Edited version of your written advice

Authorisation Number: 1012699676776

Ruling

Subject: Employee Share Schemes

Issue 1

Employee Share Schemes

Question 1

Are irretrievable cash contributions by X to Y(the "Trustee") of an employee share trust ("EST") to fund the acquisition of X shares (the "shares") an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 ("ITAA 1997")?

Answer

Yes.

Question 2

Part A: Is the deduction for X in respect of the irretrievable contributions to the EST allowed in the same year of income when the contribution is made to the EST, provided it is in respect of shares that have been granted to employees, or rights to acquire shares that have been previously granted to employees, pursuant to section 83A-210 of the ITAA 1997?

Part B: If irretrievable contributions are made to the EST in order to facilitate grants of rights that have not yet occurred at the time of the contribution, is the deduction for X, in respect of the irretrievable contributions to the EST, allowed in the same year of income that the rights in question are granted to an employee, pursuant to section 83A-210 of the ITAA 1997?

Answer

Part A: yes.

Part B: yes.

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 ("ITAA 1936") apply to the arrangement where irretrievable contributions are made to the Trustee of the EST to fund the acquisition of X shares?

Answer

No.

Question 4

Is the provision of shares to employees pursuant to the Performance Rights Plan Rules (the "PRP") arrangements subject to Fringe Benefits Tax ("FBT") within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ("FBTAA")?

Answer

No.

Question 5

Are irretrievable contributions of money to the Trustee of the EST, to fund the acquisition of shares in X, subject to FBT pursuant to the definition in subsection 136(1) of the FBTAA?

Answer

No.

Question 6

Will the Commissioner seek to apply section 67 of the FBTAA to the proposed arrangements?

Answer

No.

This ruling applies for the following periods:

30 June 2015

30 June 2016

30 June 2017

30 June 2018

30 June 2019

The scheme commences on:

1 July 2014

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.

The following information has been provided in the Private Binding Ruling Application

1. X is focused on rewarding staff performance by enabling staff to participate in the future growth and profitability of X, in order to facilitate an increase in shareholder value;

2. As part of their growth strategy, X has a long term equity incentive plan in place, providing grants of performance rights;

3. Under X's existing long-term incentive structure, eligible directors and employees receive Performance Rights under the X Performance Rights Plan Rules (the "PRP");

4. A Copy of the PRP has been provided at appendix 1 of the Private Binding Ruling ("PBR") application;

5. The performance rights are issued in accordance with the guidelines established by X's Remuneration Committee;

6. Key details of the PRP are outlined in the remuneration reports from the relevant annual reports (provided at appendix 2 of the PBR);

7. To assist with the effectiveness, structure and administration of X's PRP, an Employee Share Trust ("EST") was established;

8. The EST is a separate vehicle for the sole purpose of acquiring ordinary shares for the benefit of eligible directors and employees under X's employee equity plans;

9. A copy of the Trust Deed was provided at appendix 3 of the PBR application.

X's reasons for using a trust structure

X has put forward a number of reasons for using a trust structure, as detailed below:

10. The trust facilitates the acquisition of shares by the trustee, either on market or by a new issue of shares by the company;

11. An arm's length vehicle for acquiring and holding shares in the company, either by way of new issue or acquiring market;

12. It better aligns the company's tax effect accounting policy with its cash flows;

13. The trust is an efficient structure for giving effect to disposal restrictions/vesting conditions. As the trustee is the legal owner, employees have no ability to deal in the shares prior to the time of allocation;

14. Contributing to the trust can enable the company to hedge against share price growth;

15. The trust provides the flexibility to acquire and hold shares that will be allocated to employees under its rights plan, and it also facilitates the forfeiture of rights when performance hurdles are not met. The trust is more able to hold shares for reallocation- this enables easy recycling of shares;

16. The trust will provide a single vehicle for the administration of the group's employee rights plan, and enables outsourcing to a third party (the trustee);

17. The trust establishes independent records and accounts for participating employees; and

18. A trust is the most appropriate vehicle to be used to acquire shares and manage dividend income during the vesting period, due to Corporations Law restrictions on the company from dealing with its own shares.

Employee Share Trust- purpose

19. The EST has been established for the sole purpose of subscribing for, or acquiring, delivering, allocating and holding shares in the company under X's PRP, to satisfy outstanding performance rights, options awards, and future performance rights and options awards;

20. The sole activity of the Trustee is to acquire shares for the purpose of providing them to participants at a discount, and the administration of the EST;

21. The Trustee will acquire shares at market value, and will have the discretion to acquire them on or off market, or by subscribing for new shares;

22. The EST is managed and administrated so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997;

23. Under the terms of the Trust Deed, eligible directors and employees are the beneficiaries of the EST;

24. Prior to the time of vesting, participants are not entitled to any voting rights, dividends or rights issues based on their participation in the PRP;

25. Under the terms of the Trust Deed, X will instruct the Trustee to subscribe for, or purchase, a number of shares specified in the notice, to be held by the Trustee as trust shares in respect of the participant;

26. This instruction may occur at the time of equity grant, or at a later time, depending on X's capital management strategy;

27. The Trustee, in accordance with instructions received pursuant to the plan rules, acquires, delivers and allocates shares for the benefit of participants, provided that the Trustee receives sufficient payment to subscribe for, or purchase, shares and/or has sufficient unallocated trust shares available;

28. Shares are not allocated to employees under the EST, and no interest in the shares will arise until the relevant performance/vesting hurdles are met and the equity interest has been exercised;

29. Contributions made to the EST are irretrievable contributions in the form of the initial contribution, and additional similar contribution as required to fund the PRP. The amount of the contributions made by the company will depend on:

a. The number of performance rights granted to employees under the relevant plans;

b. The number of shares held at the time by the trustee;

c. The type of rights plan being administered at the time; and

d. The likelihood of rights vesting; and

e. The employee contributions expected on vesting, if any.

30. Participants are absolutely entitled to the shares, as against the Trustee, from when vesting occurs and the shares are allocated to them. While such shares are held on trust, the participant may be entitled to dividend and voting rights;

31. All funds received by the trustee from X constitute accretions to the corpus of the EST and no participant is entitled to receive such funds. The funds are not repaid to the company (i.e. the contributions are irretrievable). However, the Trustee may apply part of the funds received to subscribe for shares in the company, which would require a payment to the company;

32. Where an amount paid by the company to the Trustee in respect of the acquisition of shares for the benefit of a participant is in excess of the amount required by the Trustee to acquire those shares, the company may require the Trustee to apply such amount to acquire, deliver, or allocate shares in accordance with the deed, the relevant plan rules, or the relevant terms of participation, or deposit the funds into any account opened and operated by the trustee;

33. To the extent that vesting or performance conditions are not met, or the equity interests are otherwise forfeited in accordance with the PRP, the shares are forfeited to the Trustee, who acquires the shares;

34. The Trustee is not permitted to offer, issue, or acquire any share or any rights to any share, if to do so would contravene any applicable law;

35. The Trustee is not permitted to carry out activities that are not matters or things that are necessary or expedient to administer and maintain the EST. Further, the Trustee is not permitted to carry out activities that result in the participants being provided with additional benefits, other than the benefits that arise from the relevant PRP;

36. The EST is used to administer all of X's employee equity awards for existing and future awards under the PRP (the PRP has been provided at appendix 1 of the PBR application);

37. X has no interest in the shares held by the EST;

38. There are no other loan agreements, or any other agreements, between X, the trust, Trustee, or employee/director in relation to the scheme.

Previous PBR applications

39. In 2012, X sought a PBR on the same issue. The facts have remained substantially the same.

Relevant legislative provisions

Section 8-1 of the Income Tax Assessment Act 1997

Part IVA of the Income Tax Assessment Act 1936

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

Section 8-1 of the Income Tax Assessment Act 1997

Subsection 8-1(2) of the Income Tax Assessment Act 1997

Subsection 51(1) of the Income Tax Assessment Act 1936

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

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

Section 177A of the Income Tax Assessment Act 1936

Paragraph 177D (b) of the Income Tax Assessment Act 1936

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

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

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

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

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

Paragraphs 130-85(4) (a) and 130-85(4) (b) of the ITAA 1997

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

Section 67 of the Fringe Benefits Tax Assessment Act 1986

Issue 1

Employee Share Schemes- Employee Share Trust

Question 1

Are irretrievable cash contributions by X to Y(the "Trustee") of an employee share trust ("EST") to fund the acquisition of X shares (the "shares") an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 ("ITAA 1997")?

Summary

The irretrievable cash contributions are incurred to improve X's operating performance, and to motivate and retain high quality staff. They are also made to the Trustee under the Performance Rights Plan Rules, in order to enhance the profitability of X's business, and in producing their assessable income.

Therefore, the irretrievable cash contributions that are made to the Trustee, in order to acquire shares, are allowable deductions for X under section 8-1 of the ITAA 1997.

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 is a general deduction provision, and provides the following:

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; or

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

Subsection 8-1(2) of the ITAA 1997 continues by stating:

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.

X has established an Employee Share Trust ("EST") for the sole purpose of acquiring ordinary shares for the benefit of eligible directors and employees (the "Participants") under X's Employee Equity Plans.

In accordance with X's long-term incentive structure, Participants receive Performance Rights under the company's Performance Rights Plan Rules ("PRP") as part of its remuneration policy, with the intention of attracting and retaining suitable employees to its business.

In Pridecraft Pty Ltd v. FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210 and FC of T v. Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745 payments that were made by an employer company to a trust, which was established for the purpose of providing incentive payments to employees, were determined to be on revenue account, and not capital, or capital in nature.

However, it should be noted that, although the court held that the payments were deductible under subsection 51(1) of the Income Tax Assessment Act 1936 ("ITAA 1936"), it found that subsection 177F (1) of Part IVA of the ITAA 1936 applied to cancel the tax benefit arising from the deduction. The reasoning was based on the elements associated with prepayments to fund future bonuses and a loan back, which are not applicable in the present context.

The above court decisions confirm the opinion expressed in ATO Interpretative Decision ATO ID 2002/1074 Income Tax: Deductibility- irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme ("ATO ID 2002/1074").

In accordance with ATO ID 2002/1074, the provision of a discounted share or right is considered part of the overall remuneration of an employee. Further, the employer contributions of money and/or property to the trustee of its employee share scheme ("ESS") are considered part of the overall employee remuneration costs of the employer. Therefore, the contributions (when used to acquire shares or rights) are deductible to the employer under section 8-1 of the ITAA 1997.

In the current circumstances, the cash contributions made by X to the Trustee of the EST (in order to fund the subscription for, or acquisition of, shares by the trust) are irretrievable and non-refundable under the Trust Deed. Clause 7.4 of the Trust Deed states:

All funds provided by the Company to the Trustee under the Trust or in accordance with the Plan shall be irretrievable cash contributions to the Trust.

The irretrievable cash contributions are incurred to reward staff performance, by enabling them to contribute to the future growth and profitability of X, and to facilitate an increase in shareholder value.

In accordance with the above, the irretrievable cash contributions made to the Trustee under the PRP are directed at enhancing the profitability of X's business, and in producing assessable income.

The facts of the PBR application do not indicate that the irretrievable cash contributions are private or domestic in nature, that they are incurred in gaining or producing exempt income, or that they are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or ITAA 1936.

Conclusion

Therefore, the irretrievable cash contributions made to the Trustee to acquire shares are allowable deductions in accordance with section 8-1 of the ITAA 1997.

Question 2

Part A: Is the deduction for X in respect of the irretrievable contributions to the EST allowed in the same year of income when the contribution is made to the EST, provided it is in respect of shares that have been granted to employees, or rights to acquire shares that have been previously granted to employees, pursuant to section 83A-210 of the ITAA 1997?

Part B: If irretrievable contributions are made to the EST in order to facilitate grants of rights that have not yet occurred at the time of the contribution, is the deduction for X, in respect of the irretrievable contributions to the EST, allowed in the same year of income that the rights in question are granted to an employee, pursuant to section 83A-210 of the ITAA 1997?

Summary

Part A: the cash contributions that X makes to the Trustee will be deductible in the income year in which the acquisition arises for the rights.

Part B: Section 83A-210 of the ITAA 1997 will not apply if X makes cash contributions in an income year that is later than the income year in which the rights are granted. In this case, a cash contribution will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is incurred i.e. in a later income year.

Detailed reasoning

As previously established in question one (1), the provision of money to the trustee of an EST by an employer, for the purpose of remunerating its employees under an ESS, is an outgoing incurred in carrying on the employer's business, and is therefore deductible under section 8-1 of the ITAA 1997.

In general, deductions for irretrievable cash contributions under section 8-1 of the ITAA 1997 will be allowable in the income year in which the employer incurred the outgoing. However, in certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.

Section 83A-210

In accordance with section 83A-210 of the ITAA 1997, an employer may provide an amount of money or property to another entity under an indirect arrangement (e.g. an ESS) for the purpose of providing ESS interests to its employees under an ESS. In these cases, the deduction for the employer is delayed until such time as the employee acquires the ESS interest. Section 83A-210 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.

Therefore, section 83A-210 of the ITAA 1997 determines when a deduction is allowable under the circumstances set out in Question 1, in relation to ESS and ESS interests.

An ESS is a scheme under which ESS interests in a company are provided to employees, 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 company share, or a right to acquire beneficial interests in a company share (subsection 83A-10(1) of the ITAA 1997).

When determining the income year that the taxpayer can claim the general deduction allowable under section 8-1 of the ITAA 1997, the taxpayer is taken to have provided the money or property at the time the individual acquires the ESS interest. Accordingly, the deduction is allowed in the year that the acquisition occurs, which may be later than the income year that the money or property was advanced.

The PRP is an ESS, and the rights are considered to be ESS interests, being rights to acquire a beneficial interest in the share of a company (i.e. rights to acquire X shares).

The adoption of the PRP; the creation of the EST; the granting of beneficial interests in the rights; the provision of money to the Trustee; the acquisition and holding of the shares by the Trustee and the allocation of the shares to participants are all interrelated components of the ESS which, for the purpose of paragraph 83A-210(a)(i) of the ITAA 1997, constitute the arrangement in these circumstances.

The provision of money to the Trustee necessarily allows the scheme to proceed. X will provide money to the Trustee of the EST to enable the Trustee to acquire X shares, for the purpose of satisfying the grant of rights under the PRP.

As discussed above, the rights are ESS interests, which the participants will acquire when they are granted them by X. Therefore, the acquisition time for the purpose of section 83A-210 of the ITAA 1997 occurs when the rights to the shares are granted to the participants.

Conclusion

Part A

In accordance with the above, and pursuant to section 83A-210 of the ITAA 1997, the cash contributions provided by X to the Trustee will be deductible in the income year in which the acquisition time arises for the rights. The ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax: Employee Share Scheme: timing of deduction for money provided to the trustee of an employee share trust ("ATO ID 2010/103") supports this conclusion.

Therefore, when X makes a cash contribution to the Trustee in an income year before the income year in which the acquisition time for the rights occurs, a deduction will be allowed under section 83A-210 of the ITAA 1997 in the income year in which the ESS interests (rights) are granted (acquired).

Part B

However, despite the above, section 83A-210 of the ITAA 1997 will not apply if X makes a cash contribution in an income year that is later than the income year in which the rights are granted.

In the present case, a cash contribution will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is incurred, for example, in a later income year.

In conclusion, it should be noted that, if the Trustee uses the money to purchase excess shares intended to meet a future obligation arising from a future grant of rights, the excess payment will occur before the employees acquire the relevant rights (ESS interests) under the scheme. In that instance, section 83A-210 of the ITAA 1997 will apply, and the excess payment will only be deductible to X in the year of income that the relevant rights are subsequently granted to PRP participants.

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 ("ITAA 1936") apply to the arrangement where irretrievable contributions are made to the Trustee of the EST to fund the acquisition of X shares?

Summary

The dominant purpose of the scheme is to provide remuneration for X's eligible employees, who participate in the scheme in a manner that promotes the company's business objectives, as opposed to obtaining a tax benefit.

Therefore, in consideration of the above, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to an arrangement where irretrievable contributions are made to the Trustee of the EST in order to fund the acquisition of X's shares.

Detailed reasoning

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules ("PS LA 2005/24") provides instruction and practical guidance to Tax officers on the application of Part IVA and other General Anti-Avoidance Rules. Accordingly, PS LA 2005/24 should be taken into consideration when making a determination under Part IVA.

Before the Commissioner can exercise his discretion regarding the application of Part IVA, which is provided for in subsection 177F (1) of the ITAA 1936, three requirements must be met, as outlined below:

1. There must be a 'scheme' within the meaning of section 177A of the ITAA 1936;

2. A 'tax benefit' must arise, that was obtained, or would be obtained, in connection with the scheme, but for Part IVA; and

3. Having regard to the matters in paragraph 177D (b) of the ITAA 1936, the scheme is one to which Part IVA applies.

The Scheme

A 'scheme' is defined in subsection 177A (1) of the ITAA 1936 as follows:

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

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

It is considered that the definition of 'scheme' in subsection 177A (1) of the ITAA 1936 is wide enough to cover the employee arrangement under the PRP, which consists of the creation of the EST (including the trust deed), and the payment of the irretrievable contributions to the Trustee.

Tax Benefit

A 'tax benefit' is defined in subsection 177C (1) of the ITAA 1936, with the relevant paragraph being:

Subject to this section, a reference to this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

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

To determine the tax benefit that would be derived by X from the scheme, it is necessary to examine the alternative hypotheses (or counterfactuals). Alternative hypotheses are other schemes that the company might reasonably have been expected to enter into in order to achieve its aims in relation to employee remuneration.

At page A of X's PBR application, they explain the following alternate actions:

As part of X's remuneration strategy, incentives are provided by way of grants under the PRP. The alternative to these grants would be payments of salary, bonuses or superannuation contributions. The payments of these additional cash would be deductible under section 8-1 of the ITAA 1997. On this basis, we do not consider there to be a tax benefit in relation to the proposed arrangements.

However, another alternative postulate that could be considered is that, if X issued new shares directly to employees (rather than via the EST), they may not receive a deduction for the amount incurred in issuing the shares.

Therefore, by using the EST, a tax benefit is created by virtue of the deduction X will receive under section 8-1 of the ITAA 1997 for the irretrievable cash contributions they make to the Trustee.

Dominant purpose

For most tax benefits caught by Part IVA, it must be able to be concluded that at least one person who entered into or carried out the scheme did so for the sole, or 'dominant purpose', of obtaining a tax benefit.

In deciding whether obtaining a tax benefit is the sole or dominant purpose of a scheme, the Commissioner is required to take into account the following matters listed in paragraph 177D(2) of the ITAA 1936, as set out below:

a) the manner in which the scheme was entered into or carried out- strictly, this involves a "hindsight" assessment, but the ATO will provide binding private rulings on the potential application of Pt IVA to proposed arrangements, e.g. product rulings;

b) the form and substance of the scheme;

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

d) the income tax result that, but for Pt IVA, would be achieved by the scheme;

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

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

g) any other consequence for the relevant taxpayer, or for any person referred to in (6) of the scheme having been entered into or carried out; and

h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in (6).

Therefore, when considering whether Part IVA of the ITAA 1936 applies to a scheme, the necessary comparison to be made in relation to the factors listed in paragraph 177D(2) is between the scheme as proposed, and the relevant counterfactual.

(a) The manner in which the scheme was entered into or carried out

As previously established, the inclusion of the EST in the scheme will give rise to a tax benefit for X. However, in their PBR application, the company contends that the presence of the EST provides other commercial benefits.

At page 16 of the PBR application, X argues that the adoption of the EST is a commonly accepted and "commercially prevalent means" for employee equity schemes to be facilitated, stating that the EST was established based on the following:

• the trust will facilitate the acquisition of shares by the trustee either on market or by new issue of shares by the company;

• it is an arm's length vehicle for acquiring and holding shares in the company, either by way of new issue or acquiring on market;

• it better aligns the company's tax effect accounting policy with cash flows;

• the trust is an efficient structure for giving effect to disposal restrictions/vesting conditions. As the trustee is the legal owner, employees have no ability to deal in the shares;

• contributing to the trust can enable the company to hedge against share price growth;

• the trust provides the flexibility to acquire and hold shares that will be allocated to employees under its employee rights plans and facilitates the forfeiture of rights when performance hurdles are not met. The trust is more able to hold shares for reallocation. This enables easy recycling of shares;

• the trust provides one single vehicle for the administration of the group's employee rights plan;

• the trust establishes independent records and accounts for participating employees; and

• a trust is the most appropriate vehicle to be used to acquire the shares and manage dividend income during the vesting period.

In consideration of the above, it is accepted that the EST provides benefits to the operation of the scheme that would unavailable to X if the shares were provided directly by the company, as in the relevant counterfactual.

(b) The form and substance of the scheme

The substance of the scheme is the provision of remuneration in the form of shares, which are provided to eligible employees who participate in the PRP (including employees who participate in future ESS). It takes the form of payments by X to the Trustee, who acquires the shares and transfers them to employees.

Whilst it has been recognised that the existence of the EST confers a tax benefit for X, it cannot be concluded that it is the only benefit, as outlined above.

X have argued that the form of the arrangement, and the inclusion of the EST, actually provides the scheme with a number of non-tax benefits, and this argument is accepted.

(c) The timing of the scheme

The scheme has been established for the purpose of incentivising, motivating and remunerating staff, as well as increasing the efficiency of X on an ongoing basis. This is supported by the fact that the scheme operates to offer certain rights to eligible employees, with vesting over a two to three year period, and only thereafter on the basis that 'performance hurdles' are met over a 'measurement period'.

Therefore, the contribution will be made progressively over the future years, as and when eligible employees, as participants under the PRP, become eligible to the shares. Additionally, the length of the scheme is not intended to be for a short period of time, rather, it is intended that it remain in place into the future (provided that the commercial benefits are met).

Therefore, in consideration of the above, the timing of the scheme does not suggest that the dominant purpose involves obtaining a tax benefit in relation to the scheme.

(d) The income tax result that, but for Part IVA, would be achieved by the scheme

The tax result of the scheme is to provide X with allowable deductions for the contributions it makes to the EST. However, it should be noted that the contributions are 'irretrievable', and reflect a genuine non-capital outgoing on the part of the company, in order to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances.

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

As explained above, X makes irretrievable contributions to the EST, which represents a real expense. Therefore, the company's financial position is changed to that extent.

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

The contributions that X makes to the EST will form part of the corpus of the EST, and must be dealt with by the Trustee in accordance with the terms of the Trust Deed (i.e. for the acquisition of shares that will be provided to participants in ESS).

X is not a beneficiary of the EST, and its contributions cannot be returned to it, except when the Trustee acquires shares from the company by subscribing for new issues at market value.

Therefore, the contributions that are made by X will amount to a change in the financial position of the Trustee. The financial position of the participants to the scheme will also undergo a real change.

(g) Any other consequences

Not relevant to this scheme.

(h) The nature of any connection between the company and any other persons

The relationship between X and the Participants in the scheme is an employee/employer relationship. The Trustee is independent to the company, and is under a fiduciary obligation to act in the interests of the beneficiaries (Participants) who are participating in the ESS, and in particular, the PRP.

The contributions that are made by X to the Trustee are commensurate with the company's stated aim, which is to encourage employees to share in the ownership and long-term success of the company.

Finally, there is nothing to suggest that the parties to the ESS are not acting at arm's length with one another. Accordingly, there is nothing in relation to paragraph 177D (2)(h) of the ITAA 1936 to suggest that the dominant purpose of the scheme is to obtain a tax benefit.

Conclusion

In consideration of all the factors referred to in subsection 177D(2) of the ITAA 1936, it can be concluded that the dominant purpose of the scheme is to provide remuneration to X's eligible employees, who participate in the scheme in a manner that promotes the company's business objectives, as opposed to obtaining a tax benefit.

Therefore, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by X in respect of the irretrievable cash contributions made to the Trustee to acquire shares, or the costs incurred by X in relation to the implementation and ongoing administration of the PRP and the EST.

Question 4

Is the provision of shares to employees pursuant to the Performance Rights Plan Rules ("PRP") arrangements subject to Fringe Benefits Tax ("FBT") within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ("FBTAA")?

Summary

The grant of rights to acquire shares under the PRP, and the granting of those shares to employees, will not be subject to FBT because they are specifically excluded from being a 'fringe benefit' in accordance with subsection 136(1) of the FBTAA.

Detailed reasoning

In accordance with subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ("FBTAA") a 'fringe benefit' will only arise where benefits are provided by employers to employees, or associates of employees.

Further, under the definition of a fringe benefit in subsection 136(1) of the FBTAA, a benefit must be provided 'in respect of the employment of the employee'. No amount will be subject to fringe benefits tax ("FBT"), unless a 'fringe benefit' is provided.

However, it must be noted that the following is not included in the definition of fringe benefit in subsection 136(1) of the FBTAA:

(h) 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.

The Commissioner accepts that the PRP described in the company's PBR application is an ESS, under which the relevant ESS interests (being the beneficial interest in the shares) are acquired by employees of X(or 'associates of those employees'), and the acquisition of the ESS interests is in relation to the employees' employment. Additionally, the shares acquired by the Trustee under the PRP (to satisfy the rights to acquire the shares) are also provided to employees under the same ESS.

Therefore, the grant of rights to acquire shares under the PRP, and the granting of those shares to employees, will not be subject to FBT because they are specifically excluded from being a 'fringe benefit' in accordance with subsection 136(1) of the FBTAA.

However, pursuant to subsection 83A-20(2) of the ITAA 1997, shares granted to employees under the PRP, to satisfy rights to acquire shares that are not ESS interests, are not considered ESS interests acquired under an ESS to which subdivision 83A-B or 83A-C of the ITAA 1997 applies.

Subsection 83A-20(2) of the ITAA 1997 states:

However, this subdivision does not apply if the ESS interest is a beneficial interest in a share that you acquire as a result of exercising a right, if you acquired a beneficial interest in the right under and employee share scheme.

Therefore, the provision of the shares will not be specifically excluded from the definition of a 'fringe benefit' under paragraph (h) of the definition in subsection 136(1) of the FBTAA. Essentially, this means that shares granted under the PRP, to satisfy rights, are not ESS interests acquired under an ESS.

Consequently, the acquisition of the shares (as a result of exercising the rights) is not excluded from being a fringe benefit by virtue of the definition of fringe benefit in subsection 136(1) of the FBTAA. Nonetheless, for the benefit to be a fringe benefit, it must be provided 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. It was stated by the court at ATC 4158 that:

Whatever question is to be asked, it must be remembered that what must be established is whether there is 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 FC of T 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. The full Federal Court noted that what has occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.

In the present circumstances, when an employee accepts to participate in the plan, they obtain a right to acquire a beneficial interest of a share in X, and this right constitutes an ESS interest. When the right is subsequently exercised, any benefit received will be in respect of the exercise of the right, and not in respect of employment.

Therefore, the benefit that arises to an employee upon the exercise of a right under the incentive plan will not give rise to a fringe benefit, as a benefit has not been provided in respect of the employment of the employee.

Question 5

Are irretrievable contributions of money to the Trustee of the EST, to fund the acquisition of shares in X, subject to FBT pursuant to the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA?

Summary

Paragraph (ha) in subsection 136(1) of the FBTAA specifically excludes contributions to the trustee of an EST from being a fringe benefit.

Therefore, X will not be required to pay FBT in respect of the irretrievable cash contributions that it makes to the Trustee of the EST, for the purpose of funding the acquisition of X's shares (as per the Trust Deed).

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA, with paragraph (ha) specifically stating 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 EST is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given to it by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides that an EST for an ESS (having the meaning given to it 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

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

Therefore, in accordance with the above, a payment of money by X to the EST is not subject to FBT, provided that the sole activities of the EST are obtaining shares, or rights to acquire shares, in X.

Additionally, undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997, which are outlined above, will require that the Trustee carries out incidental activities that are a function of managing the PRP and administering the EST.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, ATO Interpretative Decision ATO ID 2010/108 Income Tax- Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities ("ATO ID 2010/108") sets out the Commissioner's views on an EST that obtains shares in a company to satisfy the exercise of rights acquired under an ESS, and on exercise allocates and holds those shares for the benefit of employees of the company.

Specifically, the Commissioner considers the following activities as merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997:

• 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; and

• receiving and immediately distributing shares under a demerger.

However, as explained in ATO ID 2010/108, 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.

Clause 2.3 of the Trust Deed states:

2.3 Purpose of Trust

The sole purpose of the Trust is to Acquire and hold Plan Shares pursuant to the Plan Rules for the benefit of Residual Beneficiaries and Beneficiaries in accordance with this Deed (Purpose). For the avoidance of doubt, all other activities are incidental to the Purpose and the Company and the Trustee acknowledge that the Trust shall be administered in such a way as to satisfy the requirements of subsection 130-85(4) of the ITAA 1997.

Therefore, in accordance with the above clause, it is accepted that the EST is an ESS, as defined in subsection 995-1(1) of the ITAA 1997. The functions of the Trustee (including acquiring, holding, and allocating ESS interests) are limited to the activities mentioned in paragraphs 130-85(4)(a) and (b) of the ITAA 1997, or are merely incidental activities, as referred to in paragraph 130-85(4)(c) of the ITAA 1997.

Conclusion

Paragraph (ha) in subsection 136(1) of the FBTAA excludes contributions to the trustee of an EST from being a fringe benefit.

Therefore, X will not be required to pay FBT in respect of the irretrievable cash contributions that it makes to the Trustee of the EST, for the purpose of funding the acquisition of shares (as per the Trust Deed).

Question 6

Will the Commissioner seek to apply section 67 of the FBTAA to the proposed arrangements?

Summary

The benefits provided to the Trustee of the EST, by way of irretrievable contributions to the EST, and to eligible employees in the form of rights and shares under the PRP, are excluded from the definition of a 'fringe benefit' (as determined in questions (4) and (5)).

Therefore, because the benefits have been excluded from the definition of a 'fringe benefit', and there is also no FBT currently payable under the PRP (nor likely to be payable) the FBT liability is not any less than it would have been, but for the arrangement.

Detailed reasoning

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules ("PS LA 2005/24") is designed to assist those who are contemplating the application of Part IVA to an arrangement. It concisely explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 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) 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.

Therefore, in consideration of the above, it is evident that the Commissioner will only seek to make a determination under section 67 of the FBTAA if the arrangement results in the payment of less FBT than would be payable 'but for' entering into the arrangement.

The above point is effectively made in Miscellaneous Taxation Ruling MT 2021 Fringe benefits tax: response to questions by major rural organisation ("MT 2012") under the heading "Appendix, Question 18" where, 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. Those conditions would not apply either where additional cash wages were paid or one benefit was withdrawn and replaced by another.

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

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.

In the present case, the benefits provided to the Trustee of the EST, by way of irretrievable contributions, and to eligible employees, by way of rights and shares under the PRP, are excluded from the definition of a 'fringe benefit', as previously explained in questions (4) and (5) of the PBR.

Therefore, as the benefits are excluded from the definition of a 'fringe benefit', and there is no FBT currently payable under the PRP (nor likely to be payable), the FBT liability is not any less that it would have been, but for the arrangement.

Conclusion

In accordance with the above, the Commissioner will not make a determination that section 67 of the FBTAA applies to include a sum in the aggregate fringe benefits amount of X, in relation to a tax benefit obtained under the PRP from irretrievable cash contributions made by X to the Trustee of the EST (which is used to fund the acquisition of shares, as required by the Trust Deed).

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