Edited version of your written advice

Authorisation Number: 1012666496195

Ruling

Subject: Employee Equity Plans

Question 1

Will Company A obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions that Company A or any subsidiary member of the Company A income tax consolidated group makes to the Trustee of the EST to fund the subscription for, or acquisition on-market, of Company A shares?

Answer

Yes.

Question 2

Will Company A obtain an income tax deduction, pursuant to section 8-1 or 25-5 of the ITAA 1997, in respect of costs incurred in relation to the on-going administration of the EST?

Answer

Yes.

Question 3 (a)

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

Answer

Yes.

Question 3 (b)

Are irretrievable contributions made by Company A (including contributions made by subsidiary members of the Company A income tax consolidated group), to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares by the EST to satisfy ESS interests, deductible to Company A at a time determined by former section 139DB of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of those ESS interests which are subject to Division 13A of the ITAA 1936?

Answer

Yes.

Question 4

Will the Commissioner seek to make a determination that former Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable contributions made prior to 16 November 2012 by Company A (including contributions made by subsidiary members of the Company A income tax consolidated group) to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A shares by the EST?

Answer

No.

Question 5

Will the Commissioner seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable contributions made on or after 16 November 2012 by Company A (including contributions made by subsidiary members of the Company A income tax consolidated group) to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A shares by the EST?

Answer

No.

The rulings for questions 1 to 5 inclusive each apply for the following periods:

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

1 July 2017 to 30 June 2018

Question 6

Is the provision of Performance Rights, Options or shares in Company A under the Company A Equity Plans to employees of Company A or any subsidiary member of the Company A income tax consolidated group, a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 7

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

Answer

No.

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A or any subsidiary member of the Company A income tax consolidated group by the amount of the tax benefit gained from the irretrievable contributions made by Company A or the subsidiary member of the Company A income tax consolidated group to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A shares in accordance with the Trust Deed?

Answer

No.

The rulings for questions 6 to 8 inclusive each apply for the following periods:

1 April 2014 to 31 March 2015

1 April 2015 to 31 March 2016

1 April 2016 to 31 March 2017

1 April 2017 to 31 March 2018

1 April 2018 to 31 March 2019

Relevant facts and circumstances

Company A is successful in its ability to attract and retain high quality employees. Company A needs to provide incentives to ensure they get the right people to join and stay committed to the group to ensure its future success. Company A's remuneration policy is designed to be competitive and equitable with the aim of aligning the economic interests of employees with those of Company A's shareholders by providing an opportunity for employees to earn significant rewards by potentially acquiring an equity interest in Company A based on creating shareholder value.

Company A has implemented a number of equity based compensation plans being the Company A Employee Option Plan (ESOP), the Executive Incentive Plan (EIP) and the Company A Performance Rights Plan (PRP) (all three plans are collectively referred to as the Company A Equity Plans).

Company A established the Company Employee Share Trust (EST) pursuant to Company A Employee Share Trust Deed and entered into between Company A and Company B Pty Ltd (Trust Deed) to facilitate the provision of shares in Company A under each of the above mentioned Company A Equity Plans to Australian employees and directors of Company A and certain other entities that form part of the Company A income tax consolidated group.

Pursuant to the Deed of Retirement and Appointment of Trustee Company A Employee Share Trust and entered into between Company A, Company B Pty Ltd and Company C Pty Ltd the trustee of the EST is now Company C Pty Limited (Trustee) (previously it was Company B Pty Ltd). The Trustee is an unrelated entity.

The applicant submits that the EST was implemented to provide Company A with greater flexibility to accommodate the long term incentive arrangements of Company A whilst the business continues to expand in terms of operation and employee numbers in future years. The EST also accommodates capital management flexibility for Company A in that the EST can use the contributions from Company A to either acquire shares in Company A on-market or alternatively, subscribe for new shares in Company A.

Similarly, use of the EST allows for a streamlined approach to the administration of the Company A Equity Plans. The EST can also be used to provide a range of incentives involving shares in Company A as circumstances change in the labour market and can be used in conjunction with the different incentives required to be provided in order to attract, reward and retain key employees. The key features of the Company A Equity Plans and EST are outlined below.

ESOP

As stated in the letters of invitation issued to Participants in the ESOP and the Company A Employee Option Plan Rules (ESOP Rules), the purpose of the ESOP is to attract and retain quality personnel and to further align the interests of staff and shareholders. The ESOP has been in place over ten years and has been regularly approved at annual general meetings.

The ESOP broadly operates as follows:

• It is at the employer's discretion to extend the invitation to certain employees to apply for the number of Options specified in the invitation.

• An Option may only be offered under the ESOP to:

• a full time or part-time employee of Company A, any of its associated bodies corporate and any other entity the results of which form part of the consolidated financial results of the company for financial reporting purposes;

• an executive director of Company A or any of its associated bodies corporate who has been such a director for a continuous period of at least one year; and

• any other person that provides services to Company A or any associated body corporate who the Board deems to be an employee for the purposes of the ESOP.

• An Option is ordinarily granted under the ESOP for no consideration. Any monetary consideration payable for an issue of Options must not exceed the lesser of 1 cent and 1% of the exercise price of the Option.

• The maximum number of shares that can be issued under the ESOP at exercise must not at any time exceed 5% of the total number of shares in Company A on issue, disregarding issues of Options or issues of shares on the exercise of Options following an offer or invitation to a person situated outside Australia or by an excluded offer or invitation.

• An Option issued pursuant to the ESOP is personal to the employee and cannot be assigned, transferred, encumbered or otherwise dealt with by the employee.

• No Option holder has any right pursuant to their award of Options to participate in any other share issue of Company A or of any other entity except in certain circumstances as described in the ESOP Rules.

• Subject to any terms or conditions set out in the terms of issue, Options granted under the plan expire after 58 months and carry no dividend or voting rights. When exercisable, each Option is convertible into one ordinary share in Company A. Subject to any terms or conditions set out in the terms of issue, Options granted are able to be exercised subject to the following vesting periods:

• up to 50% may be exercised after 30 months from the date of grant;

• up to 75% may be exercised after 42 months from the date of grant; and

• up to 100% may be exercised after 54 months and before the end of 58 months from the date of grant.

• Unless stated otherwise in the terms of issue, the exercise price of the Options is determined using the Volume Weighted five day Average Market Price (5 day VWAP) for Company A shares preceding the date of grant.

• If an Option holder ceases to be an employee or director by reason of dismissal, expiry of contract or resignation (other than as a result of the person reaching retirement age or suffering an illness or incapacity), the Options held by that person will lapse unless Company A determines otherwise.

• If an Option holder ceases to be an employee or director by reason of retirement (as defined in the ESOP rules), the Options held by that person will remain capable of exercise in accordance with the time period described above unless the Board determines otherwise.

• Any Option which has not been exercised by the expiry of the exercise period will automatically lapse.

• Administration of the ESOP is vested in the Board or through a Committee of the Board.

• The ESOP Rules were amended by Board resolution so that the EST must be used to administer the ESOP as follows for Australian resident Participants (as at the date of this ruling the EST will not be used in respect of foreign employees of Company A non-resident companies):

• on exercise of Options the Trustee of the EST will acquire the shares on behalf of each employee, either on market, via a new share issue or allocate shares already acquired by the Trustee to the relevant Participant. Such shares will rank equally with all other shares in Company A;

• while such shares are held on trust in the EST on behalf of the employees, the employees will be entitled to dividend and voting rights;

• employees are absolutely entitled to the shares as against the Trustee from when the shares are allocated to them; and

• by written notice, employees can apply for legal title to the shares held in the EST to be transferred to them or their nominee or to be sold on their behalf with a remittance of the sale proceeds (less any brokerage costs).

EIP

• An Option is ordinarily granted under the EIP for nil consideration

• The Options outstanding as at 30 June 2013 expire 60 months after issue and are able to be exercised subject to the following vesting periods:

• up to 50% could be exercised 24 months from the date of issue; and

• up to 100% could be exercised after 36 months from the date of issue.

• The use of the EST meant that:

• Company A or a subsidiary member of the Company A income tax consolidated group, was able to contribute the necessary funds to the EST so that the Trustee of the EST could acquire the relevant amount of shares on behalf of selected employees on market, via a new share issue, or by allocating shares already acquired by the Trustee, in satisfaction of the exercise of any Options by the selected employees. Such shares would rank equally with all other shares in Company A;

• whilst such shares were held on trust in the EST, the selected employees were entitled to dividend and voting rights;

• The selected employees were absolutely entitled to the shares as against the Trustee from when the shares were allocated to them; and

• By written notice, the selected employees were able to apply for legal title to the shares held in the EST to be transferred to them or their nominee or to be sold on their behalf with a remittance of the sale proceeds (less any brokerage costs).

PRP

• The PRP has been established to assist in the reward, retention and motivation of employees, and align the economic interests of eligible employees with those of shareholders by providing an opportunity for eligible employees to earn significant rewards by potentially acquiring an equity interest in Company A based on creating shareholder value.

• The PRP broadly operates as follows in accordance with the Company A Performance Rights Plan Rules (PRP Rules):

• it is at the Board's discretion to extend an invitation to certain employees to apply for the number of Performance Rights specified in the invitation;

• no consideration will be paid by the employee for the grant of a Performance Right.

• the exercise price in respect of each Performance Right is nil;

• accordingly, where certain vesting conditions and performance conditions, as determined by the Board, are met, eligible employees will receive ordinary shares in Company A;

• once exercised, each Performance Right will entitle the holder to one ordinary share in Company A;

• the number of Performance Rights made available to the employee will depend on various factors such as their position within the Company A income tax consolidated group;

• the Performance Rights will vest if the employee satisfies the relevant vesting and/or performance conditions specified in the invitation letter;

• the employee will forfeit his/her Performance Rights where, for example, an employee commits an act of gross misconduct, ceases employment with Company A in certain circumstances, or fails to meet the performance criteria. However, the Board may in their absolute discretion, decide to allow an employee that is no longer employed by Company A to exercise part or all of the Performance Rights held by the employee that has not yet been exercised (Good Leavers as described in the PRP Rules);

• Performance Rights are not transferable without written consent of the Board;

• if there are any bonus issues of shares (other than in lieu of a dividend payment) during the period in which an employee holds Performance Rights, on exercise of their Performance Rights, the employee will also receive the appropriate number of bonus shares in addition to their original allocation;

• Participants are not entitled to any voting rights, dividends or to participate in any rights issue as a result of solely holding Performance Rights, until the Performance Rights are exercised and the Trustee holds shares on behalf of those Participants;

• on exercise of Performance Rights, the Trustee of the EST is directed by the Board to acquire shares on behalf of each employee, either on market or via a new share issue or allocate any pre-acquired shares. Such shares will rank equally with all other shares in Company A;

• while such shares are held on trust in the EST, the employees are entitled to dividend and voting rights and to participate in any rights issue. Employees are absolutely entitled to the shares as against the Trustee from when the shares are allocated to them;

• by written notice, employees can apply for legal title to the shares held in the EST to be transferred to them.

Options issued under the ESOP and the PRP and Performance Rights issued under the PRP are collectively referred to as Rights.

Operation of the EST

• Pursuant to the Recitals of the Trust Deed, the EST has been established for the sole purpose of subscribing for or acquiring, allocating, holding and delivering Company A shares under the Company A Equity Plans (as well as any future plans established by Company A requiring shares to be held by the Trustee under the terms of the EST - see definition of the term Plan or Plans in the Trust Deed).

• The EST is funded by cash contributions from Company A or members of the Company A income tax consolidated group.

• Pursuant to the Trust Deed the Trustee is not permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the EST. In addition, it is not permitted to carry out activities which result in the Participants in the Company A Equity Plans being provided with additional benefits other than the benefits that arise from the relevant plan.

• Pursuant to the Trust Deed the Trustee of the EST is empowered to acquire Company A shares in Company A either on-market or via subscription for new shares in Company A.

• Pursuant to the Trust Deed the Board, on behalf of a Participant, will instruct the Trustee, by way of notice in writing, to subscribe for, purchase and/or allocate the requisite number of Company A shares in Company A specified in the notice.

• Pursuant to the Trust Deed, Company A must provide the necessary funds to the Trustee for the purpose of enabling it to acquire Company A shares as specified in the notice in accordance with the Trust Deed.

• The Trustee will, in accordance with instructions received pursuant to the rules of the Company A Equity Plans, acquire, deliver and allocate Company A shares for the benefit of Participants provided that the Trustee receives, when required and necessary, sufficient payment from a Participant to subscribe for or purchase such shares and/or has sufficient unallocated trust shares available.

• The Trustee (or any other party which the Trustee considers appropriate) will establish and maintain a separate Trust Share Account or record in respect of each Participant in accordance with the Trust Deed.

• While shares in Company A are held in trust, the Participant will be entitled to dividend and voting rights. By written notice, Participants can apply for legal title to the appropriate Company A shares held in the EST to be transferred to them.

• All funds received by the Trustee from Company A will constitute accretions to the corpus of the trust and no Participant will be entitled to receive such funds. The contributions will not be repaid to Company A unless they are used to subscribe for Company A shares.

• Where an amount paid by Company A to the Trustee in respect of the acquisition of Company A shares for the benefit of a Participant is in excess of the amount required by the Trustee to acquire those shares, Company A may require the Trustee to apply such amount to acquire, deliver or allocate the shares in accordance with the Trust Deed, the relevant plan rules or the relevant terms of participation or deposit the funds into any account opened and operated by the Trustee.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 20-20

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Section 83A-35

Income Tax Assessment Act 1997 Section 83A-205

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 104-155

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

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Section 139DB

Income Tax Assessment Act 1936 Section 139E

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

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

Income Tax (Transitional Provisions) Act 1997 Section 83A-10

Fringe Benefits Tax Assessment Act 1986 Section 67

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Question 1

Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. Broadly, the provision provides an entitlement to a deduction from assessable income for 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. However, subsection 8-1(2) of the ITAA 1997 prevents such a deduction to the extent that it is a loss or outgoing of capital, or of a capital nature, is a loss or outgoing of a private or a domestic nature, is incurred in gaining or producing exempt income, or is prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

Losses or outgoings

Pursuant to the Trust Deed, Company A must provide the Trustee with all the funds (contributions) required to enable it to subscribe for, or acquire Company A shares in accordance with the Trust Deed. The Trustee will, in accordance with instructions received pursuant to the relevant Company A Equity Plan, acquire, deliver and allocate Company A shares for the benefit of Participants provided that the Trustee receives sufficient payment to subscribe for or purchase such shares and / or has sufficient unallocated trust shares available. These contributions made to the Trustee by Company A or any subsidiary member of the Company A income tax consolidated group will be irretrievable and non-refundable to Company A in accordance with the Trust Deed which provides that funds provided to the Trustee will not be repaid to Company A and no Participant shall be entitled to receive the funds. On this basis, it is concluded that the irretrievable contributions made by Company A or any subsidiary member of the Company A income tax consolidated group are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997.

Relevant nexus

The purpose of Company A in establishing and making irretrievable contributions to the Trustee of the EST is to provide benefits to certain eligible employees in the form of shares in Company A.

All the documentation provided indicates that the contributions are made to the Trustee of the EST solely to enable the Trustee to acquire Company A shares for eligible employees of the business. As stated by the applicant in its private ruling application:

'In our view, the contributions will be deductible on the basis that they would be incurred to facilitate achievement of the purposes set out in the rules governing each of the Company A Equity Plans which are ultimately designed to boost Company A's operating performance and therefore its assessable income...'

Accordingly, there is a sufficient nexus between the outgoings (contributions made by either Company A or any subsidiary member of the Company A income tax consolidated group) and the derivation of Company A's assessable income (The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288, W. Nevill And Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin No Liabaility v The Federal Commissioner of Taxation(1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147).

Capital or Revenue

Company A's contributions will be recurring and be made from time to time as and when Company A shares and are to be subscribed for or acquired pursuant to the Trust Deed. Therefore, to this end, it is concluded that the contributions are not capital in nature, but rather outgoings incurred by the company in carrying on its business. In support of this conclusion, the Court held in Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; Spotlight Stores Pty Ltd v Federal Commissioner of Taxation [2004] FCA 650; 2004 ATC 4674; 55 ATR 745 that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature. This confirms the view expressed in ATO ID 2002/1074 that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made to the trustee of its employee share scheme.

Apportionment

A contribution to the trustee of an employee share trust is of capital or of a capital nature, where the contribution secures for the 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 contended workforce.

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

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

Finally, nothing in the facts suggests that the contributions are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

Therefore, when Company A or any of the subsidiary members of the Company A income tax consolidated group makes irretrievable contributions to the Trustee of the EST to fund the acquisition of Company A shares in accordance with the Trust Deed, those contributions will be an allowable deduction to Company A under section 8-1 of the ITAA 1997.

Single entity rule

The single entity rule in subsection 701-1(1) of the ITAA 1997 does not affect the answer to the question of whether the contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to the Trustee of the EST are deductible under section 8-1 of the ITAA 1997.

On the basis of the facts and circumstances that form part of this Ruling, the operation of the single entity rule cannot affect the fundamental questions that will determine deductibility. Those questions are:

• were the amounts contributed held for the exclusive benefit of entities who are not members of the Company A income tax consolidated group?

• to what extent are the contributions incurred in gaining or producing Company A's assessable income and are not of a capital, private or domestic nature?

Therefore, when Company A or a subsidiary member of the Company A income tax consolidated group makes irretrievable cash contributions to the Trustee of the EST to fund the acquisition of Company A shares and in accordance with the Trust Deed, those contributions will be an allowable deduction to Company A under section 8-1 of the ITAA 1997.

Question 2

Company A will incur various costs in relation to the on-going administration of the EST. For example, Company A will incur costs associated with the services provided by the Trustee of the EST. These costs are likely to include:

• employee plan record keeping;

• production and dispatch of holding statements to employees;

• provision of annual income tax return information;

• acquisition of shares and allocation to Participants; and

• management of employee termination.

In addition to the services to be provided by the Trustee of the EST, Company A has incurred costs associated with applying for this private ruling.

In accordance with the Trust Deed,

The Trustee is not entitled to receive from the Trust any fees, commission or remuneration in respect of its performance of its obligations as trustee of the Trust. The Company may pay to the Trustee from the Company's own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as the Company and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement.

Such costs are likely to include brokering costs incurred by the Trustee of the EST (for example, where the Trustee is directed to acquire Company A shares on-market), as well as other Trustee expenses such as the annual audit of the financial statements of the EST.

The costs incurred by Company A in relation to the implementation and on-going administration of the EST are deductible under section 8-1 of the ITAA 1997 as either:

• costs incurred in gaining or producing the assessable income of Company A; or alternatively

• costs necessarily incurred in carrying on Company A's business for the purpose of gaining or producing the assessable income of Company A.

The view that the costs incurred by Company A are deductible under section 8-1 of the ITAA 1997 is consistent with ATO ID 2002/961 in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer.

Consistent with the analysis above in Question 1, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses, and are deductible under section 8-1 of the ITAA 1997.

25-5

In relation to costs associated with recognised tax advisers the Commissioner accepts that such costs would be deductible in accordance with and under section 25-5 of the ITAA 1997.

Question 3 (a)

Preliminary - application of Division 83A of the ITAA 1997

Division 83A of the ITAA 1997 will apply to ESS Interests issued on or after 1July 2009 and also, in certain circumstances, to ESS Interests that were provided under an employee share scheme prior to 1 July 2009.

Rights issued on or after 1 July 2009

Division 83-A of the ITAA 1997 will apply to Rights issued under the Company A Equity Plans on or after 1 July 2009 as they will have been acquired on or after 1 July 2009 thereby satisfying subsection 83A-5(1) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997).

Rights issued before 1 July 2009

The applicant has advised that some Rights have been issued under the Company A Equity Plans before 1 July 2009. From 1 July 2009, Subdivision 83A-C of the ITAA 1997 will apply to these Rights if all of the following subparagraphs of paragraph 83A-5(2)(a) of the IT(TP)A 1997 are satisfied:

(i) at the pre-Division 83A time, subsection 139B(3) of the Income Tax Assessment Act 1936 applied in relation to the interest;

(ii) the interest was acquired (within the meaning of former Division 13A of the ITAA 1936) before 1 July 2009;

(iii) the cessation time mentioned in subsection 139B(3) of the Income Tax Assessment Act 1936, as in force at the pre-Division 83A time, for the interest did not occur before 1 July 2009.

The applicant has advised that it cannot be certain that all Rights issued under the Company A Equity Plans before 1 July 2009 will satisfy paragraph 83A-5(2)(a) of the IT(TP)A 1997. In particular, it cannot be certain that a cessation time has occurred under former subsection 139B(3) or if Participants, who had Rights issued to them before 1 July 2009, made an election under former 139E of the ITAA 1936 to be taxed upfront - if a Participant has made such an election the cessation time referred to in subparagraph 83A-5(2)(a)(iii) of the IT(TP)A 1997 will have been taken to have occurred before 1 July 2009. As a result, paragraph 83A-5(2)(a) of the IT(TP)A 1997 will not be satisfied and former Division 13A of the ITAA 1936 will continue to apply to such Rights issued under the Company A Equity Plans before 1 July 2009. Former Division 13A of the ITAA 1936 will therefore apply to determine what the tax consequences will be for these Rights at the time they are exercised and shares transferred to them by the EST.

Accordingly, former section 139DB of former Division 13A of the ITAA 1936 of the ITAA 1936 will apply in these circumstances (see reasoning below for Question 3(b)) to determine when a deduction is allowable to Company A for cash contributions made by it or any subsidiary member of the Company A income tax consolidated group to the EST to enable the Trustee to acquire shares to satisfy the exercise of Rights issued before 1 July 2009.

Application of section 83A-210 of the ITAA 1997

Section 83A-210 of the ITAA 1997 states:

If:

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

(i) under an arrangement; and

(ii) for the purposes 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 purposes 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.

Arrangement

The adoption of each of the Company A Equity Plans, their respective plan rules and the associated EST, constitutes an arrangement in these circumstances for the purposes of paragraph 83A-210(a)(i) of the ITAA 1997 and the provision of money to the Trustee necessarily allows each scheme to proceed.

Acquiring an ESS interest '…directly or indirectly...'

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

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

Rights

Under the Company A Equity Plans, a Participant will acquire a right under an employee share scheme because the conditions of section 83A-10 of the ITAA 1997 are satisfied.

The deductibility of money provided to employee share trusts is considered in ATO ID 2010/103. The facts described in ATO ID 2010/103 are comparable to the present Company A Equity Plans and therefore, the reasoning in it is relevant to them as explained immediately below.

Rights granted to an employee under the Company A Equity Plans will be ESS interests as each Performance Right or Option represents a right to acquire a beneficial interest in a share in a company (in this case Company A). These ESS interests will also be granted under an employee share scheme as they are granted in relation to the employee's employment. A Company A share acquired by the Trustee to satisfy a right to acquire a share, granted under the employee share scheme to an employee in relation to the employee's employment, is itself provided under the same scheme.

The granting of the beneficial interests in the Rights, the provision of the money to the Trustee under the arrangement (being any of the Company A Equity Plans), the acquisition and holding of Company A shares by the Trustee and the allocation of those Company A shares to the Participants are all interrelated components of the Company A Equity Plans. All the components of these schemes must be carried out so that the schemes can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the schemes to proceed.

Accordingly, the provision of money to the Trustee to acquire Company A shares is considered to be for the purpose of enabling the Participants, indirectly as part of the Company A Equity Plans, to acquire Rights (that is, ESS interests).

Timing - acquisition time

Contribution made in an income year prior to the income year that Rights are acquired

The acquisition time for the purposes of paragraph 83A-210(b) of the ITAA 1997 will occur when the Rights are granted to Participants. Accordingly, when Company A or any subsidiary member of the Company A income tax consolidated group makes a cash contribution to the Trustee in an income year before the income year in which the acquisition time for these ESS interests occurs, the timing of the deduction allowable under section 8-1 of the ITAA 1997 will be determined by section 83A-210 of the ITAA 1997 as being the later income year in which these ESS interests (Rights issued under the Company A Equity Plans) are granted (acquired).

Contribution made after the income year in which Rights are acquired

Section 83A-210 of the ITAA 1997 will not apply if Company A or any subsidiary member of the Company A income tax consolidated group makes cash contributions in an income year that is later than the income year in which the Rights are granted (acquired). In this case, the cash contribution will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is properly incurred (i.e. in the later income year).

Question 3 (b)

Former section 139DB of the ITAA 1936

For the reasons stated above, former section 139DB of the ITAA 1997 may still apply to Rights issued under the Company A Equity Plans.

Former section 139DB of the ITAA 1936 states:

If, at a particular time, a person (the provider) provides another person with money or other property:

(a) under an arrangement; and

(b) for the purpose of enabling another person (the ultimate beneficiary) to acquire, directly or indirectly, a share or right, under an employee share scheme;

then, for the purpose of determining when any deduction is allowable to the provider in respect of provision of the money or other property, the provider is taken to have provided it not before the time when the ultimate beneficiary acquires the share or right.

The deductibility of money provided to an employee share trust is considered in ATO Interpretative Decision ATO ID 2005/181 (now withdrawn). The facts described in that ATO ID are comparable to the present Company A Equity Plans and therefore, the reasoning in it is still relevant to them.

However, Rights which were issued before 1 July 2009 and to which former Division 13A of the ITAA 1936 still applies, were acquired before the establishment and creation of the EST. As a consequence, the irretrievable contributions eventually made to the Trust to enable the EST to acquire shares to satisfy pre-1 July 2009 Rights, will be paid after the Participant has acquired their Rights. Therefore former section 139DB of the ITAA 1936 will not act to defer the timing of the deduction for irretrievable contributions made by Company A or a subsidiary member of the Company A income tax consolidated group to the EST. Rather, the cash contributions will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is incurred, that is, in the year the irretrievable contribution is made.

Question 4

Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise his discretion to make a determination 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 must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out, and

• having regard to the matters in paragraph 177D(b) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies (dominant purpose)

On the basis of an analysis of these requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable contributions Company A or any subsidiary member of the Company A income tax consolidated group made, prior to 16 November 2012, to the Trustee of the EST to fund the subscription for or acquisition on-market of shares in Company A by the EST.

Question 5

For the same reasons expressed in question 5 above, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable contributions Company A or any subsidiary member of the Company A income tax consolidated group makes, on or after 16 November 2012, to the Trustee of the EST to fund the subscription for or acquisition on-market of shares in Company A by the EST.

Question 6

The provision of Rights

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' 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.

Subsection 83A-10(1) of the ITAA 1997 defines an ESS interest in a company as:

…a beneficial interest in:

(a) a share in the company; or

(b) a right to acquire a beneficial interest in a share in the company.

Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as:

…a scheme under which ESS interests in a company are provided to employees, or associates of employees, including past or prospective employees of:

(a) the company, or

(b) subsidiaries of the company

in relation to the employees employment.

The applicant has stated that ESS interests (being the Rights which are rights to acquire a beneficial interest in the share of a company, Company A) will be granted to Participants of the Company A Equity Plans. The ESS interests offered to Participants under the Company A Equity Plans are offered in connection with a Participant's employment by Company A (i.e. any entity of the Company A income tax consolidated group).

It is therefore accepted that each of the Company A Equity Plans comprises an employee share scheme (that incorporates the use of the EST which is an employee share trust within the meaning of subsection 130-85(4) of the ITAA 1997 - see question 8 below).

Accordingly, the acquisition of ESS interests (being the Rights) pursuant to the Company A Equity Plans will not be subject to fringe benefits tax on the basis that they are acquired under an employee share scheme (to which Subdivision 83A-B or 83A-C of the ITAA 1997 will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

The provision of Company A shares upon exercise of Rights

As stated above, 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.

The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. Heerey, Merkel and Finkelstein JJ at page 410 stated :

Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, casual connection or relationship between the benefit and the employment.

The situation is similar to that which existed in Federal Commissioner of Taxation v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. Davies, Gummow and Lee JJ 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.

When an employee of the Company A income tax consolidated group accepts to participate in any of the Company A Equity Plans, they obtain a right to acquire a beneficial interest in a share in Company A and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received would be in respect of the exercise of the right, and not in respect of employment (refer ATO ID 2010/219).

Therefore, the benefit that arises to an employee upon the exercise of a vested Right (being the provision of a share in Company A) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee.

Question 7

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

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

Employee share trust

Subsection 130-85(4) of the ITAA 1997 states:

An employee share trust, for an employee share scheme, 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).

A payment of money by Company A or a subsidiary member of the Company A income tax consolidated group to the Trustee of the EST will therefore not be subject to FBT provided that the sole activities of the EST are obtaining shares or rights to acquire shares in Company A.

The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997.

An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment.

Each of the Company A Equity Plans is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because each is a scheme under which rights to acquire shares in the company are provided to employees in relation to the employee's employment.

Under the Company A Equity Plans, the employer has established the EST to acquire shares in the company and to allocate those shares to employees to satisfy the Rights acquired under Company A Equity Plans. The beneficial interest in the share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights to acquire the shares are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997.

Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

• the EST acquires shares in a company (being Company A); and

• the EST ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the governing documents of the scheme (i.e. the Company A Equity Plans).

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require a trustee to undertake incidental activities that are a function of managing the employee share scheme and administering the trust.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental, as set out in ATO ID 2010/108, include:

• the opening and operation of a bank account to facilitate the receipt and payment of money

• the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee

• the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme

• dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme

• the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares

• the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries

• receiving and immediately distributing shares under a demerger.

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental.

For the purposes of the EST, the powers of the Trustee are set out in the Trust Deed. Clauses in the Trust Deed limit the powers given to the Trustee under the Trust Deed so as to ensure that the powers of the Trustee under the Trust Deed are exercised in accordance with the purpose of the Trust Deed as evidenced in Recitals, that is, '.. for the sole purpose of obtaining shares for the benefit of Participants..' These provisions collectively make it clear that the Trustee can only use the contributions received exclusively for the acquisition of shares for eligible employees in accordance with the Company A Equity Plans. To this end, all other duties/general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the shares for the sole benefit of Participants in accordance with the Company A Equity Plans.

Therefore, the EST is an employee share trust as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 as concluded above, and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Accordingly, as paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 excludes the contributions to the Trustee of the EST from being a fringe benefit, Company A or a subsidiary member of the Company A income tax consolidated group will not be required to pay FBT in respect of irretrievable contributions made to the Trustee of the EST to fund the acquisition of shares in Company A in accordance with the Trust Deed.

Question 8

Law Administration Practice Statement PS LA 2005/24 (PS LA 2005/24) has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement. It succinctly explains how section 67 of the FBTAA 1986 operates. Most notably, paragraphs 145-148 of PS LA 2005/24 provide as follows:

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

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

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

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

(i) a benefit is provided to a person;

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

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

It is clear, therefore, that the Commissioner would only seek to make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 under the heading 'Appendix, Question 18' where, on the application of section 67 of the FBTAA 1986, the Commissioner states:

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

Further, paragraph 151 of PS LA 2005/24 provides:

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

Under the existing Company A Equity Plans, if an EST was not used, no fringe benefits tax would be payable and nor is it likely that benefits provided to employees under other alternative remuneration plans would result in fringe benefits tax being payable.

In addition, under the Company A Equity Plan arrangements (with an EST), the benefits provided by way of irretrievable contributions to the EST and the provision of Rights (and the Company A shares received on their vesting) to eligible employees are excluded from the definition of a fringe benefit for the reasons given in the responses to questions 7 and 8 above. Therefore, as these benefits have been excluded from the definition of a fringe benefit, no fringe benefit arises and no fringe benefits tax will be payable by using an EST with the Company A Equity Plans. Also, as there would be no fringe benefits tax payable under the Company A Equity Plans without the use of an EST (and nor likely would fringe benefits tax be payable under other alternative remuneration plans), the fringe benefits tax liability is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA 1986 applies to include an amount in the aggregate fringe benefits amount of Company A or any subsidiary member of the Company A income tax consolidated group in relation to a tax benefit obtained from the irretrievable cash contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to the Trustee of the EST to fund the subscription for or acquisition on-market of shares in Company A.

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