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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012567585348

Ruling

Subject: employee incentive plans

Issue 1 Deductions

Question 1

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

Answer: Yes

Question 2

Will the Company 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 non-refundable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company shares by the EST to satisfy ESS interests, deductible to the Company at a time determined by section 83A-210 of the ITAA 1997, in respect of 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

Issue 2 Assessable income

Question 4

If the Trustee of the EST satisfies its obligations under the Long Term Incentive Plan (the Plan) by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under sections 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997?

Answer: No

Issue 3 Part IVA

Question 5

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 non-refundable cash 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?

Answer: No

Issue 4 Fringe Benefits Tax

Question 6

Is the provision of Options or Performance Rights by the Company to Participants under the Plan, a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer: No

Question 7

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

Answer: No

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to the Company, by the amount of tax benefit gained from non-refundable cash 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?

Answer: No

This ruling applies for the following period(s)

For income tax matters: the income years ending 30 June 2014 to 30 June 2018.

For FBT matters: the FBT years ended 31 March 2013 to 31 March 2018.

The scheme commences on

I July 2013

Relevant facts and circumstances

The Company is the head company of an income tax consolidated group.

The Remuneration and Incentive Programme

The objective of the Company's remuneration framework is to ensure reward for performance is competitive and appropriate for the results delivered.

The Company currently operates a Share Option Plan and a Performance Rights Plan.

The Long Term Incentive Plan (the Plan)

The Plan Rules (the Rules) provide the objectives of the Plan are to establish a method by which Eligible Employees can participate in the future growth and profitability of the Company, to provide an incentive and reward for Eligible Employees for their contributions to the company, and to attract and retain a high standard of managerial and technical personnel for the benefit of the Company (Rule 2).

The Rules include two schedules with:

· Schedule 1 applying where the Company makes an offer of Options to an Eligible Employee, and

· Schedule 2 applying where the Company makes an offer of Performance Rights to an Eligible Employee.

The definitions of terms used in the Rules are contained in Rule 3.1.

An Option is defined as a right, other than a Performance Right, to subscribe for or otherwise acquire a Share on the terms set on in the Rules.

A Performance Right means a right to subscribe or otherwise acquire shares on terms set out in the Rules.

An Eligible Employee is a person who is an executive director, or a full time or part time employee of the Company or a Related Body Corporate of the Company, other than such a person who has given notice of resignation, or who has been given notice of termination, of his or her employment, or removed from his or her position.

The Plan will be administered by the Board and commence on a date determined by resolution of the Board. The Board shall determine the number of Options and Performance Rights to be set aside for the purposes of the Plan. For so long as the Company is admitted to the official list of ASX, Options and Performance Rights may not be offered to a Director or his or her associates except where approval is given by the shareholders of the Company in general meeting in accordance with the requirements of the Listing Rules.(Rule 4)

The Board powers are provided in Rule 15.1 and include the discretion to delegate to the exercise of any of the Board's powers or discretions under the Plan to one or more persons.

Rule 5 states that the Board may use an employee share trust for the purposes of holding any Plan Shares for Participants under the Plan.

Participant is defined as an Eligible Employee to whom Options or Performance Rights have been validly granted under the Plan.

The Board may determine criteria to apply to an Eligible Employee for participation in the Plan including a minimum period of service. The Board may in its discretion determine the number of Options and Performance Rights offered to an Eligible Employee and the terms and conditions applicable to such Options and Performance Rights. (Rule 6)

Generally, Options and Performance Rights will automatically lapse and be forfeited if the Participant to whom the Options or Performance rights were first granted voluntarily resigns, is dismissed from employment or removed from his or her position during the Restricted Period (Rule 7.1). However, in certain circumstances as set out in Rule 7.2, Options and Performance Rights will not lapse and be forfeited if the Participant ceases employment or is removed from his or her position. The discretion in Rule 7.2(e) will not be exercised on a routine basis to allow Participants voluntarily ceasing employment to receive their unvested Options or Performance Rights.

The Restricted Period is defined as the period commencing on the Issue Date and expiring on the later of the Vesting Date (if any) and the date when the last of any Exercise Conditions (if any) is satisfied or waived by the Company. The Issue Date means the date on which the Company issues the Option or Performance Right. The Vesting Date is a date after the Issue Date as determined by the Board and specified in the Offer of Options or Performance Rights.

The Board must not offer or grant Options or Performance Rights if the total number of Shares to be granted under the Offer, plus the shares subject to outstanding Offers, the number of shares to be issued if outstanding Options and Performances rights were to be exercised and the number of Shares issued during the previous five years under an employee share plan, exceeds 5% of the total number of Shares of the Company (Rule 9).

Rule 10 provides the Exercise Conditions and Vesting Conditions. The Board may impose Exercise Conditions or Vesting Conditions in respect of an Option or Performance Right on such terms as the Board considers appropriate. If an Option or Performance Right is subject to Exercise Conditions or Vesting Conditions then the Option or Performance Right may only be exercised if the Exercise Conditions or Vesting Conditions relating to it have been satisfied or waived by the Board in its absolute discretion.

The Company may determine and enforce transfer restrictions on Plan Shares, including imposing a holding lock on the Plan Shares or using an employee share trust to hold the Plan Shares during the relevant restriction period (Rule 11).

Participants granted Options or Performance Rights are bound by the Plan Rules and the constitution of the Company.

Schedule 1 - Options

Schedule 1 contains the provisions that will apply where the Company makes an offer of Options to an Eligible Employee.

Broadly, the Company may make Offers in writing to Eligible Employees inviting them to accept an offer of Options under the Plan. Each Offer must specify the number of Options being offered and the terms and conditions including Expiry Date, Exercise Price and the Restricted Period. Options must be offered for no more than Nominal Consideration. Each Option entitles the holder to subscribe for one Share on exercise of the Option.

The Exercise Price of an Option shall be the price determined by the Board prior to or on grant of the Options. The Exercise Period of an Option shall be the period determined by the Board prior to or on grant of the Option and if no period is determined by the Board then the Exercise Period shall be the period from the date of grant of the Option to the Expiry Date. On expiry of the Exercise Period an Option not exercised shall automatically lapse.

Options may only be exercised by notice in writing to the Company which specifies the number of Options being exercised and must be accompanied by the Exercise Price for the number of Options specified. Shares issued, transferred or allocated pursuant to the exercise of Options will be dispatched within ten business days after the holder has validly exercised the Options. All shares allotted upon exercise of Options will be credited as fully paid and will be of the same class and rank equally in all respects with other Shares.

Schedule 2 - Performance Rights

Schedule 2 contains the provisions that apply where the Company makes an offer of Performance Rights to an Eligible Employee.

Broadly, the Company may make Offers in writing to Eligible Employees inviting then to accept an offer of Performance Rights under the Plan. Each Offer must specify the number of Performance Rights being offered and the terms and conditions including the Performance Hurdles (if any), the Vesting Dates and the Vesting Conditions (if any). Performance Hurdles are determined by the Remuneration Committee of the Board. The Board determines the Vesting Conditions which may include Performance Hurdles. Rights must be offered under the Plan for no more than Nominal Consideration.

Each Performance Right entitles the holder to subscribe for one share on vesting of the Performance Right. The Vesting Conditions of a Performance Right shall be the determined by the Board prior to or on grant of the Performance Right. On expiry of the Exercise Period a Performance Right not exercised shall automatically lapse.

Performance Rights will automatically vest on the satisfaction of the Vesting Conditions. Shares issued, transferred or allocated pursuant to the vesting of Performance Rights will be dispatched within ten business days after the holder has validly exercised the Performance Rights. All Shares allotted upon exercise of Performance Rights will be credited as fully paid and will be of the same class and rank equally in all respects with other shares.

Employee Share Trust (EST)

The Employee Share Trust Deed (Trust Deed) between the Company and the company acting as trustee (the Trustee) will establish a trust to facilitate the provision of shares to employees under the Plan.

The Trustee is an external trustee and will act in an independent capacity on behalf of the beneficiaries of the EST in accordance with the terms of the Trust Deed. The Trustee is not trustee for any member of the Group and no member of the Group is a beneficiary of the Trust.

The EST is being established for the sole purpose of obtaining Shares for the benefit of Participants, including subscribing for or acquiring, allocating, holding, and delivering Shares under the Plan and other employee equity plans for the benefit of Participants (Clause B of Recitals of the Trust Deed).

The Trustee declares in respect of:

· the Trust Shares held by the Trustee on behalf of the Participant;

· the proceeds of sale by the Trustee of rights under a Rights Issue on behalf of the Participant; and

· all other benefits and privileges related to or arising from Trust Share held on behalf of the Participant

will be held by the Trustee on trust for and on behalf of that Participant on the terms of the Trust Deed and subject to the Relevant Plan rules and relevant Terms of Participation (Sub-clause xx).

The Trustee will, in accordance with instructions received from the Company pursuant to the Plan Rules, acquire, allocate and deliver Shares for the benefit of the Participants provided the Trustee receives sufficient payment to subscribe for or purchase Shares and/or has sufficient Unallocated Trust Shares available. (Clause xx)

The Trust Deed does not confer on the Company any charge, lien or any other proprietary right or interest in the Shares acquired by the Trustee in accordance with the Trust Deed.

Once Options or Performance Rights are exercised pursuant to Schedule 1, paragraph xx and Schedule 2, paragraph xx of the Plan, within 10 Business Days after delivery of the Exercise Notice or the vesting of Performance Rights, the Company must instruct the Trustee to subscribe for, acquire and/or allocate the relevant number of shares specified, and the Trustee will hold those shares on behalf of the Participant in accordance with the terms of the Trust Deed (Clause xx).

After receiving a notice from the Board and subject to receiving sufficient funds from the Company, the Trustee must on behalf of the Participants:

· purchase the requisite number of Shares on or off market;

· subscribe for the requisite number of Shares;

· allocate Shares that are Trust Assets; or

· effect a combination of these alternatives (Clause xx)

Clause xx of the Trust Deed requires the Company to provide the Trustee with any funds required in order to fulfill its obligations under Clause xx All funds received by the Trustee from the Company will constitute accretions to the corpus of the Trust and will not be repaid to the Company and no Participant will be entitled to receive the funds. Funds received by the Trustee from the Company may be paid to the Company where the Trustee subscribes for Shares in accordance with this Deed, the relevant Plan Rules or relevant Terms of Participation.

The Trustee must maintain a separate share account or record for each participant, notify each Participant of Shares acquired, allocated and held on their behalf and maintain adequate books and records of the Trust (Clause 7).

Where the Trustee holds shares on behalf of a Participant:

Any time after the Restrictive Period, being the period during which there are restrictions on dealing with or transferring the relevant Trust Shares, the Participant may give the Trustee a Withdrawal Notice and following approval of the Board, the Trustee must transfer legal title in the Trust shares or sell the Trust shares in accordance with the Withdrawal Notice and clause xx. (Clause xx)

Clause xx requires the Trustee to sell shares at the direction of the Participant and pay the balance of proceeds of sale to the Participant, less any brokerage costs and other expenses incurred by the Trustee.

Clause xx requires the Trustee to do all things necessary to transfer legal title in Trust Shares to a Participant, as directed by the Participant, where required to do so by the Plan Rules, if the Trust is terminated or otherwise, where the Board in its discretion determines.

the Company must provide to the Trustee all necessary funds required to be able to pay any liability for any Tax in relation to any Trust Shares held by the Trustee or any Tax, fees, costs and expenses in relation to the Trust.

Response to request for information

The Company does not currently intend for the amount contributed to the Trust to exceed the amount required to acquire shares that are delivered to Participants on the vesting of the rights.

The taxpayer states the performance period during which the vesting conditions must be satisfied is 3 years in respect of all Performance Rights currently on issue by the Company to Eligible Employees.

Assumption(s)

· The EST will be established in a manner consistent with the terms of the Trust Deed provided.

· The Plan and the EST are administered in accordance with their terms.

· Options and Performance Rights acquired by Participants will be subject to Subdivision 83A-B or 83A-C of the ITAA 1997.

· The EST will only acquire shares in respect of the future vesting or exercise of Performance Rights and Options issued to Participants. That is, the EST will not acquire shares to satisfy the future vesting or exercise of Performance Rights or Options not already on issue.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Fringe Benefits Tax Assessment Act 1986 Section 67

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 20-20

Income Tax Assessment Act 1997 Section 104-35

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

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Issue 1 Deductions

Question 1

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the non-refundable cash contributions made by the Company to the 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

Detailed reasoning

An employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an employee share trust that is either:

· incurred in gaining or producing assessable income ('first limb') or

· necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income ('second limb')

to the extent the contribution is not private or domestic in nature, is not of capital or of a capital nature, does not relate to the earning of exempt income or non-assessable non-exempt income and deductibility is not precluded by another provision of the ITAA 1997 or ITAA 1936.

To qualify for a deduction under section 8-1 of the ITAA 1997 a contribution to the trustee of an employee share trust must be incurred.

As a broad guide, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in Taxation Ruling TR 97/7 and Taxation Ruling TR 94/26.

A contribution made to the trustee of an employee share trust is incurred only when the ownership of that contribution passes from an employer to the trustee of the employee share trust and there is no circumstance in which the employer can retrieve any of the contribution - Pridecraft Pty Ltd v. Federal Commissioner of Taxation (Pridecraft); Spotlight Stores Pty Ltd v. Commissioner of Taxation (Spotlight).

The Company will establish an employee share trust (the EST) under the terms of the Trust Deed. The EST's sole purpose is of obtaining Shares for the benefit of Participants, including subscribing for or acquiring, allocating, holding, and delivering Shares under the Plan and other employee equity plans for the benefit of Participants.

Clause xx of the Trust Deed provides that the Trustee will, in accordance with instructions received from the Company pursuant to the Plan Rules, acquire, allocate and deliver Shares for the benefit of the Participants provided the Trustee receives sufficient payment to subscribe for or purchase Shares and/or has sufficient Unallocated Trust Shares available.

The Company will make contributions to the EST to allow the Trustee to purchase shares on market or off market, or to subscribe new shares to allow rights under the Plan to be satisfied. All funds received by the Trustee from the Company will constitute accretions to the corpus of the Trust and will not be repaid to the Company and no Participant will be entitled to receive the funds. The Trust Deed does not confer on the Company any charge, lien or any other proprietary right or interest in the Shares acquired by the Trustee in accordance with the Trust Deed.

Given these facts, it is considered that the contributions made to the Trustee of the EST by the Company will be incurred at the time the contributions are made.

Further, to be deductible under section 8-1 of the ITAA 1997, a contribution must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

In order to satisfy the second limb of section 8-1 of the ITAA 1997 there must be a relevant connection between the outgoing and the business. An expense will have the relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' (Ronpibon Tin NL and Tongkah Compound NL v. FC of T (Ronpibon); Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation (Magna Alloys)).

Where an employer:

· carries on a business for the purpose of gaining or producing assessable income and engages employees in the ordinary course of carrying on that business,

· makes a contribution to the trustee of an employee share trust, and

· at the time the contribution is made, the primary purpose of the contribution is for it to be applied, within a relatively short period of time, to the direct provision of remuneration of employees (who are employed in that business),

then, such a contribution would ordinarily satisfy the nexus of being necessarily incurred in carrying on that business.

It is considered that the Company is carrying on a business and when the Company makes a contribution to the Trustee of the EST, its primary purpose is for the contribution to be applied to the direct provision of remuneration of its employees in the form of shares in the Company.

The contribution to the EST is expected to occur upon vesting of the Performance Rights or Options and the Company does not intend for the amount contributed to the EST to exceed the amount required to acquire shares that are delivered to Participants on the vesting of Performance Rights or Options. Currently, the performance period during which the vesting conditions must be satisfied is 3 years in respect of all Performance Rights on issue by the Company to eligible employees under the existing Long Term Incentive Plan.

Once Options or Performance Rights are exercised pursuant to Schedule 1 and Schedule 2 of the Plan, within 10 business days the Company must instruct the Trustee to subscribe for, acquire and/or allocate the relevant number of shares specified.

The Trustee of the EST must, on receipt of funds, purchase or subscribe for the requisite number of shares with seven days (clause xx of the Trust Deed).

Consequently, we consider that the contributions to the Trustee of the EST by the Company employer for the purpose of remunerating its employees under the Plan is an outgoing in carrying on the Company's business for the purpose of gaining or producing assessable income.

Where a contribution satisfies either limb of subsection 8-1(1) of the ITAA 1997, it may still be capital or of a capital nature. Pursuant to subsection 8-1(2) of the ITAA 1997, the contribution will not be deductible to an employer under section 8-1 to the extent to which it is capital or of a capital nature.

Whether an outgoing is capital or revenue in nature can generally be determined by reference to the test articulated by Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation:

A contribution to the trustee of an employee share trust is of capital or of a capital nature, where the contribution secures for an employer an asset or advantage of an enduring or lasting nature that is independent of year to year benefits that the employer derives from a loyal and contented workforce.

Where a contribution is, ultimately and in substance, applied by the trustee of an employee share trust to subscribe for equity interests in the employer (for example shares), the employer has also acquired an asset or advantage of an enduring nature.

The combined operation of subsections 8-1(1) and 8-1(2) of the ITAA 1997 may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a differing nature.

Where a contribution is made for the purpose of securing for the employer advantages of both a revenue and capital nature, but the advantages of a capital nature are only expected to be very small or trifling by comparison, apportionment may not be required.

Where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period of the contribution being made, it is considered that any amount of the contribution attributable to securing a capital structure advantage will only be very small or trifling where it is intended that:

· any direct interest in the employer acquired by the trustee of the employee share trust (for example shares) will be transferred to employees within that relatively short period, and

· such shares will not be on-sold to third parties at that time or shortly thereafter.

On weighing up the facts in this case we consider the capital structure advantage will only be very small or trifling as:

· the contribution is quickly dissipated in providing shares (or an interest in shares) to eligible employees after the vesting period and performance hurdles are met;

· the amount of the contribution corresponds closely with the amounts needed to fund the ESS interests and are likely be applied within a three year vesting period;

· eligible employees will receive absolute entitlement to shares (direct interest in the employer) post the vesting period and the shares will not have any trading restrictions or holding locks; and

· the Plan provides eligible employees with an opportunity to participate in the future growth and profit of the employer as vesting conditions are linked to performance and retention of eligible employees.

Therefore, apportionment for the capital structure advantage will not be required.

Accordingly, the non-refundable cash contributions made by the Company to the Trustee of the EST to fund the subscription for or acquisition on-market of the Company shares by the EST will be deductible by the Company under section 8-1 of the ITAA 1997.

Question 2

Will the Company 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

Detailed reasoning

As discussed in question 1 above, section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

The Company will incur costs associated with implementation and on-going administration of the EST by the Trustee. These costs are part of the ordinary recurring cost to the Company of remunerating its employees and are therefore deductible under section 8-1 of the ITAA 1997. This is consistent with the ATO view expressed in ATO Interpretative Decision 2002/961.

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

Question 3

Are non-refundable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company shares by the EST to satisfy ESS interests, deductible to the Company at a time determined by section 83A-210 of the ITAA 1997, in respect of 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

Detailed reasoning

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:

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 employee share scheme in relation to the employee's employment.

The deductibility of money provided to employee share trusts is considered in
ATO Interpretative Decision 2010/103. The facts described in ATO ID 2010/103 are comparable to this arrangement and therefore, the reasoning in it is relevant to them as explained immediately below.

The arrangement is constituted of the Plan, the Rules that govern the Plan, the creation of the EST under the Trust Deed and the provision of money to the Trustee of the EST to acquire and hold shares on behalf of Participants under the employee share scheme.

An ESS interest 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 employee share scheme is a scheme under which the ESS interests in a company (or subsidiaries of the company) are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2) of ITAA 1997).

Rights granted to an Eligible Employee under the Plan will be ESS interests as each Option or Performance Right represents a right to acquire a beneficial interest in a share in a company (the Company) and therefore the conditions of section 83A-10 of the ITAA 1997 are satisfied. These 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 or subscribed for 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 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 established in question 1, the Company will make irretrievable contributions to the EST and under the terms the Trust Deed, the Trustee will, in accordance with instructions received from the Company pursuant to the Plan Rules, acquire, allocate and deliver Shares for the benefit of the Participants provided the Trustee receives sufficient payment to subscribe for or purchase Shares and/or has sufficient Unallocated Trust Shares available.

The provision of money by the Company to the Trustee is considered to be for the purpose of enabling the participating employees, directly or indirectly, as part of the employee share scheme, to acquire the ESS interests. A deduction for the purchase of shares to satisfy the existing obligations arising from the grant of ESS interests is allowable to the Company in the year in which the money was paid to the Trustee, under section 8-1 of the ITAA 1997.

However, where the irretrievable contributions are made by the Company to the Trustee of the EST before the income year in which the ESS interests are granted to the employee, section 83A-210 will apply. Under section 83A-210 of ITAA 1997, if an amount of irretrievable contributions are made to the Trustee under the arrangement to purchase shares in excess of the obligations for the ESS interests already granted, the amount will be deductible in the income year in which the relevant ESS interests are granted to the participating employees, that is the income year in which the employee acquires the ESS interests.

Issue 2 Assessable income

Question 4

If the Trustee of the EST satisfies its obligations under the Plan by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under sections 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997?

Answer: No

Detailed reasoning

Ordinary Income

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

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

In GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. They further stated at page 138 that:

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

Accordingly, when the Company receives subscription proceeds from the Trustee of the EST where the EST have subscribed for new shares in the Company to satisfy obligations to Participants under the Plan, the subscription proceeds received by the Company are a capital receipt. That is, the subscription proceeds will not be on revenue account, and not ordinary income under section 6-5 of the ITAA 1997.

Section 20-20 of the ITAA 1997

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

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

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

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

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

The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing.

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

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

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

Capital Gains Tax

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

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

However, paragraph 104-35(5)(c) of the ITAA 1997 states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, the Company will issue shares, being equity interests as defined in section 974-75 of the ITAA 1997, to the Trustee of the EST, therefore CGT event D1 does not happen.

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

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

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

Issue 3 Part IVA

Question 5

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 non-refundable cash 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?

Answer: No

Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are:

· there must be a scheme within the meaning of section 177A of the ITAA 1936

· a tax benefit arises that was obtained or would be obtained in connection with the scheme but for Part IVA of the ITAA 1936 and

· having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies.

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 plans.

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 to fund the acquisition of the Company's shares under the scheme.

Issue 4 Fringe Benefits Tax

Question 6

Is the provision of Options or Performance Rights by the Company to Participants under the Plan, a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer: No

Detailed reasoning

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

The terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10 of the ITAA 1997 (as discussed in question 3).

The Commissioner accepts that the Plan as described in this private ruling application is an employee share scheme under which relevant ESS interests (being Options or Performance Rights) 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.

Therefore, the provision of Options or Performance Rights by the Company to Participants under the Plan will not be subject to FBT on the basis that they are ESS interests acquired under an employee share scheme and are thereby excluded from the definition of 'fringe benefit' pursuant to subsection 136(1) of the FBTAA.

Question 7

Will the non-refundable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1956?

Answer: No

Detailed reasoning

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

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:

The terms 'ESS interest' and 'employee share scheme' as defined in section 83A-10 of the ITAA 1997 were considered in question 3 and it is accepted the Plan will be an employee share scheme under which the ESS interests (being rights or restricted shares) are provided to employees, or associates of employees, of the company.

The Company will establish the EST and under the Trust Deed, the EST's sole purpose is to obtain shares for the benefit of Participants, including subscribing for or acquiring, allocating, holding, and delivering Shares under the Plan. There are some incidental activities undertaken by the Trustee to manage and administer the EST, such as the operation of bank accounts and maintenance of adequate books and records.

Therefore, the EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, 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 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 irretrievable cash contributions the Company makes to the Trustee of the EST, to fund the subscription for, or acquisition on-market of, the company shares in accordance with the Trust Deed are not a fringe benefit under subsection 136(1) of the FBTAA .

Question 8

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

Answer: No

Detailed reasoning

Section 67 of the FBTAA is the general anti-avoidance provision in the FBTAA. Practice Statement Law Administration PSLA 2005/24 provides guidance on the application of section 67 of the FBTAA 1986. Paragraphs 145-148 state:

The Commissioner will only make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement.

In Miscellaneous Taxation Ruling MT 2021, at Appendix 1 Question 18, on the application of section 67, the Commissioner states:

Under the Plan, benefits provided to the Trustee by way of irretrievable cash contributions to the EST and to Participants by way of the provision of Options and Performance Rights will not be subject to FBT. Consequently, no amount could reasonably be expected to be included in the aggregate fringe benefits amount, attributable to the Plan, if the arrangement had not been entered into. Therefore, the fringe benefits tax is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to the Company, by the amount of tax benefit gained from non-refundable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company shares.

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