Edited version of your private ruling

Authorisation Number: 1012582257803

Ruling

Subject: Employee Share Scheme

Question 1

Will the Commissioner confirm that the contribution of the funds by the Company to the Trust will not be a fringe benefit under section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

Will the Commissioner confirm that the irretrievable contributions made by the Company to the Trust to enable the Trustee to acquire shares, by subscribing for those shares or purchasing them on market, will be an allowable income tax deduction to the Company under section 8-I of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 3

Will the Commissioner confirm that the deduction for the Company in respect of the irretrievable contributions to the Trust will be allowed under section 83A-210 of the ITAA 1997 in the year of income when the contribution is made to the Trust, provided it is in respect of rights to acquire shares that have previously been granted to employees?

Answer

Yes

Question 4

Will the Commissioner confirm that he will not make a determination under Part IVA of the ITAA 1936 in relation to any part of these arrangements?

Answer

Yes

This ruling applies for the following periods:

1 July 2013 - 30 June 2014

1 July 2014 - 30 June 2015

1 July 2015 - 30 June 2016

1 July 2016 - 30 June 2017

1 July 2017 - 30 June 2018

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Company established an employee share plan. The Plan utilises performance rights (being the right to acquire a share at a future point in time for nil consideration) to remunerate eligible employees of the Company. The Company is the head company of an income tax consolidated group (the Group).

The first tranche of performance rights which were granted in 2010 vested in 2013.

The Company intends to establish an employee share trust (the Trust) under the Plan Trust Deed (the Trust Deed) and to use the Trust to support the performance rights that may be granted in the future and those performance rights that have previously been granted but have not yet vested. It is also intended that the Trust will be available for satisfying the requirements of any future equity plans implemented by the Company.

Performance Rights Plan

Under the Performance Rights Plan (the Plan), eligible executives are provided with Performance Rights. The Plan Rules (the Rules) provide the rules governing the Plan. The objects of the Plan are to:

a) provide an incentive for Eligible Executives to remain in their employment in the long term and maximize their contribution to the performance of the Group;

b) recognise the ongoing ability of Eligible Executives and their expected efforts and contribution in the long term to the performance and success of the Group; and

c) provide Eligible Executives with the opportunity to acquire Performance Rights, and ultimately Shares, in the Company, in accordance with these Rules.

The Rules contain the definitions of terms used, including:

Eligible Executive means an Executive who the Plan Committee determines is to receive an Offer under the Plan.

Executive means:

a) a Senior Manager who the Plan Committee determines to be in the full-time or part-time employment of a body corporate in the Group (including any Senior Manager on parental leave, long service leave or other special leave as approved by the Plan Committee); or

b) an executive Director

Performance Right means an entitlement to a Performance Share subject to satisfaction of Performance Hurdles, and the corresponding obligation of the Company to provide a Performance Share, pursuant to the acceptance by an Eligible Executive of an Offer made to the Eligible Executive.

Performance Share means a Share issued or transferred to the Participant upon exercise of a Performance Right.

Performance Hurdles in relation to a Performance Right means the performance, vesting or other conditions (if any) determined by the Plan Committee and specified in the Offer of the Performance Right which are required to be satisfied, reached or met before the Performance Right can, during the Exercise Period, be exercised.

Exercise Period means the period commencing on the First Exercise Date and ending on the Last Exercise Date.

First Exercise Date with respect to a Performance Right means, unless otherwise specified in an Offer or these Rules, the earlier of:

a) the third anniversary of an Award Date or any other date as determined by the Plan Committee; and

b) the date on which a Special Circumstance arises in respect of the Participant holding the Performance Right.

Last Exercise Date with respect to a Performance Right means, unless otherwise specified in an Offer or these Rules:

a) subject to paragraph (b), the seven year anniversary of the Award Date; or

b) if a Special Circumstance arises in respect of a Participant, then the date 90 days that is (or such longer period as may be determined by the Plan Committee) after the Special Circumstance arises.

Award Date means, with respect to a Performance Right, the date on which the Plan Committee grants or awards the Performance Right to an Eligible Executive.

Special Circumstance means with respect to a Participant:

a) Total and Permanent Disablement;

b) Redundancy;

c) retirement of the Participant;

d) the death of the Participant;

e) any other circumstances as the Plan Committee may at any time determine (whether in relation to the Participant, a class of Participants, particular circumstances or a class of circumstances) and whether before or after the Award Date.

Participant means a person who holds at least one Performance Right awarded under the Plan or one Performance Share and includes, if the Participant dies or becomes subject to a legal disability, the Legal Personal Representative of the Participant.

The Plan Committee is delegated the power to administer the Plan by the Board of the Company.

Under the Plan, the Plan Committee makes an Offer of Performance Rights to the Eligible Executives. The information in the Offer includes:

• the period for acceptance of the invitation constituted by the Offer;

• the maximum number of Performance Rights for which the Eligible Executive may make application;

• the expected Award Date

• the expected First Exercise Date of the Performance Rights the subject of the Offer;

• the expected Last Exercise Date of the Performance Rights the subject of the Offer; and

• the Performance Hurdles (if any) attaching to the Performance Rights the subject of the Offer

Unless the Plan Committee determines otherwise no payment of money is required for the award of a Performance Right or to exercise a Performance Right.

An Eligible Executive may accept an Offer by giving the Company an Application Form within the period specified in the Offer and may accept the Offer in whole but not in part. An Offer not accepted lapses unless the Plan Committee determines otherwise.

The Company may, within 30 days after receiving the Application Form but subject to the conditions of the Offer

a) accept the Application Form;

b) award to the Eligible Executive all of the Performance Rights, and

c) notify the Eligible Executive of the Award Date of those Performance Rights.

Each Performance Right confers on its holder the entitlement, on exercise of the Performance Right, to acquire one fully paid ordinary share in the Company, subject to the Rules and the Vesting of the Performance Right.

A Performance Right may be exercised at any time during the Exercise Period. However, a Performance Right may be exercised before the Exercise Period if an accelerated vesting event occurs or on winding up of the Company. If the Offer specifies any Performance Hurdles, the Performance Rights may not be exercised unless and until those Performance Hurdles have been satisfied. The Plan Committee may reduce or waive the Performance Hurdles attaching to Performance Rights in whole or in part. On the exercise of a Vested Performance Right, the Company must procure the transfer of a Share, or issue and allot a Share to the Participant.

The holder of the Shares must not dispose of or deal with or grant a Security Interest over any of those Shares for a period of 12 months from the date the Shares are issued unless the Company has given the ASX a notice in accordance with section 708A(5)(e) of the Corporations Act.

The powers of the Plan Committee are listed in the Rules and include the powers to:

a) determine appropriate procedures and make regulations for the administration of the Plan which are consistent with these Rules;

d) terminate or suspend the operation of the Plan at any time, provided that the termination or suspension does not adversely affect or prejudice the rights of Participants holding Performance Rights at that time; and

e) delegate those functions and powers it considers appropriate for the efficient administration of the Plan, to any person or persons who the Plan Committee reasonably believes to be capable of performing those functions and exercising those powers.

If an amendment to the rules would adversely affect the rights of Participants in respect of any Performance Rights then held by them, the Board must obtain the consent of Participants who between them hold not less than 75% of the total number of those Performance Rights held by all those Participants before making the amendment.

The Trust Deed

The Company established the Trust for the purpose of holding Shares for the benefit of employees of the Group who are or will become entitled to acquire Shares under the Performance Rights Plan. The Company will appoint a Trustee as the first trustee of the Trust on the terms and conditions set out in the Trust Deed.

The Plan Purpose as defined in the Trust Deed means the sole purpose of enabling or assisting the Company to satisfy its obligations to provide Shares to Participants on the future vesting or exercise of Performance Rights. The Trust must be operated in accordance with the Trust Deed and the rules of the Performance Rights Plan. The powers of the Trustee are outlined in the Trust Deed.

The Trust must be managed and administered so that it satisfies the 'Sole Activities Test' meaning it is at all times an employee share trust and satisfies the requirements of subsection 130-85(4) of the ITAA 1997.

One section of the Trust Deed outlines how the Trust will work, including:

• contributions will be made to the Trustee by the Company to fund the acquisition of Shares to be held by the Trustee for a Plan Purpose

• the Trustee must not accept contributions from Participants

• the Trustee has the discretion to apply contributions to acquire Shares

• on-market

• off-market

• new share subscription

• the Trustee is not required to acquire Shares if it does not have sufficient funds to do so

• the Trustee must keep an account of all Unallocated Shares acquired for a Plan Purpose

• the Trustee must either transfer Plan Shares to a Participant or Allocate Plan Shares to a Participant once the Restriction Period in respect of the Shares has expired or been lifted

• the Trustee must provide written notification to the Participant of the number of Plan Shares transferred or allocated to them

• the Company has no Security Interest, proprietary right or proprietary interest (whether legal or beneficial) in Shares acquired by the Trustee

An initial contribution was made by the Company to the Trust to meet its obligations under the Performance Rights Plan in respect of performance rights granted. The Company will contribute funds to the Trust at various times throughout the vesting period so that the Trust can acquire the shares needed when the rights subsequently vest.

At all times, decisions by the Trustee will be made in accordance with the Trust Deed and in fulfilment of the Trustee's fiduciary duty to beneficiaries.

The Company will not be a beneficiary under the Trust Deed. There is nothing in either the Plan Rules or the Trust Deed that will allow any funds contributed by the Company to the Trust to be refunded, repaid or returned to the Company (other than by way of the Trustee paying the issue price where it subscribes for shares in the Company).

To the extent that the Trust derives interest or dividend income from holding Unallocated Shares that is in excess of the costs of the Trust, such income may be used to acquire more shares. To the extent that there is no one presently entitled to the income of the Trust, the Trustee will pay tax on this income.

All of the shares acquired by the Trust will be ordinary shares in the Company.

The relevant features of the Trust deed are:

• the Trustee must use any finds contributed to the Trust to acquire shares to provide to employees of the Company in satisfaction of any share or right grant

• the beneficiaries of the Trust are Participants in the Company's Performance Rights Plan, a trust established and maintained for the benefit of all employees of the tax consolidated group, or other employees not participating in the long term incentive plan

• the Trustee of the Trust has, for the sole purpose of exercising its powers and fulfilling its obligations under the Trust deed, and the rules of the employee share plan, all powers that are legally permissible for the Trustee to exercise, including the power to establish and/or support the employee share plan

• the Trustee does not have the power to do anything that may cause it to fail the definition of an employee share trust in section 130-85(4) of the ITAA 1997

• the Trustee in its discretion has the power to acquire shares for the purpose of satisfying grants made pursuant to the rules of the employee share plan by way of an on-market purchase, by subscribing for shares in the Company, or through a combination of both

• the Trustee has the power to sell, allocate or transfer shares in accordance with the rules of the Company's employee share plan

• the Company has no legal or beneficial entitlement to any of its shares forming part of the Trust fund at any time, and may not acquire such an interest

• the Trustee has the discretion to distribute any capital receipts, dividends, distributions or other entitlements received in respect of any shares to beneficiaries of the Trust, and

• at all times the Trustee must act in accordance with the Trust Deed and in accordance with its fiduciary duty.

The trigger for contributions to the Trust is as follows:

1. The Company grants a number of Performance Rights to Participants in the Plan

2. Participants accept the offer

3. The Performance Rights will typically have a 3 year vesting period

4. Over the course of the vesting period, the board of the Trust will meet periodically to assess the need for the Trustee to acquire shares to satisfy the needs of the Plan. This assessment will be based on the perceived probability that the Performance Rights will vest at the time of the meeting, for example, by comparing forecasts and current Company performance to the performance hurdles set out in the offer letter.

5. The Trustee communicates the requirements to the board of the Company who will settle the requisite funds on the Trust to enable the Trustee to either subscribe for new shares in the Company or to purchase shares on market.  If the Trustee wishes to subscribe for new shares in the Company, the Trustee will communicate this to the Company's board that may accept or reject the offer subject to circumstances at the time.

6. At the end of the vesting period, the number of vested Performance Rights can be determined.

7. If additional shares are required to satisfy the needs of the plan, step 5 will be repeated.

8. The appropriate numbers of shares then become allocated trust property within the Trust in the name of each of the Participants whose Performance Rights have vested.

9. The Participants can then exercise the Performance Rights, and the shares will be transferred to them.

The Trust will not acquire more shares than it needs to satisfy vested or unvested Performance Rights.

Offer, Application and Exercise Documents

The Offer Document specifies:

• Performance targets to be met

• Employee acceptance requirements

• Vesting and Exercise conditions

• 3 year vesting period

• Partial vesting

• Employee restrictions on disposal of shares

• Under the Plan Rules

• Under the Company Share Trading Policy

• Under paragraph 708A(5)(3) of the Corporations Act 2001 or ASX Listing Rules

• No obligation to accept offer.

Share trading policy

The Company's share trading policy is contained within its Code of Practice and Code of Conduct.

The policy restricts trading in securities (ordinary shares, preference shares and options) during the two months prior to the announcement of half yearly and yearly financial reports.

The policy advises trading in the four weeks immediately following the announcement of half yearly and yearly financial reports.

Relevant legislative provisions

Part IVA of the Income Tax Assessment Act 1936

Subsection 177F(1) of the Income Tax Assessment Act 1936

Section 177A of the Income Tax Assessment Act 1936

Subsection 177D(2) of the Income Tax Assessment Act 1936

Section 136(1) of the Fringe Benefits Tax Assessment Act 1986

Section 8-1 of the Income Tax Assessment Act 1997

Section 83A-10 of the Income Tax Assessment Act 1997

Section 83A-210 of the Income Tax Assessment Act 1997

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

Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Summary

Yes. The Commissioner will confirm that the contribution of the funds by the Company to the Trust will not be a fringe benefit under section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

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:

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

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

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

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

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

(i) the company; or

(ii) a subsidiary of the company; and

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

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 defined as 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 Executive under the Plan will be ESS interests as each Performance Right represents a right to acquire a beneficial interest in a share in a 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.

The Company has established the Trust and under the Trust Deed, the Trust'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 Trust, such as the operation of bank accounts and maintenance of adequate books and records.

Therefore, the Trust is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the Trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the Trust from being a fringe benefit.

Accordingly, the irretrievable cash contributions the Company makes to the Trustee of the Trust, to fund the subscription 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 2

Summary

Yes. The Commissioner will confirm that the irretrievable contributions made by the Company to the Trust to enable the Trustee to acquire shares, by subscribing for those shares or purchasing them on market, will be an allowable income tax deduction to the Company under section 8-I of the ITAA 1997.

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 has established an employee share trust (the EST) under the terms of the Trust Deed. The EST's purpose is of obtaining shares for the benefit of Participants, including subscribing for or acquiring, allocating, holding, and delivering Shares under the Performance Rights Plan (the Plan) for the benefit of Participants.

The Company will make contributions to the EST to allow the Trustee to purchase shares on market or off market, or to subscribe for new shares to allow rights under the Plan to be satisfied. The Trust Deed does not confer on the Company any security interest, proprietary right or proprietary interest (whether legal or beneficial) in shares acquired by the Trustee under the Trust Deed. There is no clause in the Trust Deed or rule within the Plan Rules that will allow the Company to retrieve any of the contributions it makes to the EST.

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 it 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 when the Performance Rights are due to vest 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 exercise of the Performance Rights. 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 Performance Rights Plan.

Once Performance Rights are exercised pursuant to the Plan Rules, the Trustee may transfer any Plan Shares to the relevant Participant as per the Trust Deed.

The Trustee of the EST may, on receipt of funds, purchase or subscribe for the requisite number of shares to be held by the Trustee for the Plan Purpose as per the Trust Deed.

Consequently, we consider that the contributions to the Trustee of the EST by the Company 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:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay...

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.

Draft Taxation Ruling TR 2014/D1 Income tax: employee remuneration trust arrangements (TR 2014/D1) provides guidance on this issue at paragraphs 17 to 20:

17. A contribution by an employer to the trustee of an ERT is considered to be capital or of a capital nature in whole or in part where the contribution is made for a purpose of securing a capital advantage by way of:

•establishing or forming part of a fund which is applied to make loans or otherwise provide finance to employees (a 'financing facility advantage'); or

•being ultimately and in substance, applied by the trustee to acquire a direct interest in the employer (for example shares) (a 'capital structure advantage').

18. A contribution by an employer to the trustee of an ERT in part made for a purpose of securing a capital advantage is only deductible under section 8 1 of the ITAA 1997 to the extent that the contribution is incurred for the primary purpose of being applied, within a relatively short period of time, to the direct provision of remuneration of employees (who are employed in the ordinary course of their employer's business carried on for the purpose of gaining or producing assessable income).

19. The Commissioner will accept all fair and reasonable bases of apportionment.

20. Where the contribution is made in part for securing a capital advantage referred to in paragraph 17, but the capital advantage is only expected to be very small or trifling compared to the advantage expected to be secured by directly remunerating employees (employed in the ordinary course of the employer's income producing business) within a relatively short period of time, it may be fair and reasonable for no part of the contribution to be apportioned to that capital advantage.

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 that the employer:

• intends 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.

In relation to what is accepted as a 'relatively short time period', paragraph 178 of TR 2014/D1 provides

178. The Commissioner will generally accept a relatively short period of time for the trustee of an ERT to diminish a contribution for the direct provision of remuneration to employees to be up to five years from the date the contribution was made by an employer to the trustee of an ERT. However, where the contribution has been made to facilitate an employee having an interest in the ERT corresponding to a particular number of shares (or rights to acquire shares) in the employer or in its subsidiaries to which Subdivision 83A C of the ITAA 1997 applies, the statutory scheme is such that a relatively short period of time for these arrangements will generally be accepted as being up to seven years from the date the contribution is made.

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 and the employee has exercised the Performance Rights, as vesting generally occurs after three years and the Last Exercise Date is on the seven year anniversary of the date the performance rights were awarded

• the amount of the contribution corresponds closely with the amounts needed to fund the ESS interests and is 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, exercise period and adhering to any statutory or policy security trading restrictions, 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 the 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 of its shares by the EST will be deductible by the Company under section 8-1 of the ITAA 1997.

Question 3

Summary

Yes. The Commissioner will confirm that the deduction for the Company in respect of the irretrievable contributions to the Trust will be allowed under section 83A-210 of the ITAA 1997 in the year of income when the contribution is made to the Trust, provided it is in respect of rights to acquire shares that have previously been granted to employees.

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:

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

(i) under an arrangement; and

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

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

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

Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the funds 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 funds provided to employee share trusts is considered in ATO Interpretative Decision ATO ID 2010/103 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 this arrangement and therefore, the reasoning is relevant 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 funds 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 Executive under the Plan will be ESS interests as each Performance Right represents a right to acquire a beneficial interest in a share in a 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 funds to the Trustee under the arrangement, the acquisition and holding of the shares by the Trustee and the allocation and transfer 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 2, the Company will make irretrievable contributions to the EST and under the terms the Trust Deed, the Trustee will acquire, allocate and deliver Shares for the benefit of the Participants provided the Trustee receives sufficient funds to subscribe for or purchase Shares and/or has sufficient Unallocated Shares available.

The provision of funds 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.

Question 4

Summary

Yes. The Commissioner will confirm that he will not make a determination under Part IVA of the ITAA 1936 in relation to any part of these arrangements.

Detailed reasoning

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 performance rights plan.

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 its shares under the scheme.

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