Edited version of your written advice

Authorisation Number: 1012706235776

Ruling

Subject: Employee Share Scheme

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 made by Company A to the Trustee of the EST to fund the subscription for, or acquisition on-market of, Company A's shares, to satisfy ESS interests issued pursuant to the Original Option Plan and the Amended Option Plan (the Option Plans)?

Answer

Yes.

Question 2a

Are irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares by the Trustee of the EST to satisfy ESS interests issued pursuant to the Option Plans, 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 2b

Are irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A's shares by the Trustee of the EST to satisfy ESS interests issued pursuant to the Option Plans, deductible to Company A under section 8-1 of the ITAA 1997 at the time of the contribution, where the contributions are paid after the acquisition of the relevant ESS interests?

Answer

Yes.

Question 3

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A shares by the Trustee of the EST?

Answer

No.

The rulings for questions 1 to 3 inclusive each apply for the following periods:

Year ending 30 June 2015 - year ending 30 June 2019

Question 4

Is the provision by Company A of options or shares in Company A to employees of Company A under the Option Plans a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

Will the irretrievable cash contributions made by Company A 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 6

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, by the amount of the tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares?

Answer

No.

The rulings for questions 4 to 6 inclusive each apply for the following periods:

Year ending 31 March 2015 - year ending 31 March 2019

Relevant facts and circumstances

Company A provides a diversified range of services and is listed on the ASX. Its executive remuneration generally comprises:

• fixed remuneration (including super and benefits set at marketplace levels); and

• long-term equity linked performance incentives.

Company A's Board, considers that the use of options is the most appropriate form of long term equity-based performance incentive to reinforce alignment with shareholder interests.

The Executive Option Plan

Some years ago, Company A executed the Company A Executive Option Plan (Original Option Plan). Company A recently evaluated ways to improve the scope and implementation of its incentive programmes, which resulted in;

• the establishment of the Company A Employee Share Plan Trust (EST) to facilitate the provision of Company A shares to Participants of the Original Option Plan

• amending the Original Option Plan in order to facilitate its operation through an employee share trust (the Amended Option Plan) (together, 'the Option Plans'),

The Option Plans' objectives are to provide an incentive for employees to remain in their employment in the long term, and to recognise their ongoing ability and contribution to the performance and success of Company A and its subsidiaries ('the Group'). The incentive offered is the opportunity to acquire options, and ultimately shares, in Company A.

The Option Plans broadly operate as follows:

• Eligible Employees are invited to apply for an issue of options (Options) under the Option Plans, through the issue of a valid offer (Offer).

• An 'Eligible Employee' is an employee the Board determines should receive an Offer. An 'employee' of Company A can include:

• an individual in the part or full time employment of the Group;

• a director who holds a salaried office in a body corporate in the Group;

• an individual who provides services to a body corporate in the Group, or who is otherwise in the employment of a body corporate in the Group, whom the Board determines to be an Employee for the purposes of the Option Plans, and

• an individual, company or trustee of a trust (other than a super fund) who or which is an associate (as defined in section 995-1) of an individual who provides services to a body corporate in the Group, which individual the Board determines to be an Employee for the purposes of the Option Plans.

• A valid Offer includes, among other things, the number of Options offered to that particular Eligible Employee as determined by the Board.

• The Eligible Employee may accept the invitation by giving Company A an application form within the period specified in the Offer. Such acceptance will confer on the Eligible Employee (now called a Participant) an entitlement to be issued or transferred one fully paid share in Company A (a Share) at the exercise price, where certain conditions are satisfied.

• An Offer must not be made if the total number of Shares which would be issued if those Options were exercised, plus:

• the total number of Shares which would be issued under all outstanding Options which have been granted but not exercised, lapsed or expired; and

• the number of Shares issued during the previous five years pursuant to any employee share plan of Company A; but

• disregarding any Offer made to persons situated outside Australia at the time of receipt, an Offer under a disclosure document or an Offer that did not need disclosure because of section 708 of the Corporations Act;

would exceed 5% of the total number of Shares on issue at the time of the Offer.

• A Participant may exercise their Options subject to:

• satisfying any Performance or Exercise Conditions specified in the Offer or the Option Plans, and

• paying an Exercise Price as determined by the Board at the date of grant .

However, the Board may reduce or waive the Performance or Exercise Conditions at its discretion.

• Subject to satisfying any Performance or Exercise conditions (or the Board's discretion being exercised to reduce those conditions), a Participant can exercise an Option at any time during the 'Exercise Period' for that Option, by paying the Exercise Price. The 'Exercise Period' is defined in the Option Plans as commencing on the day the Options vest and concluding seven years after the date of grant.

• An accelerated vesting date may occur where there is a death or permanent disability of a Participant (a Special Circumstance), or one of a number of corporate events such as a takeover (Corporate Control Event).

• Participants may choose to exercise vested Options at any time, subject to Company A's Securities Trading Policy, prior to their lapsing. Options will lapse on the earlier of:

• forfeiture of the Option because a performance condition is not satisfied;

• the date of termination of employment if that date is prior to the vesting date of an Option;

• two months after the date of termination of employment if the Option had vested prior to termination;

• a determination that the Option should lapse because the Participant, in the Board's opinion, has acted fraudulently, or

• the last Exercise Date.

• Where a Participant exercises a vested Option, Company A must issue, or cause to be transferred, a Share to the Participant. The Share will rank equally with all existing shares on issue.

• In circumstances where the Board has specified in the Offer that the Shares will be subject to a disposal restriction (Restricted Shares), they may only be dealt with subject to Company A's Securities Trading Policy.

• A holder of Restricted Shares may apply to Company A to withdraw their Restricted Shares, and the Board may, in its absolute discretion, accept or reject such an application. Notwithstanding, the Board must reject the request if certain events have occurred, i.e. if there is a black out period or if the Participant owes debts to any member of the Group.

• If Company A makes a bonus issue of Shares to existing Shareholders (whether before or during the Exercise Period), and no Share has been issued in respect of an Option before the record date for determining entitlements to bonus issues, then the number of underlying Shares over which the Option is exercisable is increased by the number of Shares which the Participant would have received if they had exercised the Option prior to the record date.

• The Option Plans are administered by the Board and at its discretion, may use an employee share trust for the purposes of holding Shares (whether on an allocated or unallocated basis) and/or fulfilling awards made under the Option Plans.

Employee Share Plan Trust

Company A established the EST pursuant to the Company A Trust Deed (Trust Deed) between Company A and the Trustee.

The establishment and operation of the EST will provide Company A with:

• greater flexibility to accommodate the long term incentive arrangements of Company A;

• capital management flexibility, (in that the EST can use the contributions made by Company A either to acquire Shares on-market, or alternatively to subscribe for newly issued Shares), and

• an arm's length vehicle through which Shares can be acquired and held on trust on behalf of Participants.

In effect, this final aspect will allow Company A to satisfy its trading policy and Corporations Law requirements relating to companies dealing in their own shares.

Operation of the EST

Broadly, the EST is intended to operate as follows:

• Pursuant to the Recitals of the Trust Deed, the EST has been established for the purposes of holding Shares in Company A for the benefit of Participants who are, or will become, the beneficial owners of those Shares pursuant to a 'Company Plan'. The Company Plans include the Option Plans.

• As directed by the Board, the Trustee must acquire:

• Shares in the ordinary course of trading on the ASX

• Shares by way of an off-market transaction; and/or

• new Shares issued by Company A

for the purpose of enabling Company A to satisfy its obligations to allocate Shares under a Company Plan, either at that time or in the future.

• Company A must provide the Trustee with any funds it requires to comply with its obligations (after application of any capital of the EST). If the Trustee does not receive sufficient payment from Company A, it is not required to acquire Shares.

• Funds received by the Trustee from Company A (except where the Trustee subscribes for Shares or receives reimbursement of expenses) will constitute accretions to the corpus of the EST and will not be repaid to Company A.

• In the event of the EST's termination, the Trustee can only apply that part of the EST's capital to which no Participant is entitled for the benefit of certain beneficiaries, of which Company A is not one.

• Company A intends that contributions will only be made to the EST to satisfy Options under the Option Plans that have already been granted to Participants and are likely to vest, i.e. there will be a link between the amount of the contributions and the need to apply the funds to acquire Shares to satisfy Options that have been or are likely to be exercised by Participants.

• Company A will annually consider how many Options on issue are likely to vest and be exercised in a particular year, and then determine the corresponding amount of contributions necessary to enable the Trustee to acquire the Shares to satisfy those Options.

• Company A has no intention of accumulating contributions in the EST.

• Unless and until Shares are allocated or transferred to a Participant, the Trustee will hold them on trust for the benefit of Participants generally. The Trustee is precluded from exercising voting rights in relation to the unallocated Shares, and may be required to waive its right to be paid all capital receipts and dividends, if the Board so instructs.

• When the Board directs it to do so, the Trustee must allocate a number of Shares held by the Trustee to a nominated Participant (Allocated Shares). Shares which have been so allocated are held by the Trustee on behalf of that particular Participant, who becomes the beneficial owner of those Shares, and is recorded as such in the Trustee's books.

• If the Trustee holds Allocated Shares on a Participant's behalf, the Participant is entitled to receive all cash dividends paid in respect of their Allocated Shares. Further, the Participant will be presently entitled to so much of the net income of the EST which is attributable to their Allocated Shares, including transactions related to their Allocated shares (including sale etc).

• Where a Participant forfeits Allocated Shares, the Trustee must reallocate those forfeited Shares to one or more other Participants or to the benefit of a Company Plan, as instructed by the Board.

• Subject to Company A's Securities Trading Policy, if the Board directs it to do so, the Trustee must transfer a specified number of Allocated Shares to a Participant. Once the Trustee has registered them as the holder of those Shares, the Participant will be absolutely legally and beneficially entitled to them.

• Company A and the Trustee agree that the EST will be administered so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Section 83A-25

Income Tax Assessment Act 1997 Section 83A-35

Income Tax Assessment Act 1997 Section 83A-210

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

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177CB

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

Fringe Benefits Tax Assessment Act 1986 Section 66

Fringe Benefits Tax Assessment Act 1986 Section 67

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Subsection 8-1(1) is a general deduction provision. Broadly, it provides an entitlement to a deduction from your assessable income for any loss or outgoing to the extent that it is:

• incurred in gaining or producing your assessable income; or

• necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

However, subsection 8-1(2) prevents such a deduction to the extent that the outgoing is:

• capital or of a capital nature, or

• of a private or domestic nature, or

• incurred in gaining or producing exempt income, or

• prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

Losses or outgoings

If directed by the Board, the Trustee must acquire Shares to enable Company A to satisfy its obligations under the terms of the Option Plans, either at the time or in the future. Company A must provide the Trustee with all the funds required to enable it to subscribe for or acquire those Shares. Nothing in the Trust Deed requires the Trustee to acquire Shares if it does not receive sufficient contributions from Company A, or if it does not have sufficient funds to do so out of the property of the EST.

The Trustee will hold unallocated Company A shares on trust for the benefit of Participants generally, and will allocate or transfer those Shares to particular Participants as directed by the Board in accordance with the Option Plans.

The contributions made to the Trustee by Company A 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 (except where the Trustee subscribes for Company A shares), or to any Participant. Even in the event of the EST's termination, the Trustee can only apply that part of the EST's capital to which no Participant is entitled for the benefit of beneficiaries, of which Company A is not one. On this basis, it is concluded that the irretrievable contributions made by Company A are considered to be a loss or outgoing for the purpose of subsection 8-1(1).

Relevant nexus

For a loss or outgoing to be deductible under subsection 8-1(1), the outgoing must be either incurred in gaining or producing your assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Case law has established that this occurs where there is a sufficient nexus between the loss or outgoing and the derivation of your 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).

Company A established the EST to facilitate the Option Plans. Its objectives are to provide an incentive for Eligible Employees to remain in their employment in the long term, and to recognise their ongoing ability and contribution to the long term success of the Group. The incentive offered is the opportunity to acquire Options, and ultimately shares, in Company A. Company A makes irretrievable contributions to the Trustee to enable the Trustee to acquire and hold Shares for the benefit of Participants.

Company A's Annual Report contains information about the design of the Group's remuneration policy, including the Option Plans. It states that the Group's remuneration policies are designed to align the interests of staff and shareholders while attracting and retaining staff members who are critical to its growth and success. Further, it states that the Board believes that the use of options is the most appropriate form of long-term equity-based performance incentive to reinforce alignment with shareholder interests.

Capital or Revenue

Company A will make contributions on a recurring basis from time to time, as and when Shares are to be subscribed for or acquired pursuant to the Trust Deed.

Two Federal Court decisions concluded 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 (Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210 and Spotlight Stores Pty Ltd v Federal Commissioner of Taxation [2004] FCA 650; 2004 ATC 4674; 55 ATR 745). This confirms the view 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, that a company will be entitled to a deduction under section 8-1 for irretrievable contributions made to the trustee of its employee share scheme.

In accordance with the Federal Court decisions noted above, we can conclude that the contributions are not capital in nature, but rather outgoings incurred by Company A in carrying on its business.

Apportionment

The combined operation of subsections 8-1(1) and 8-1(2) 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.

A contribution to the trustee of an employee share trust is 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 contented 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.

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 by way of contributions to the EST in order to carry 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.

Private or domestic in nature

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 makes irretrievable contributions to the Trustee to fund the acquisition of Shares in accordance with the Trust Deed, those contributions will be an allowable deduction to Company A under section 8-1.

Question 2a

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.

Section 83A-210 will only apply if there is an arrangement under which there is a relevant connection between the money provided to the trustee and the acquisition of ESS interests (directly or indirectly) by the employee under an employee share scheme in relation to the employee's employment.

Arrangement

Company A's adoption of the Option Plans, the establishment of the Trust, and Company's provision of money to the Trustee, is considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i).

ESS interest

An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in a company or a beneficial interest in a right to acquire a beneficial interest in a share in a company. Under the Option Plans, Options issued to Eligible Employees are a right to acquire a beneficial interest in a share in Company A, and are accordingly 'ESS interests'.

Employee share scheme

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)). Each of the Option Plans is a scheme under which ESS interests in Company A are provided to employees of Company A in relation to their employment, and is accordingly an employee share scheme. A Share acquired by the Trustee to satisfy an Option to acquire a share under the ESS, granted to an employee in relation their employment, is itself provided under the same ESS.

Relevant connection

The granting of the Options, the provision of the money to the Trustee under the arrangement, the acquisition and holding of the Shares by the Trustee, and the allocation of those Shares to the Participants are all interrelated components of the ESS. All the components of the arrangement must be carried out so that the ESS can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed. Accordingly, the provision of money to the Trustee to acquire Shares is considered to be for the purpose of enabling Participants, indirectly as part of the Option Plans, to acquire Options (that is ESS interests).

Contribution made prior to the acquisition of ESS interests

Section 83A-210 will only apply in situations where a contribution is made to the Trustee prior to the time when the ultimate beneficiary acquires the ESS interests. When it does apply, it operates by deferring the timing of the deduction to the income year in which the ultimate beneficiary acquires the ESS interests.

For the purposes of paragraph 83A-210(b), a Participant acquires the ESS interests when the Options are granted to them.

Accordingly, when Company A makes a cash contribution to the Trustee before the acquisition time for these ESS interests occurs, the timing of the deduction allowable under section 8-1 will be determined by section 83A-210 as being the income year in which these ESS interests (Options issued under the Option Plans) are granted (acquired).

Question 2b

For the reasons stated above in answer to Question 2(a), section 83A-210 will not apply if Company A makes cash contributions after the time that the ultimate beneficiary acquires the relevant ESS interests. Where this occurs, the cash contribution will be deductible under section 8-1 in the income year in which the loss or outgoing is properly incurred.

The deductibility of money provided to employee share trusts is considered 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. The facts described in ATO ID 2010/103 are comparable to Company A's circumstances, and therefore the reasoning in it is relevant to Company A.

Question 3

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 made to the Trustee of the EST to fund the subscription for or acquisition on-market of shares in Company A by the EST.

Question 4

The provision of Options

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.

It is accepted that the Option Plans comprise an employee share scheme, that the Options are ESS interests (see question 2(a) above) and that Subdivision 83A-B or 83A-C applies to those interests.

Accordingly, the acquisition of ESS interests (being the Options) pursuant to the Option 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 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 Options

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, causal 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 Company A accepts an offer to participate in the Option Plans, they obtain an Option (being a right to acquire a beneficial interest in a share in Company A) and this Option constitutes an ESS interest. When this Option is subsequently exercised, any benefit received would be in respect of the exercise of the Option, and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

Therefore, the benefit that arises to an employee upon the exercise of a vested Option (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 5

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);

An 'employee share trust' for an employee share scheme is defined in subsection 130-85(4) as 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).

For the purposes of paragraph 130-85(4)(c), activities which are merely incidental, as set out in 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, 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; and

• 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.

A clause of the Trust Deed is titled 'Sole activities test' and provides that Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of section 130-85(4).

For the avoidance of doubt, this statement is supported by Recitals A and B of the Trust Deed which provide that the EST was established by Company A to facilitate the Option Plans and for the purposes of holding Shares for the benefit of Participants who are, or will become, the beneficial owners of Shares pursuant to a Company Plan. It is further supported by another clause of the Trust Deed which expressly provides for the Trustee to apply funds it acquires from Company A to obtaining Shares in Company A, and to ensuring that those Shares are allocated or transferred to relevant Participants.

Therefore, the EST satisfies the definition of an employee share trust in subsection 130-85(4) as:

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

• the EST ensures that ESS interests as defined in subsection 83A-10(1), being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2), by allocating those shares to the Participants in accordance with the Option Plans; and

• the Trust Deed does not provide for the Trustee to participate in any activities which are not considered merely incidental to a function of managing the employee share scheme and administering the trust.

As paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the EST from being a fringe benefit, Company A will not be required to pay FBT in respect of irretrievable contributions made to the Trustee of the Trust to fund the acquisition of shares in Company A.

Question 6

As mentioned in the answer to Question 3, 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 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) [sic] 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 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 , 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 Option 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 alternative remuneration plans would result in fringe benefits tax being payable.

In addition, under the Option Plans arrangements (with an EST), the benefits provided by way of irretrievable contributions to the EST and the provision of Options (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 4 and 5 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. As there would be no fringe benefits tax payable under the Option Plans without the use of an EST (and nor likely would fringe benefits tax be payable under 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 applies to include an amount in the aggregate fringe benefits amount of Company A, in relation to a tax benefit obtained from the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of shares in Company A.

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