Edited version of private advice

Authorisation Number: 1012631617082

Issue 1

Deduction for irretrievable cash contributions

Question 1

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

Answer

Yes

Question 2

Are irretrievable contributions made by the taxpayer (or a subsidiary of the income tax consolidated group) to the trustee of the EST, to fund the subscription for, or acquisition on-market of, taxpayer shares by the EST to satisfy ESS interests, deductible to the taxpayer (or the relevant subsidiary) at a time determined by section 83A-210 of the ITAA 1997, in respect to those ESS interests which are subject to Division 83A of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes

Question 3

Are irretrievable contributions made by the taxpayer (or a subsidiary of its income tax consolidated group) to the trustee of the EST, to fund the subscription for, or acquisition on-market of, taxpayer shares by the EST to satisfy ESS interests, deductible to the taxpayer (or the relevant subsidiary) under section 8-1 of the ITAA 1997, in the income year when the contributions are made, where the contribution is made after the acquisition of the relevant ESS interests?

Answer

Yes

Question 4

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

Answer

No

This ruling applies for the following periods

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

The scheme commences on

30 April 2013

Issue 2

Fringe Benefits Tax

Question 1

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

Answer

No

Question 2

Will the irretrievable cash contributions made by the taxpayer or its subsidiaries to the trustee of the EST to fund the subscription for, or acquisition of on-market of, shares in the taxpayer be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No

This ruling applies for the following periods

For the fringe benefits tax years

1 April 2013 to 31 March 2014

1 April 2014 to 31 March 2015

1 April 2015 to 31 March 2016

1 April 2016 to 31 March 2017

The scheme commences on

30 April 2013

Relevant facts and circumstances

Documents provided with the application:

1. Rules of the Performance Rights Plan (the Plan).

2. Employee Share Trust Deed (Deed).

3. Pro forma invitation under the Performance Rights Plan (Invitation).

4. Notice of Annual General Meeting for 2012.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Subsection 51(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

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

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

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

Income Tax Assessment Act 1997 Section 8-1

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

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-10

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

Income Tax Assessment Act 1997 Subsection 83A-25(1)

Income Tax Assessment Act 1997 Section 83A-35

Income Tax Assessment Act 1997 Section 83A-105

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 83A-205

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

Anti-avoidance rules

Part IVA considered.

Ruling

Subject: Employee Share Schemes

Issue 1 Deduction of irretrievable contributions

Question 1

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

An employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an EST 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 and does not relate to the earning of exempt income or non-assessable non-exempt income.

To qualify for a deduction under section 8-1 of the ITAA 1997 a contribution to the trustee of an EST must be incurred. There is no statutory definition of the term '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 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance.

A contribution made to the trustee of an EST is incurred only when the ownership of that contribution passes from an employer to the trustee of the EST and there is no circumstance in which the employer can retrieve any of the contribution - Pridecraft Pty Ltd v. FC of T [2004] FCAFC 339; 2005 ATC 4001; (Pridecraft); FC of T v Spotlight Stores Pty Ltd [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 209; (Spotlight).

The taxpayer intends to provide contributions to an independent entity as the trustee of an EST to fund the taxpayer's legal obligations to provide shares to its employees who participate in its employee share scheme and exercise the rights granted to them under the Plan.

Funds may be contributed at any time the Board considers appropriate although generally only after a grant where the contribution is to be used to acquire shares to satisfy that grant. The taxpayer must ensure sufficient contributions have been made to the trustee of the EST to fulfil any share acquisition directed by the Board in fulfilment of its legal obligations under the Plan (ie shares must be acquired within 30 days of the exercise of the right by the employee). If the funds are not provided to the EST, the trustee can refuse the Board's direction to acquire shares. The Deed provides for allocated shares to be held in trust for the employee who is the beneficial owner of the shares. The Deed prevents the trustee from exercising any rights in relation to the shares once they have been allocated to an employee. On termination of the trust, the taxpayer has no recourse to any of the contributions it has made to the trust. Therefore we conclude that when the taxpayer makes a contribution to the trustee of the EST, ownership of the contribution passes to the trustee. The contributions made to the EST by the taxpayer 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 (1949) 78 CLR 47 8 ATD 431 (Ronpibon); Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation 80 ATC 4542; 11 ATR 276 (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 EST

• 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.

The taxpayer's Group is not involved in the acquisition, sale or holding of shares, securities or other investments. The taxpayer makes contributions to the EST to fulfil its legal obligation to provide shares to participant employees soon after the exercise of the Performance Rights. The required connection to the assessable income or the carrying on of the business is evident in the performance hurdles that participant employees to the Plan must achieve before they can exercise the rights. These targets are currently linked to increases in total shareholder return (TSR) and/or increased sales for the taxpayer's Group. The stated aim of the Plan is to attract, motivate and retain eligible employees and align the employees' financial interests with those of the company shareholders through an incentive of rewarding them with rights to ordinary shares in the taxpayer. The contributions are required to fund the employee reward scheme and are necessarily incurred by the taxpayer in carrying on its business for the purpose of gaining or producing assessable income.

In Spotlight and Pridecraft, both the Federal Court and Full Federal Court agreed that the employer's contribution to an EST was deductible under former subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936) because the employer intended from the outset that the contribution be applied by the trustee of the EST to provide bonuses for employees over a five year period. The contribution was characterised as a 'prepayment of bonuses'. The Commissioner will accept a 'reasonable period of time' for the trustee of an EST to dissipate a contribution for the direct provision of remuneration to employees to be five years from the date the contribution was made by an employer to the trustee of an EST.

The taxpayer intends to make contributions to the trustee to fulfil its obligations under the Plan at some time between the granting of the rights to its employees and soon after the exercise of those rights. All rights expire within a five year period if not exercised before that time. The Plan requires the shares to be allocated to the employee or the nominated associate or trust noted in the Acceptance soon after notification of the exercise of the grant. However, in the future a possible holding period may restrict the participant from selling the shares.

We conclude that the taxpayer's primary purpose in making the contributions to the EST is to provide remuneration directly to its employees within a reasonable period of time.

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 (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403:

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 EST 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 EST 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.

In this case, the outgoings incurred by the taxpayer in carrying on its business are either not capital in nature or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction.

There are no specific provisions of the ITAA 1997 or the ITAA 1936 which prevent the irretrievable contributions from being a deduction. Therefore section 8-1(2) of the ITAA 1997 will not prevent the irretrievable cash contributions paid by the taxpayer and its Group to the EST from being a deduction.

The taxpayer will obtain a deduction under section 8-1 of the ITAA 1997 for irretrievable cash contributions made by the taxpayer or a subsidiary member its income tax consolidated group to the trustee of the employee share trust fund to fund the subscription for, or acquisition on-market of, shares in the taxpayer.

Question 2

Are irretrievable contributions made by the taxpayer (or a subsidiary of the taxpayer's income tax consolidated group) to the trustee of the EST, to fund the subscription for, or acquisition on-market of, the taxpayer's shares by the EST to satisfy ESS interests, deductible to the taxpayer (or the relevant subsidiary) at a time determined by section 83A-210 of the ITAA 1997, in respect to those ESS interests which are subject to Division 83A of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

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.

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

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.

As established in question 1, the taxpayer (and its subsidiaries) makes irretrievable contributions to the EST and under the terms of the Deed, the trustee is required to acquire, hold, and allocate shares to employees participating in employee share plans operated by the taxpayer.

The Plan rules allow the taxpayer to offer employees rights to acquire fully paid shares subject to the terms of the invitation and the Plan rules. The rights meet the definition of ESS interests (subsection 83A-10(1) of ITAA 1997) as they are beneficial interests in rights to acquire beneficial interests in shares in the taxpayer. The Plan meets the definition of an employee share scheme (subsection 83A-10(2) of ITAA 1997) in that it is a scheme under which the rights to shares in the taxpayer are provided to employees or their associates of the taxpayer or its subsidiaries in relation to the employee's employment.

The arrangement is comprised of the rules for the employee share plans, 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 to satisfy the allocation of shares to participants under the employee share 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 provision of money by the taxpayer or its subsidiaries, 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 or to fund subscription for shares to satisfy the existing obligations arising from the grant of ESS interests is allowable to the taxpayer in the year in which the money was paid to the trustee, under section 8-1 of the ITAA 1997. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust which considers the timing of deductions allowable to an employer in respect of money provided to the trustee of an employee share trust.

However, where the irretrievable contributions are made by the taxpayer and its subsidiaries 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 3

Are irretrievable contributions made by the taxpayer (or a subsidiary of its income tax consolidated group) to the trustee of the EST, to fund the subscription for, or acquisition on-market of, the taxpayer's shares by the EST to satisfy ESS interests, deductible to the taxpayer (or the relevant subsidiary) under section 8-1 of the ITAA 1997, in the income year when the contributions are made, where the contribution is made after the acquisition of the relevant ESS interests?

As discussed in the previous answer to question 2, section 83A-210 of ITAA 1997 applies if, under an arrangement, an amount of irretrievable contributions are made to the trustee to acquire shares to satisfy future obligations under the employee share plan, which is before the grant of the ESS interests that are rights to shares to participating employees.

Section 83A-210 of the ITAA 1997 will not apply where the taxpayer or its subsidiaries make irretrievable contributions to the EST to fund the acquisition of the taxpayer's shares by the trust to satisfy ESS interests, where the contribution is made after the acquisition of the relevant ESS interests.

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

Question 4

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

Law Administration Practice Statement PS LA 2005/24 (PSLA 2005/24) Application of General Anti-Avoidance Rules addresses the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1) of the ITAA 1936. The following requirements must be met before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936:

• a 'tax benefit', as identified in section 177C, was or would, but for subsection 177F(1), have been obtained;

• the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and

• having regard to section 177D, the scheme is one to which Part IVA applies.

The Scheme

Subsection 177A(1) of the ITAA 1936 (subsection 995-1(1) of the ITAA 1997) provides that 'scheme' means:

(a). any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b). any scheme, plan, proposal, action, course of action or course of conduct;

It is considered that this definition is sufficiently wide to cover the proposed arrangement under the Plan which utilises a payment made by the taxpayer or its subsidiaries to the trustee of the EST (in accordance with the Deed), to fund the acquisition of the taxpayer's shares on behalf of participating employees by the trustee.

Tax Benefit

'Tax benefit' is defined in subsection 177C(1) of the ITAA 1936 as including:

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out;

In order to determine the tax benefit that would be derived by the taxpayer or its subsidiaries from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the companies might reasonably have been expected to enter into to achieve the taxpayer's aims in relation to employee remuneration.

The applicant has provided the following counterfactuals:

1. The taxpayer could fund the purchase of shares on-market in the name of the participant at the time conditional rights vest and in the case of performance rights and options at exercise. Under this alternative, a tax deduction would be available to the taxpayer for the purchase cost of the shares.

2. The taxpayer could remunerate employees via payments of salary, bonuses or superannuation contributions (ie cash equivalent amounts based on the value of shares) rather than through the grant of awards and delivery of shares. Under this alternative, payments of the additional cash amounts would be deductible to the taxpayer.

3. The taxpayer could issue new shares directly to participants when conditional rights vest and performance rights or options are exercised. Under this alternative, the taxpayer would be entitled to a tax deduction for costs incurred in issuing and transferring the shares, but it is unlikely to receive a deduction for the cost/value of the shares issued.

Consideration of the tax advantages of the counterfactuals/alternative forms of remuneration and the proposed scheme suggests there is no tax benefit for the first two counterfactuals because the deductible amounts under both of them would be the same or similar from the taxpayer's tax perspective under the current ESS arrangement. Counterfactual 1 would result in a deduction for the purchase cost of the shares. Counterfactual 2 would equally result in a similar tax benefit as payments of the additional cash amounts would also be deductible to the taxpayer.

However, the third counterfactual acknowledges that if the taxpayer were to issue new shares to fulfil the rights, it would not be entitled to any deduction for the shares, only the costs incurred when issuing and transferring any shares, unless section 83A-205 of the ITAA 1997 was satisfied. This provision requires that:

• The taxpayer must have provided an ESS interest to an individual under an employee share scheme

• The taxpayer must have done this as the individual's employer (or as the holding company of the employer)

• with the exception of paragraph 83A-35(2)(b) of the ITAA 1997, section 83A-35 must have applied to reduce the amount included in that individual's assessable income under subsection 83A-25(1).

If the shares did meet these conditions, the taxpayer would be entitled to a deduction equal to the amount of the reduction allowable to the individual under section 83A-35 of the ITAA 1997 (a maximum deduction of $1,000).

By contrast the use of the trust arrangement permits the taxpayer, subject to the requirements of sections 8-1 and 83A-210 of the ITAA 1997, to claim a deduction for the full amount of the contributions it makes to the trust. It is probable that this amount would exceed that which would be allowable under section 83A-205 of the ITAA 1997 in the third counterfactual above. Therefore, to the extent of any increased deductions because of the trust arrangement, the taxpayer obtains a tax benefit.

While, for the reasons noted above by the applicant, it is unlikely that it would choose any other incentive plan that did not give rise to an allowable deduction (and therefore there would not be the necessary tax benefit), the analysis below proceeds on the assumption that the Commissioner would in fact be able to identify a relevant tax benefit.

Section 177D of the ITAA 1936 provides that Part IVA only applies if, after having regard to certain factors specified in paragraph 177D(2) of the ITAA 1936, it would be concluded that a person who entered into the scheme did so for the sole or dominant purpose of enabling the tax payer to obtain the tax benefit.

Paragraph 177D(2) of the ITAA 1936

Paragraph 177D(2) of the ITAA 1936 sets out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit:

(i) the manner in which the scheme was entered into or carried out;

(ii) the form and substance of the scheme;

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),

(i) The manner of the scheme

In considering whether Part IVA applies or not, the necessary comparison to be made in relation to the factors listed in paragraph 177D(2) of the ITAA 1936 is between the scheme as proposed and the relevant counterfactual.

The inclusion of the EST in the scheme does give rise to a tax benefit, but the taxpayer has provided the following commercial reasons for the operation of the trust:

As a company the taxpayer is unable to hold its own shares under Australian corporation law. The trust is a vehicle which will enable the taxpayer to effectively acquire and hold its own shares for the purposes of fulfilling its obligations resulting from new and existing grants under the Plan. Using the EST allows the taxpayer to:

• Warehouse shares in the EST (ie acquire and hold shares before they are to be allocated to participants).

• Hedge the cost of satisfying rights by funding the acquisition of shares via the trust at the time rights are granted or at any appropriate time during the performance/vesting period.

• 'Recycle' shares that are no longer required for rights that are forfeited under the Plan, to satisfy other rights.

• Subject shares to a restriction on dealing (for example, to enforce the company's share trading policy or to enforce any holding lock), for a specified period of time after vesting/exercise of rights, during which time they will be held in the EST (should the taxpayer decide to impose such restrictions). The EST is the legal owner of the shares until they are transferred out of the EST to the participant when the holding lock ends.

• Have greater choice in the source of the shares used to satisfy rights and options eg market purchase, new issue or other transfer.

• The trust establishes independent records and accounts for participating employees.

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

It is accepted that the trust provides benefits to the operation of the scheme that would not be available if the shares were provided directly by the taxpayer in the third counterfactual.

(ii) The Form and Substance of the scheme

The substance of the scheme is the provision of remuneration in the form of shares to employees who participate in the ESS. It takes the form of payments by the taxpayer Group to the trustee which acquires the shares and transfers them to employees.

While existence of the trust may confer a tax benefit, it cannot be concluded that it is the only benefit provided, as outlined above. The applicant has argued that the form of the arrangement with the trust provides the scheme with non-tax benefits and this is accepted.

(iii) The timing of the scheme

The irretrievable cash contributions made by the taxpayer and its subsidiaries to the trustee enable the trustee to acquire shares in the taxpayer in satisfaction of employee rights and to use market conditions advantageously to meet potential employee share requirements in advance. The application of section 83A-210 to cash contributions made before the employee receives the right, prevents any timing advantage for the deductibility of those contributions.

(iv) The result of the scheme

The result of the scheme is to provide the taxpayer and its subsidiaries with allowable deductions for the contributions they make to the EST. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of the taxpayer and its subsidiaries to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances.

(v) Any change in the financial position of the taxpayer

As noted above, the taxpayer and its subsidiaries makes irretrievable cash contributions to the trust and those contributions constitute a real expense with the result that the taxpayer and its subsidiaries financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with a trust as part of the scheme, in contrast to the taxpayer providing shares to employees directly, there is nothing artificial, contrived or notional about the taxpayer and its subsidiaries expenditure.

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

The contributions by the taxpayer to the trustee will form part of the corpus of the trust and must be dealt with by the trustee in accordance with the terms of the Deed, that is, for the acquisition of shares to ultimately be provided to participants in the ESS. The taxpayer is not a beneficiary of the trust and its contributions cannot be returned to it in any form except where the trustee acquires shares from the taxpayer by subscribing for new shares at market value. Therefore, the contributions made by the taxpayer amount to a real change to the financial position of the trustee. The financial position of employee participants and their associates in the scheme will also undergo a real change. This will be the case whether the shares are acquired through the EST or provided direct by the taxpayer. There is nothing artificial, contrived or notional about these changes.

(vii) Any other consequence

There are no other consequences for the taxpayer and its subsidiaries, their employees and or their associates that would be relevant as evidence of a dominant purpose of obtaining a tax benefit.

(viii) The nature of any connection between the taxpayer and any other persons

The relationship between the taxpayer and its subsidiaries and the participants in the Plan is one of employer/employee. The trustee and the taxpayer and its subsidiaries are unrelated.

The contributions made by the taxpayer and its subsidiaries to the trustee are commensurate with the taxpayer's stated aim of providing the participants with remuneration in a form that aligns their personal financial rewards with the risks and returns of its shareholders. There is nothing to suggest that the parties to the employee share scheme are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit.

Conclusion - the purpose of the scheme

A consideration of all the factors referred to in paragraph 177D(2) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the taxpayer and its subsidiaries employees who participate in the scheme in a form that promotes the taxpayer and its subsidiaries business objectives, rather than to obtain a tax benefit.

Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the taxpayer and its subsidiaries in relation to irretrievable contributions made by the taxpayer and its subsidiaries to the trust to fund the acquisition of employer shares in accordance with the scheme as outlined above.

Issue 2

Fringe Benefits Tax

Question 1

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

In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

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

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

An ESS interest in a company is 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 ESS interests in the company are provided to employees (or associates of employees) of the company or subsidiaries of the company, in relation to the employee's employment. (Subsection 83A-10 of the ITAA 1997).

The employers' employees will receive beneficial interests in options to acquire beneficial interests in shares at a discount in respect of their employment, upon acceptance of participation in the Plan.

The Commissioner accepts that the scheme described in the facts is an employee share scheme under which relevant ESS interests (being beneficial interests in rights to acquire beneficial interests in shares) are acquired by employees (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to the employment of those employees. Therefore, the provision of those rights will not be subject to fringe benefits tax because they are specifically excluded from the definition of fringe benefit.

The shares acquired by the trustee under the Plan to satisfy the rights are also provided to employees under that same employee share scheme.

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

As stated above, a fringe benefit will only arise under subsection 136(1) of the FBTAA where the benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee. Under the Plan, the benefit (beneficial interest in shares) that arises upon the end of the vesting period is considered to be provided as a result of the employee exercising rights (previously obtained upon acceptance to participate in the Plan).

The situation mentioned above is considered to be analogous to that stated in ATO Interpretative Decision ATO ID 2003/316 Fringe Benefits Tax Fringe benefit: benefit arising upon discharge of a limited recourse loan which refers to the case of FC of T v. McArdle 89 ATC 4051;(1988) 19 ATR 1901. In that case, an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.

In the present circumstances, when an employee agrees to participate in the Plan, he or she obtains a right to acquire a beneficial interest in a share in the taxpayer and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received, that is, a beneficial interest in shares, would be in respect of the exercise of the right, and not in respect of employment.

Therefore, the benefit that arises to an employee after the vesting period under the Plan, being the beneficial interest in a share, does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of' their employment with the taxpayer.

Question 2

Will the irretrievable cash contributions made by the taxpayer or its subsidiaries to the trustee of the EST to fund the subscription for or acquisition on-market of shares in the taxpayer be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

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

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

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

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

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

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

(i) the company; or

(ii) a subsidiary of the company; and

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

The terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10 of the ITAA 1997 were considered in question 2 and it is accepted the Plan is an employee share scheme under which the ESS interests (being rights or restricted shares) are provided to employees, or associates of employees, of the taxpayer and its subsidiaries.

The taxpayer has established the EST and under the Deed, the EST's sole activities are to acquire, hold and allocate shares to employees participating in employee share plans operated by the taxpayer. There are some incidental activities undertaken by the trustee to manage and administer the EST, such as the operation of bank accounts, maintaining records of employee entitlements under the Plan and attending to any potential legal challenges that may arise.

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

Accordingly, the irretrievable cash contributions the taxpayer and its subsidiaries make to the trustee of the EST, to fund the subscription for, or acquisition on-market of, shares in the taxpayer in accordance with the Deed are not a fringe benefit under subsection 136(1) of the FBTAA.

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