

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

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

An employee share scheme is defined in subsection 83A-10(2) 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 Equity Plans are employee share schemes within the meaning of subsection 83A-10(2) because they are schemes under which either rights to acquire beneficial interests in shares in Company A are provided to employees in relation to the employee's employment or beneficial interests in shares in Company A are provided to employees in relation to the employee's employment.

Under the Equity Plans, the employer has also established the EST to acquire shares in Company A and to allocate those shares to employees. Therefore, paragraphs 130-85(4)(a) and (b) are satisfied because:

· the EST acquires shares or rights in Company A; and

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

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) will require the Trustee to undertake incidental activities that are a function of managing the Equity Plans and administering the EST.

For the purposes of paragraph 130-85(4)(c) and ATO Interpretative Decision ATO ID 2010/108, 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; and

· 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.

The EST is an employee share trust, as defined in subsection 995-1(1), as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and (b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). 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 irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Question 8

Law Administration Practice Statement PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 provide as follows:

145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

Therefore, the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 under the heading "Appendix, Question 18" where, on the application of section 67, the Commissioner states:

…As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement...

Further, paragraph 151 of Practice Statement 2005/24 provides:

151.The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the EST, and to employees by way of the provision of rights, options and shares under the Equity Plans are excluded from the definition of a fringe benefit for the reasons given in questions 6 and 7 above. Therefore, as these benefits have been excluded from the definition of a fringe benefit and as there is also no fringe benefits tax currently payable under the option plans, the fringe benefits tax liability is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of the company in relation to a tax benefit obtained under the option plans.

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