Edited version of private advice

Authorisation Number: 1012654780599

Ruling

Subject: Employee Share Scheme

Question 1

Will the Employer 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 Employer to the Trustee of the Employee Share Trust (EST) to fund the subscription for or on-market acquisition of shares in the Employer (Shares) by the EST?

Answer

Yes

Question 2

Will the Employer 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 Employer to the Trustee of the EST, to fund the subscription for or on-market acquisition of Shares by the EST to satisfy ESS interests, deductible to the Employer 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?

Answer

Yes

Question 4

If the Trustee of the EST satisfies its obligations under the Performance Rights Plan (PRP) by subscribing for new shares in the Employer, will the subscription proceeds be included in the assessable income of the Employer 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

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 Employer in respect of the non-refundable cash contributions made by the Employer to the Trustee of the EST to fund the subscription for or on-market acquisition of Shares by the EST?

Answer

No

Question 6

Is the provision of performance rights (Rights) by the Employer to Participants under the PRP, 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 Employer to the Trustee of the EST, to fund the subscription for or on-market acquisition of 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 applies to increase the fringe benefits taxable amount to the Employer, by the amount of tax benefit gained from non-refundable cash contributions made by the Employer to the Trustee of the EST, to fund the subscription for or on-market acquisition of Shares?

Answer

No

This ruling applies for the following periods:

Income Tax

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Fringe Benefits Tax

Year ended 31 March 2015

Year ended 31 March 2016

Year ended 31 March 2017

Year ended 31 March 2018

Year ended 31 March 2019

The scheme commences on:

1 July 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background

The Employer is an Australian listed company which undertakes its primary business activities through two wholly owned subsidiaries.

The Employer's Remuneration and Incentive Programme

As outlined in its Annual Report, the objective of the Employer's executive remuneration framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework conforms to market practice and aligns executive and director rewards with achievement of strategic objectives and the creation of value for shareholders.

The Employer's remuneration structure for executive and non-executive employees utilises fixed and variable components. In addition to a base salary, employees are largely remunerated through 'at risk' variable short-term incentive (STI) based payments, including commissions and bonuses payable from the Profit Share Bonus Pool (Profit Share Bonus Payments).

The Employer engaged external executive remuneration experts to assist with a review and update of the existing remuneration policies and practices. After consultation with external experts, the Board came to the view that a bonus based on profits (rather than revenue) would best align employee performance with shareholder interest.

The key modification to the existing policies and procedures will be an increase in the profit pool from 30% to 40% of pre-tax profits, as well as the establishment of long-term incentives (LTI) through the introduction of the Performance Rights Plan (the PRP).

Under the PRP, eligible employees will receive performance rights (Rights) that will vest into shares in the Employer (Shares) equivalent to 25% of the employee's Profit Share Bonus Payment. The PRP will result in the Profit Share Bonus Payments to be made as a combination of cash payments (75%) and Shares (25%).

It is envisaged that the PRP will continue to be a part of the Employer's remuneration strategy for the foreseeable future.

Use of the EST to Facilitate the PRP

It is increasingly common for Australian listed companies to use a trust to facilitate the provision of Shares to employees as part of equity based employee incentive and retention strategies.

In summary, the commercial benefits of using the EST for the Employer include:

• Providing the Employer with capital management flexibility by being able to direct the Trustee of the EST to either buy Shares on-market or to subscribe for an issue of new Shares (thereby providing flexibility to manage the dilution of existing shareholders if required).

• Providing a single vehicle for the administration of the PRP and any plans which the Employer introduces in the future and for the convenient outsourcing of the administration to a third party administrator (the Trustee) who efficiently oversees such plans as part of their business. This outsourcing will free up internal resources.

• Providing an arm's-length vehicle (through the use of a third party Trustee) for acquiring and holding Shares. This assists the Employer in meeting Corporations Law requirements and managing risks associated with dealing in its own shares and potential insider trading issues.

Operation of the PRP

1. The Employer has provided a copy of the PRP Rules.

2. The purpose of the PRP is to align employee compensation with returns to shareholders and assist with staff retention. It is targeted at the Employer's executives whose responsibilities provide them with the opportunity to significantly influence long-term shareholder value. The vesting of the Rights is subject to satisfaction of performance hurdles and service condition as set out in the invitation letter to eligible employees.

3. Broadly, the PRP operates as follows:

a. Responsibility for the establishment and operation of the PRP rests with the Board of Directors of the Employer (the Board). (PRP Rules)

b. The PRP operates on the basis of an annual cycle, correlated to the company's financial year. At or prior to the commencement of a financial year selected Employees will be issued with an invitation for the grant of a Right. The Right represents a right to be issued or transferred a number of Shares in the future for no consideration calculated to reflect 25% of the employee's total Profit Share Bonus Payment earned for that financial year (Invitation Letter).

c. Rights are granted for nil consideration, unless otherwise determined by the Board. (PRP Rules)

d. A Right granted to a Participant under the PRP may not be transferred, mortgaged, charged or otherwise dealt with or by a Participant, other than in accordance with the terms of the PRP, and will lapse immediately if dealt with in such a way, unless the Board consents to such action or the assignment or transfer occurs by legal operation upon the death or legal incapacity to a Participant's legal personal representative. (PRP Rules)

e. Subject to applicable laws, in the event of any reconstruction of capital (including consolidation, subdivision, reduction, return or cancellation) of the issued capital of the company, the number of Rights which a Participant has, may be adjusted by the Board on any basis in its absolute discretion to minimise any advantage or disadvantage accruing to Participants. (PRP Rules)

f. Where a Change of Control Event (PRP Rules) occurs, the Board may determine the manner in which any or all of a Participant's unvested Rights will be dealt with.

g. If a Participant, ceases employment with an Employer group company and at the date of cessation of employment has any Rights which remain unvested, those unvested Rights will automatically be forfeited, subject to the overriding discretion of the Board (PRP Rules). The discretion of the Board will not be exercised on a routine basis to allow participants voluntarily ceasing employment to receive their unvested Rights.

h. Upon the vesting of a Right:

i. The Board must instruct the Trustee to subscribe for, acquire and/or allocate the number of Shares in respect of which the Participant was entitled (Trust Deed); and

ii. the Employer, or the Trustee (by instruction from the Employer), must notify the Participant that the Trustee holds the Shares on the Participant's behalf (PRP Rules).

i. All Shares issued, transferred and/or allocated upon vesting of the Rights will rank pari passu in all respects with Shares then on issue (PRP Rules).

j. Subject to satisfaction of any Service and/or Disposal Restriction, a Participant may submit a Withdrawal Notice to the Employer in respect of some or all of the Shares the Trustee holds on behalf of the employee (PRP Rules). At this point, if the Board approves the Withdrawal Notice, the company must direct the Trustee to transfer legal title of the Shares to the Participant in accordance with the terms of the approved Withdrawal Notice (Trust Deed).

k. Where the Trustee holds Shares on behalf of a Participant:

i. the dividends payable on those Shares will be paid by the Employer to the Trustee, and the Trustee will then pay any such dividends to the Participant (clause 13.3 of the PRP Rules);

ii. the Participant may exercise any voting rights attaching to those Shares held by the Participant (or the Trustee for and on behalf of the Participant) (clause 13.5 of the PRP Rules).

Operation of the Employee Share Trust (EST)

1. The Employer has provided a copy of the Trust Deed (the Trust Deed).

2. The EST is intended to operate as follows:

a. The EST is being established for the sole purpose of obtaining shares for the benefit of Participants, including subscribing for, acquiring, holding and delivering Shares under the PRP (Recitals of the Trust Deed).

b. The EST will be funded by contributions from the Employer (i.e. for the purchase of Shares in accordance with the PRP) (Trust Deed).

c. These funds will be used by the Trustee of the EST to acquire the Shares either on-market or via a subscription for new Shares (Trust Deed), based on notification from the Employer (Trust Deed).

d. Shares acquired by the Trustee will be allocated to the relevant employees and held on trust on their behalf immediately upon the vesting of Rights held by employees under the PRP (Trust Deed).

e. The Employer may contribute funding to the EST and instruct the Trustee to acquire Shares prior to the vesting of Rights held by employees under the PRP (Trust Deed). In these circumstances it is the intention of the Employer to allocate these Shares to employees within 12 months from the date that the Trust first acquires the Shares.

f. The total period from the date that funds are contributed by the Employer to the EST to the date that Shares are allocated to the employees by the Trustee upon the vesting of Rights held under the PRP will be less than 7 years (in accordance with paragraph 178 of Draft Taxation Ruling TR 2014/D1 Income tax: employee remuneration trust arrangements (TR 2014/D1))

g. The structure of the EST and the PRP are such that Shares may be dealt with at any time after the Restriction Period lapses, in the following manner:

i. Shares allocated to each employee will generally be transferred into the name of the employee (i.e. legal title) upon a Withdrawal Notice being lodged with and approved by the Board (Trust Deed); or

ii. The Trustee can sell Shares on behalf of the employee, where permitted to do so by the employee, resulting in a cashless exercise for them. That is, the employee receives proceeds on sale of Shares by the EST less the exercise price (if any) and any brokerage costs (Trust Deed).

h. The Trustee is an external entity and has been appointed as Trustee acting in an independent capacity on behalf of the beneficiaries of the EST in accordance with the terms of the Trust Deed. The Employer will pay the Trustee's costs of operation to the extent they relate to the operation of the EST which will facilitate the PRP.

Assumptions

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

• The PRP and the EST are administered in accordance with their terms.

• 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 Rights issued to Participants. That is, the EST will not acquire Shares to satisfy the future vesting or exercise of Rights not already on issue.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA,

Income Tax Assessment Act 1936 Section 177A ,

Income Tax Assessment Act 1936 Subsection 177D(2),

Income Tax Assessment Act 1936 Subsection 177F(1),

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Subsection 8-1(1),

Income Tax Assessment Act 1997 Subsection 8–1(2),

Income Tax Assessment Act 1997 Section 20-20,

Income Tax Assessment Act 1997 Subsection 20-20(2),

Income Tax Assessment Act 1997 Subsection 20-20(3),

Income Tax Assessment Act 1997 Subsection 20-25(1),

Income Tax Assessment Act 1997 Section 20-30,

Income Tax Assessment Act 1997 Division 83A,

Income Tax Assessment Act 1997 Section 83A-10,

Income Tax Assessment Act 1997 Subsection 83A-10(1),

Income Tax Assessment Act 1997 Subsection 83A-10(2),

Income Tax Assessment Act 1997 Section 83A-210,

Income Tax Assessment Act 1997 Section 102-20 ,

Income Tax Assessment Act 1997 Division 104 ,

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

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

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

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

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

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

Income Tax Assessment Act 1997 Section 974-75,

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

Fringe Benefits Tax Assessment Act 1986 Section 66,

Fringe Benefits Tax Assessment Act 1986 Section 67 and

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1).

Reasons for decision

Question 1

Summary

Yes. the Employer will obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of the non-refundable cash contributions made by the Employer to the Trustee of the EST to fund the subscription for or on-market acquisition of Shares by the EST.

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. It states that:

You can deduct from your assessable income any loss or outgoing to the extent that:

a) it is incurred in gaining or producing your assessable income ('first limb'); or

b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income ('second limb').

Subsection 8-1(2) of the ITAA 1997 then states:

However, you cannot deduct a loss or outgoing under this section to the extent that:

a) it is a loss or outgoing of capital, or of a capital nature; or

b) it is a loss or outgoing of a private or domestic nature; or

c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

d) a provision of this Act prevents you from deducting it.

TR 2014/D1 provides the Commissioner's current view on a broad scope of taxation consequences for employers, trustees and employees who participate in an employee remuneration arrangement (ERT).

Paragraph 9 of TR 2014/D1 states that the essential elements of an ERT to which the draft ruling applies when considering the consequences for the employer and trustee are:

a) an employer carries on business for the purpose of gaining or producing assessable income;

b) employees are employed by the employer in the ordinary course of carrying on that business;

c) a trust is established by or at the instruction of the employer;

d) the trust is a resident trust for the purposes of Division 6;

e) the employer makes one or more contributions to the trustee of the trust;

f) the trustee applies the contributions to make loans to employees and/or to acquire shares or other assets; employees of the employer are capable of benefiting under the trust (for example, in the form of loans, distributions of cash and/or a transfer of assets); and

g) the value of any benefits provided to employees is determined by the employer or the trustee, having regard to the performance of the employees; the growth in value of, or generation of income from, investments held by the trustee; and/or objective indices, for example, movements in the value of shares in the employer or a related entity.

The Employer has established 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 PRP and other employee equity plans for the benefit of Participants. The way in which the EST has been established and operates is in line with the elements of an ERT to which TR 2014/D1 applies.

Where the Employer is carrying on a business for the purpose of gaining or producing assessable income, the question arises as to whether a contribution made to the trustee of an EST is necessarily incurred in carrying on that business so as to satisfy the second limb.

To qualify for a deduction under section 8-1 of the ITAA 1997 a contribution to the trustee of an EST 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 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance (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) [2004] FCAFC 339; Spotlight Stores Pty Ltd v. Commissioner of Taxation (Spotlight) [2004] FCA 650.

The Trust Deed provides that the Trustee will, in accordance with instructions received from the Employer pursuant to the PRP 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 Shares held by the Trust.

The Employer 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 PRP to be satisfied. All funds received by the Trustee from the Employer will constitute accretions to the corpus of the Trust and will not be repaid to the Employer and no Participant will be entitled to receive the funds. The Trust Deed does not confer on the Employer 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 Employer 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) (1949) 78 CLR 47; Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation (Magna Alloys) [1980] FCA 150).

Paragraph 14 of TR 2014/D1 provides that 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, 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 Employer 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.

Broadly, the PRP operates as follows:

(i) eligible employees are invited to participate in the PRP

(ii) Schedule 1 of the invitation contains the Terms of Invitation to which are attached the Application Form, Irrevocable Power of Attorney, Plan Rules and Constitution

(iii) once the Application Form is completed and accepted by the Employer, the employee is issued with one Right which is equivalent to 25% of the employee's Profit Share Bonus Payment

(iv) subject to agreed Performance Hurdles and Vesting Conditions (ongoing service condition) being satisfied, the vested Right will automatically be exercised and the employee will have a number of Shares allocated/issued/transferred on their behalf in the EST. These Shares are referred to as Plan Shares

(v) Plan Shares allocated/issued/transferred on exercise of an employee's Right may be required to be held via the EST for up to seven years from the Grant Date of the Right

(vi) Plan Shares will be subject to Vesting Conditions but not Performance Hurdles

(vii) the Plan Share Vesting Conditions are a service condition that the employee continue to be employed on the 4^th anniversary of the Grant Date (of the Right)

(viii) on satisfaction of the Plan Share Vesting Conditions, a Vesting Notice is issued to the employee. Plan shares will not have vested until a Vesting Notice is issued

(ix) there are disposal restrictions on unvested and vested Plan Shares which generally means the employee must not dispose of or otherwise deal with their Plan Shares until the 7^th anniversary of the Grant Date (of the Right)

(x) there are, subject to conditions, circumstances where Plan Shares will be compulsorily divested including Leaver, Bad Leaver, Failure to satisfy Plan Share Vesting Conditions, Fraudulent or dishonest actions and Insolvency

Once the disposal restriction period is completed, the Participant may apply pursuant to Schedule 1 of the PRP Rules to:

• have legal title to the Shares transferred to them, or

• request the trustee to sell the Shares on their behalf and provide them with the proceeds of sale less any fees.

The Employer expects to make a contribution to the EST at or around the time the Rights vest. It is not expected that the amount contributed to the EST will exceed the amount required by the EST to acquire the Shares needed to satisfy the vested Rights.

The Trustee of the EST must, on receipt of funds, purchase or subscribe for the requisite number of Shares within seven days (Trust Deed).

Consequently, we consider that the contributions to the Trustee of the EST by the Employer for the purpose of remunerating its employees under the PRP is an outgoing in carrying on the Employer'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 [1938] HCA 73:

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...

An irretrievable contribution made by the Employer 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.

The primary purpose of the Employer in making the contribution is to remunerate employees for their performance in contributing to the ordinary activities of the Employer. Further, the provision of Shares to employees as a result of the Employer making the contributions aligns the future financial benefits of the Participants from ownership of the Shares with benefits accrued by shareholders in the Employer, thus motivating employees to continue to contribute to the ordinary business goals of the Employer.

As discussed above, after the vesting conditions are satisfied, the Employer will make contributions to the Trustee of the EST and the Trustee will apply the funds to acquire Shares within a relatively short period of time of receiving the contributions.

The Shares, once acquired by Trustee, are allocated to the relevant account of each Participant in the EST within a relatively short time frame of receiving the contribution from the Employer. The Participants are beneficially entitled to the Shares in all respects, and are effectively able to attain legal ownership of the Shares from the EST at any time following the procurement allocation of the Shares by the Trustee by lodging a withdrawal notice to the Employer. The withdrawal of Shares is subject to the approval of the Board,

While it is considered that the contribution is made in part for securing a capital advantage, the capital advantage attained will be small or trifling compared to the advantage expected to be secured by rewarding the prior performance of Participants and motivating the Participants to contribute through their employment performance to the income producing activities of the Employer in the future.

The irretrievable contributions made by the Employer to the Trustee for the purposes of procuring Shares to satisfy the Employer's commitments arising under the PRP are primarily outgoings incurred by the Employer in the ordinary course of carrying on its business. Such contributions are not considered capital in nature, or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction.

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

Question 2

Summary

Yes. The Employer will 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.

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 Employer 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 Employer 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 ATO ID 2002/961 Income Tax: employer costs for the purpose of administering its employee share scheme are deductible (ATO ID 2002/961).

Question 3

Summary

Yes. Non-refundable cash contributions made by the Employer to the Trustee of the EST, to fund the subscription for or on-market acquisition of Shares by the EST to satisfy ESS interests, are deductible to the Employer 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.

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 money provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by the employee under an ESS in relation to the employee's employment.

The deductibility of money provided to an EST 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 in it is relevant to the Employer as explained immediately below.

The arrangement is constituted of the PRP, the Rules that govern the PRP, 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 PRP will be ESS interests as each Right represents a right to acquire a beneficial interest in shares in a company (the Employer) 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, 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 money to the Trustee under the arrangement, the acquisition and holding of Shares by the Trustee and the allocation of Shares to the participating employees are all interrelated components 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 Employer will make irretrievable contributions to the EST and under the terms the Trust Deed, the Trustee will, in accordance with instructions received from the Employer pursuant to the PRP 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 Employer 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 Employer 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 Employer 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

No. If the Trustee of the EST satisfies its obligations under the PRP by subscribing for new Shares, the subscription proceeds will not be included in the assessable income of the Employer under sections 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997.

Detailed reasoning

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

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

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

In GP International Pipecoaters Pty Ltd v 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:

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

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

ATO Interpretative Decision ATO ID 2010/155 Income Tax Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee (ATO ID 2010/155) considers the assessability as ordinary income for an employer of the option exercise price paid direct to the employer by the employee. While not considered in the decision as part of the ATO ID, the reasons for decision provide some insight into the assessability of the subscription price as ordinary income of the exercise price received by the employer company. The reasons for decision provide that when the trustee of the EST subscribes to the company for an issue of shares and pays the full subscription price for the shares using contributions provided by the employer in accordance with an employee share scheme, the company is taken to have received a contribution of share capital from the trustee. The subscription price received by the company is a capital receipt of the company, not ordinary income.

The character of the contribution of share capital received by the Employer 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 Employer 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 therefore is also of a capital nature.

Accordingly, when the Employer receives subscription proceeds from the Trustee of the EST where the EST has subscribed for new shares in the Employer to satisfy obligations to Participants under the PRP, the subscription proceeds received by the Employer 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 Employer 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 in subsection 20-25(1) of the ITAA 1997 to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of a loss or outgoing.

However, none of the provisions listed in section 20-30 of the ITAA 1997 are relevant to the subscription proceeds received by the Employer.

The subscription proceeds received by the Employer for issuing shares to the Trustee of the EST do not constitute an insurance or indemnity for the purposes of subsection 20-20(2) of the ITAA 1997, nor a recoupment for the purposes of subsection 20-30(3) of the ITAA 1997.

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 provides 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 PRP by subscribing for new shares in the Employer.

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

Subsection 104-35(1) of the ITAA 1997 provides that CGT event D1 happens if you create a contractual or other legal or equitable right in another entity. 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 Employer 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.

Subsection 104-155(1) of the ITAA 1997 provides that CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset that you own and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base. However, paragraph 104-155(5)(c) of the ITAA 1997 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.

When the Employer receives subscription proceeds for issuing Shares to the Trustee under the PRP, neither a CGT event D1 nor a CGT event H2 happens. Since no CGT event occurs, the Employer does not make a capital gain or capital loss from the issuance of shares to the Trustee.

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

Question 5

Summary

No. The Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Employer in respect of the non-refundable cash contributions made by the Employer to the Trustee of the EST to fund the subscription for or on-market acquisition of the Employer's shares by the EST.

Detailed reasoning

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

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

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

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

The PRP was established as part of its remuneration and reward program for employees to further align the interests of staff and shareholders. The structure of the PRP includes the use of an EST that has a range of commercial benefits for the Employer.

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 PRP. The scheme will comply with the provisions of Division 83A of the ITAA 1997.

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 Employer in relation to the irretrievable contributions made to the EST to fund the acquisition of the Employer's shares under the scheme.

Question 6

Summary

No. The provision of Rights by the Employer to Participants under the PRP is not a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

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:

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 ….

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 PRP as described in this application is an employee share scheme under which relevant ESS interests (being Rights) are acquired by employees of the company (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to the employee's employment.

Therefore, the provision of Rights by the Employer to Participants under the PRP 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

Summary

No. The irretrievable cash contributions made by the Employer to the Trustee of the EST, to fund the subscription for or on-market acquisition of the Employer shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the 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).

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 PRP 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 Employer has established 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 PRP. 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 satisfies the definition of an employee share trust, as defined in subsection 130-85(4) 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 Employer makes to the Trustee of the EST, to fund the subscription for, or on-market acquisition of Shares in accordance with the Trust Deed are not a fringe benefit under subsection 136(1) of the FBTAA.

Question 8

Summary

No. The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to the Employer, by the amount of tax benefit gained from non-refundable cash contributions made by the Employer to the Trustee of the EST, to fund the subscription for or on-market acquisition of Shares.

Detailed reasoning

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

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

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

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

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

(i) a benefit is provided to a person

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

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

The Commissioner will only make a determination under section 67 of the FBTAA 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 Fringe benefits tax: response to questions by major rural organisation (MT 2021), at Appendix 1 Question 18, on the application of section 67, the Commissioner states:

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

Under the PRP, benefits provided to the Trustee by way of irretrievable cash contributions to the EST and to Participants by way of the provision of 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 PRP 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 applies to increase the fringe benefits taxable amount to the Employer by the amount of tax benefit gained from non-refundable cash contributions made by the Employer to the Trustee of the EST, to fund the subscription for or on-market acquisition of Shares.

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