Edited version of your written advice

Authorisation Number: 1012731785647

Ruling

Subject: Employee Share Scheme

Question 1

Is the Company entitled to a corporate tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA1997) for cash contributions made to the Trust to fund the subscription for, or acquisition on-market of, shares in the Company on the basis that the amounts are in the nature of employee remuneration costs incurred in carrying on the Company's business for the purpose of deriving assessable income?

Answer

Yes.

Question 2

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred, other than those which are capital in nature, in relation to the implementation and on-going administration of the employee share trust?

Answer

Yes.

Question 3

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

Answer

No.

Question 4

Will the irretrievable cash contributions made by the Company to fund the subscription for, or acquisition on-market of, the Company shares constitute 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 provision of the Company's ESS interests at a discount by the Company or Trust to employees of the Company constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

Question 6

Will the Commissioner of Taxation seek to apply Section 67 of the FBTAA to the arrangement where ESS interests are provided to employees at a discount?

Answer

No.

This ruling applies for the following periods:

Income Tax Years:

1 July 20xx - 30 June 20xx

Fringe Benefits Tax Years:

1 April 20xx to 31 March 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The Company is an Australian public company. It has one class of shares on issue, namely ordinary shares.

The Company and members of the group are not involved predominantly in the business for the acquisition, sale or holding shares, securities and other investments.

The Company established a Plan to eligible individuals (the Participants) who permanently live and work in Australia. The Plan is part of the Company's remuneration framework which is designed to attract, retain, motivate and reward high performance individuals with the key skills and to align the interests of participants with the interests of the Company and shareholders.

The Plan provides long term incentive awards to the Participants in the form of rights or options over the Company ordinary shares (Shares). According to the definitions in the Plan Rules, "Right" means the right to be allocated a Share, and "Option" means the right to be allocated a Share on payment of the "Exercise Price". The grant of rights or options does not confer a right to vote or an entitlement to dividends until the right or option has vested.

The vesting of awards is subject to performance hurdles and a performance period. Where the vesting conditions are satisfied, the awards will vest. In the case of Rights, upon vesting the Participant will be entitled to one Share for each Right.

The Company has established a Trust. It will fund the Trust by way of a cash amount, and arrange for the Trustee to subscribe for or purchase Shares to be held on trust on behalf of the Participants in accordance with the Plan. The Trustee is not related to the Company and operates the Trust independently.

The Company has implementation and ongoing administration costs.

The Trust will be partially funded by employees (i.e. to the extent of any exercise price for options, rights and subscription price of the Company shares) and the Company (i.e. the balance, by way of irretrievable cash contributions) into the Trust.

Shares will be delivered in accordance with the terms of the Plan.

The Company's stated reasons for implementing and administering the Plan via a trust include:

• employee share trusts are common commercial vehicles, which have been used by taxpayers for many years to provide remuneration benefits to employees. Their usage is wide spread among public and private companies in Australia and overseas, and they provide significant commercial benefits to taxpayers;

• from a commercial and governance perspective, an employee share trust provides the board of directors of the Company with flexibility to satisfy its obligations under the Plan by purchasing shares on market or alternatively, through the fresh issue of shares;

• using a single vehicle assists with consolidation of administration and reduces administration costs as the employee share trust structure can be employed for all of the employee long-term incentive arrangements;

• using an employee share trust with an independent trustee acquiring shares in accordance with a settled trust deed allows a company to meet its obligations under the Corporations Act 2001 (Cth) ("Corporations Act") regarding not dealing in own shares, manage any insider trading issues involved in delivering own company shares and manage obligations in respect of Australian financial services and licensing;

• an employee share trust provides a useful means of enforcing time-related vesting and performance conditions or disposal restrictions which may be attached to the securities granted under the Plan;

• provides an efficient structure for giving effect to disposal restrictions, forfeiture conditions and other conditions on shares. As a trustee is the legal owner, employees as beneficial owners have no ability to deal in the shares unless complying with those restrictions or conditions;

• an employee share trust enables a trustee to recycle shares without increasing the percentage of ownership of other shareholders. When shares are forfeited (i.e. on termination of employment or on expiry of a plan), the shares can be re-used for future offers to employees;

• an employee share trust provides the Company with capital management flexibility, that is by allowing the Company to decide whether the trustee should purchase shares from another shareholder or subscribe for shares to hold on behalf of employees or buying shares ahead of delivery date. This flexibility may allow the Company to manage its cash flows and earnings per share, for example.

The Trust will be principally governed by three key documents:

• the trust deed for the trust (the Trust Deed);

• the Company's Plan Rules. Under the Plan, grants may be made of both rights and options to employees of the Company

The Trust Deed

The Company has established the Trust for the purpose of operating in connection with share, option and rights plans which are made available by the Company to employees from time to time. The Trustee has agreed to act as trustee of the Trust and to receive funds from the Company or its subsidiaries and apply the funds as set out in the Trust Deed. The Trustee is to deal with any Shares held in the Trust as set out in the Trust Deed.

The Object of the Trust as defined in the Trust Deed means the purpose of the Trust is to operate in conjunction with Employee Share Schemes with the object of acquiring Shares for the benefit of employees or otherwise facilitating the operation and implementation of Employee Share Scheme.

The Trust Assets are to be held by the Trustee on trust for the benefit of any one or more of the Discretionary Beneficiaries from time to time in accordance with the terms of the Trust Deed.

Subject to the Trust Deed and terms of each relevant Employee Share Scheme, the Trustee in its discretion has the full power to do all things a trustee is permitted to do by law in respect of the Trust and the Trust Assets.

The powers of the Trustee are outlined in the Trust Deed.

The limitations on Trustee are outlined in the Trust Deed.

The Trust Deed outlines how the Trust will work, including:

• to satisfy, or enable the satisfaction of, an award, entitlement or right under an Employee Share Scheme, the Trustee may purchase the Company shares on ASX or subscribe for shares (in which case, the Company will issue those shares to or at the direction of the Trustee) or a combination of both purchase and issue;

• Those shares are to be held on the Trust on behalf of the Participants (who will be the beneficial owners of the Company shares) in accordance with the Plan.

The Trust Deed contains a clause about Remuneration of Trustees.

The Trust Deed contains a clause about Costs of Trustee.

The Plan Rules

Options and Rights are defined in the Plan Rules as:

Option ….

Rights

The Plan Rules also defines that:

Expiry Date in respect of an Option

Participant means:

(a) An Eligible Employee who becomes a Participant in the Plan; or

(b) The legal personal representative

The Plan Rules provides guidance on the allocation of Shares or Payment of Cash Equivalent

The Company's default position is to settle its obligations with Shares. Where Participants are current employees, the board of directors considers that the objective of aligning the Participants' interests with the interests of the Company so as to enhance the Participants' commitment to the Company's long term goals is best met by allocating Shares to Participants.

However, the board will cash settle in some circumstances.

If, in the unlikely case that rights were settled in cash, the cash payment will be made through the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA ,

Income Tax Assessment Act 1936 section 177A,

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

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

Income Tax Assessment Act 1997 section 8-1,

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

Fringe Benefits Tax Assessment Act 1986 section 67,

Fringe Benefits Tax Assessment Act 1986 paragraph (ha) of subsection 136(1) and

Fringe Benefits Tax Assessment Act 1986 paragraph (h) of subsection 136(1).

Reasons for decision

Question 1

Summary

Yes, the Company is entitled to a corporate tax deduction for cash contributions made to the Trust to fund the subscription for, or acquisition on-market of, Shares in the Company on the basis that the amounts are in the nature of employee remuneration costs incurred in carrying on the Company business for the purpose of deriving assessable income.

Detailed reasoning

An employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an employee share trust that is either:

• incurred in gaining or producing assessable income ('first limb') or

• necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income ('second limb')

to the extent the contribution is not private or domestic in nature, is not of capital or of a capital nature, does not relate to the earning of exempt income or non-assessable non-exempt income and deductibility is not precluded by another provision of the ITAA 1997 or ITAA 1936.

Contribution to the trustee of an employee share trust

To qualify for a deduction under section 8-1 of the ITAA 1997 a contribution to the trustee of an employee share trust must be incurred.

As a broad guide, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance (TR 94/26).

A contribution made to the trustee of an employee share trust is incurred only when the ownership of that contribution passes from an employer to the trustee of the employee share trust and there is no circumstance in which the employer can retrieve any of the contribution - Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339 (Pridecraft); Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650 (Spotlight).

The Company has established an employee share trust under the terms of the Trust Deed. The Trust's purpose is of acquiring Shares for the benefit of employees or otherwise facilitating the operation and implementation of Employee Share Schemes.

The Company will make contributions to the Trust to allow the Trustee to purchase Shares on market or to subscribe for new Shares to allow Rights or Options under the Plan to be satisfied. The Trust Deed does not confer on the Company any security interest, proprietary right or proprietary interest (whether legal or beneficial) in Shares acquired by the Trustee under the Trust Deed. There is no clause in the Trust Deed or Plan Rules that will allow the Company to retrieve any of the contributions it makes to the Trust but the applicant has confirmed that the contributions are irretrievable.

Given these facts, it is considered that the contributions made to the Trustee of the Trust by the Company will be incurred at the time the contributions are made.

For the purpose of gaining or producing assessable income

Further, to be deductible under section 8-1 of the ITAA 1997, a contribution must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

In order to satisfy the second limb of section 8-1 of the ITAA 1997, there must be a relevant connection between the outgoing and the business. An expense will have the relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' (Ronpibon Tin NL and Tongkah Compound NL v. FC of T (1949) 78 CLR 47 (Ronpibon); Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation (1980) 49 FLR 183 (Magna Alloys)).

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

The way in which the Trust has been established and operates is in line with the elements of an ERT stated in paragraph 9 of TR 2014/D1.

Paragraph 14 of TR 2014/D1 provides where an employer:

• carries on a business for the purpose of gaining or producing assessable income and engages employees in the ordinary course of carrying on that business,

• makes a contribution to the trustee of an employee share trust, and

• at the time the contribution is made, the primary purpose of the contribution is for it to be applied, within a relatively short period of time, to the direct provision of remuneration of employees (who are employed in that business),

then, such a contribution would ordinarily satisfy the nexus of being necessarily incurred in carrying on that business.

The Company is carrying on a business and when the Company makes a contribution to the Trustee of the Trust, its primary purpose is for the contribution to be applied to the direct provision of remuneration of its employees in the form of Shares. The advantage sought by the Company relates to the efficient ongoing performance of business. The contribution to the Trust is an employee remuneration cost incurred in carrying on the business for the purpose of deriving assessable income.

Paragraph 178 of TR 2014/D1 provides that the Commissioner will generally accept a relatively short period of time for the trustee of an ERT to diminish a contribution for the direct provision of remuneration to employees to be up to five years from the date the contribution was made by an employer to the trustee of an ERT. However, where the contribution has been made to facilitate an employee having an interest in the ERT corresponding to a particular number of shares (or rights to acquire shares) in the employer or in its subsidiaries to which Subdivision 83A-C of the ITAA 1997 applies, the statutory scheme is such that a relatively short period of time for these arrangements will generally be accepted as being up to seven years from the date the contribution is made.

Currently, the performance period during which the vesting conditions must be satisfied is x years in respect of all Rights on issue by the Company to eligible employees under the Plan. It is considered that the contribution made under the Plan will satisfy the condition that it is to be applied, within a relatively short period of time, to the direct provision of remuneration of employees

Consequently, it is considered that the contributions to the Trustee of the Trust by the Company for remunerating its employees under the Plan is an outgoing in carrying on the Company's business for the purpose of gaining or producing assessable income.

Not of a capital nature

Where a contribution satisfies either limb of subsection 8-1(1) of the ITAA 1997, it may still be capital or of a capital nature. Pursuant to subsection 8-1(2) of the ITAA 1997, the contribution will not be deductible to an employer under section 8-1 to the extent to which it is capital or of a capital nature.

Whether an outgoing is capital or revenue in nature can generally be determined by reference to the test articulated by Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337; [1938] HCA 73 (Sun Newspapers):

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay...

A contribution to the trustee of an employee share trust is of capital or of a capital nature, where the contribution secures for an employer an asset or advantage of an enduring or lasting nature that is independent of year to year benefits that the employer derives from a loyal and contented workforce.

Other advantages obtained by the Company could, however, include that which flows to the Company from enlarging its own equity structure when the Trustee of the Trust acquires the equity interests in the form of shares in the Company (by subscription, rather than on market). The advantage obtained by the Company, in effect, is a movement of value out of profit or capitalised profit to share capital and therefore a maintenance or enhancement of the capital value of the Company. As this advantage is structural and enduring, it would be of a capital nature.

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

However, where a contribution is made for the purposes of securing advantages of both capital and revenue nature, no apportionment is required where the advantages of a capital nature are only expected to be very small or trifling by comparison.

Where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period of the contribution being made, it is considered that any amount of the contribution attributable to securing a capital structure advantage will only be very small or trifling where the employer:

• intends that any direct interest in the employer acquired by the trustee of the employee share trust (for example shares) will be transferred to employees within that relatively short period, and

• such shares will not be on-sold to third parties at that time or shortly thereafter.

In relation to what is accepted as a 'relatively short time period', paragraph 178 of TR 2014/D1 provides:

The Commissioner will generally accept a relatively short period of time for the trustee of an ERT to diminish a contribution for the direct provision of remuneration to employees to be up to five years from the date the contribution was made by an employer to the trustee of an ERT. However, where the contribution has been made to facilitate an employee having an interest in the ERT corresponding to a particular number of shares (or rights to acquire shares) in the employer or in its subsidiaries to which Subdivision 83A-C of the ITAA 1997 applies, the statutory scheme is such that a relatively short period of time for these arrangements will generally be accepted as being up to seven years from the date the contribution is made.

On weighing up the facts in this case we consider:

• the contributions made by the Company to the Trustee of the Trust are for the purposes of procuring shares to satisfy the Company's commitments arising under the Plan. They are primarily outgoings incurred in the ordinary course of carrying on its business;

• the contribution is quickly dissipated in providing Shares (or an interest in Shares) to Participants after the vesting period and performance hurdles are met and the Participant has exercised the Rights as vesting generally occurs after x years and the expiry date is the xx anniversary of the date the Option is granted;

• the amount of the contribution corresponds closely with the amounts needed to fund the ESS interests and are likely be applied within a xx year vesting period;

• eligible Participants will receive absolute entitlement to Shares (direct interest in the employer) post the vesting and exercise period, and

• the Plan provides eligible Participants with an opportunity to participate in the future growth and profit of the employer as vesting conditions are linked to performance and retention of eligible employees.

Therefore, the contributions made by the Company are not considered capital in nature, or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction.

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

Question 2

Summary

The Company will obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs charged by the trustee in relation to the administration of the employee share trust.

Detailed reasoning

The Company will incur various costs in relation to the implementation and on-going administration of the Trust. For example, the Company will incur costs associated with the services provided by the Trustee of the Trust.

In addition to the services to be provided by the Trustee of the Trust, the Company will also incur various implementation costs, including the services provided by the company's accounting and legal advisors.

In accordance with the Trust Deed, the trustee will receive fees or other remuneration in respect of its office as may be agreed with the Company from time to time, and will be entitled to be reimbursed directly out of the Trust Assets for all costs and expenses properly incurred in acting as Trustee other than general overheads and salaries.

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

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

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

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

The view that the costs incurred by the Company are deductible under section 8-1 of the ITAA 1997 is consistent with ATO Interpretative Decision ATO ID 2002/961 Income Tax: employer costs for the purpose of administering its employee share scheme are deductible (ATO ID 2002/961) in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer. Also, consistent with the analysis in Question 1 (above), 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.

The xx costs which are once-off and incurred by the employer to establish the employee share scheme. These expenses are not operating costs nor recurring. These are capital costs that are excluded from being a deduction by virtue of paragraph 8-1(2)(a) which prevents a deduction for a loss or outgoing to the extent that it is a loss or outgoing of capital or of a capital nature.

Question 3

Summary

The Commissioner of Taxation will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, a deduction claimed by the Company for the irretrievable cash contributions made by the Company to fund the subscription for, or acquisition on-market of, the Company shares by the Trust.

While the Company receives a tax benefit by making the contributions under the Plan, the Company did not enter the Plan for the dominant purpose of obtaining a tax benefit.

Detailed reasoning

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

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

• a tax benefit (177C(1)) arises that was obtained or would be obtained in connection with the scheme but for Part IVA of the ITAA 1936; and

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

The Scheme

A scheme is defined in subsection 177A(1) of the ITAA 1936 which states:

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

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

It is considered that this definition is sufficiently wide to cover the proposed employee arrangement under the Plan, which consists of the creation of the Trust, including the Trust Deed, and the payment of the irretrievable cash contributions to the Trustee, the acquisition of Shares by the Trustee, and the transfer of Shares to the Participants.

Tax Benefit

'Tax benefit' is defined in subsection 177C(1) of which the relevant paragraph is:

Subject to this section, a reference in 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 of income if the scheme had not been entered into or carried out…

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

The applicant, at page x of its application considers the following alternate actions:

Alternative 1:

The Company could renumerate employees via payments of salary bonuses or superannuation contributions (that is, cash equivalent amounts based on the value of the shares) rather than through the grant of Rights and delivery of shares. Under this alternative, payments of the cash amounts would be deductible to the Company.

Alternative 2:

The Company could fund the purchase of Shares on-market in the name of the Participant at the time the rights vest or are exercised. Under this alternative, a tax deduction would be available to the Company for the purchase price of the Shares.

Alternative 3:

The Company could issue new Shares directly to Participants when the Rights vest or are exercised. The Company would be entitled to a tax deduction for costs incurred in issuing and transferring the Shares capped at $XXX for each employee (83A-205) but is unlikely to receive a deduction for the cost/value of the Shares issued.

A comparison between the scheme and alternative 1 and 2 would likely reveal no tax benefit because the deductible amounts under both of them would be the same or similar from the Company's tax perspective.

However, a tax benefit (for the purposes of subsection 177A(1) of the ITAA 1936) may be available where the Scheme is compared to Alternative 3. Under Alternative 3, a deduction would be limited to the costs incurred in issuing and transferring Shares to the Participants. As the amount of this deduction is likely to be lower than that available under the Scheme (a deduction equivalent to the value or cost of the shares), a tax benefit may be considered to have been obtained.

In the event that Alternative 3 is considered to be reasonable counterfactual, the 'dominant purpose' test of entering into a scheme to obtain a tax benefit should be considered.

Dominant purpose

Pursuant to 177D(1), paragraphs 177D(2)(a) to (h) of the ITAA 1936 set out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit:

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

(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 the scheme was carried out;

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

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

(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 paragraph (f), of the scheme having been entered into or carried out;

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

Subsection 177A(5) of the ITAA 1936 requires the purpose to be the dominant purpose. Therefore, in considering whether Part IVA applies or not, 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 of the scheme

The inclusion of the EST in the scheme does give rise to a tax benefit, but the Company contends that the presence of the EST provides other commercial benefits. In particular, benefits include:

a) The Trust is used as a vehicle enabling the Company to acquire and hold its own Shares for the purposes of fulfilling its obligations resulting from new and existing grants under the Plan.

b) The Trust will facilitate the acquisition of Shares on market or through a new issue of Shares.

c) The Trust provides an arm's length vehicle for acquiring and holding Shares in the company either by way of new issue or acquiring on market thereby providing flexibility relating to capital management.

d) The Trust will be an efficient structure for giving effect to disposal of restrictions/vesting. As the Trustee is the legal owner, employees will have no ability to deal in the Shares.

e) The Trust provides the flexibility to acquire and hold Shares that will be allocated to employees under the Plan. When vesting conditions are not met, awards are forfeited and the trust enables Shares held for such forfeited awards to be 'recycled' to satisfy other grants of awards.

f) The Trust establishes independent records and accounts for participating employees.

It is accepted that the EST provides benefits to the operation of the scheme that would not be available 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 to eligible employees who participate in the Plan. It takes the form of payments by the Company to the Trustee who acquires the Shares and transfers them to Participants.

While the existence of the Trust confers a tax benefit (when compared to one of the alternatives considered), it cannot be concluded that it is the only benefit provided as outlined above. The Company has argued that the form of the arrangement with the Trust provides the scheme with multiple non-tax benefits and this is accepted.

(c) The timing of the scheme

The scheme has not been established at a time to provide a substantial year-end deduction to the Company nor with a contribution sufficiently large to fund the Trust for several years, but by recurring contributions. There is nothing in this factor to suggest a dominant purpose of seeking to obtain a tax benefit in relation to the scheme.

(d) The result of the scheme

The result of the scheme is to provide the Company with allowable deductions for the contributions it makes to the Trust. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of the company 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 Company

As noted above, the Company makes irretrievable contributions to the Trust and those contributions constitute a real expense with the result that the Company's financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with the Trust as part of the scheme than would be the case if the Company provided Shares to Participants directly, there is nothing artificial, contrived or notional about the Company's expenditure.

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

The contributions by the Company to the Trust 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 to provide to Participants in employee share schemes. The Company is not a beneficiary of the EST and its contributions cannot be returned to it in any form except where the Trustee acquires Shares from the Company by subscribing for new issues at market value.

The financial position of Participants in the Plan will change as a result of participating in the scheme. However this will be the case regardless of whether the Shares are acquired through the Trust or provided directly by the Company.

Therefore, the contributions made by the Company amount to a real change to the financial position of the Trustee. The financial position of Participants in the schemes will also undergo a real change. There is nothing artificial, contrived or notional about these changes.

(g) Any other consequence

Not relevant to this scheme.

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

The relationship between the Company and the Participants in the scheme is one of employer/employee. The Trustee is independent of the Company and is under a fiduciary obligation to act in the interests of the employees who participate in employee share schemes and in particular, in this case, the Plan. There is nothing to suggest that the parties to the employee share schemes are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit.

Conclusion

The Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny in part or in full any deduction claimed by the Company for the irretrievable contributions made to the Trustee of the Trust.

While the Company receives a tax benefit by making the contributions under the Plan, the Company did not enter the Plan for the dominant purpose of obtaining a tax benefit.

Question 4

Summary

No, the irretrievable cash contributions made by the Company to the Trust to fund the subscription for, or acquisition on-market of, the Company shares will not constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA).

When the cash payments are made to the Trustee, the Trustee acquires the benefit of the money, which is a capital contribution to the trust. A benefit constituted by the acquisition of money by an employee share trust is excluded from being a fringe benefit by the exclusion in paragraph (ha) of subsection 136(1) of the FBTAA.

Detailed reasoning

The irretrievable cash contributions that the Company makes to the Trustee of the Trust is used in accordance with the Trust deed and Plan Rules.

The Company's Plan is an employee share scheme (83A-10) administered using an employee share trust (130-85(4)).

The cash contributions to the Trustee constitute capital receipts to the Trustee, they are not assessable under section 6-5 or 6-10 (ATO ID 2002/965 Income Tax: Income tax- Trustee not assessable on employer contributions made to it under the employer's employee share scheme).

When the Trustee receives the cash contributions the Trustee receives the benefit of acquiring money for the employee share trust. Paragraph (ha) of the definition of a fringe benefit in subsection 136(1) of the FBTAA states that a fringe benefit does not include:

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

The benefit to the Trustee of the Trust by the employer making the cash contribution is excluded from being a fringe benefit by paragraph 136(1)(ha).

Accordingly, the irretrievable cash contributions the Company makes to the Trustee of the Trust, to fund the subscription or acquisition on-market of the Company Shares in accordance with the Trust Deed and Plan Rules are not a fringe benefit under subsection 136(1) of the FBTAA.

Question 5

Summary

No, the provision of the Company ESS interests (Rights and Options) at a discount by the Company or the Trust to employees of the Company will not be a fringe benefit for the purposes of subsection 136(1) of the FBTAA.

The Rights and Options under the Plan are both ESS interests under Subdivision 83A-B or 83A-C of the ITAA 97. The benefit from acquiring an ESS interest under an employee share scheme within the meaning of Subdivision 83A-B or 83A-C of the ITAA 97 is excluded from the definition of a fringe benefit under paragraph (h) of subsection 136(1) of the FBTAA.

Detailed reasoning

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a fringe benefit is provided.

In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 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.

• Award of a Right under the Plan-

Under subsection 83A-10(1), an ESS interest in a company is either a beneficial interest in a share in the company, or a right to acquire a beneficial interest in a share in the company.

The rules of the Plan give the Board of the Company an overriding discretion to issue Plan Invitations subject to restrictions and conditions, to prescribe performance criteria. Effectively the Board can refuse/control which employees are eligible to participate in the Plan even though the employee has accepted or been deemed to have accepted an invitation to participate in the Plan.

The vesting of rights granted to a participant is subject to performance hurdles in respect of the performance period which, is generally x years. The rules of the Plan give the Board an overriding discretion to determine that the performance period and the performance criteria have been met.

Therefore, at the time rights are granted under the Plan they are conditional. In these circumstances the Commissioner does not consider that the participant has acquired a right to acquire shares on grant of the right.

Section 83A-340 provides that where you acquire a beneficial interest in a right that later becomes a right to acquire a beneficial interest in a share, Division 83A will apply as if the right had always been a right to acquire the beneficial interest in the share.

Section 83A-340 states:

(1) This section applies if:

(a) you acquire a beneficial interest in a right; and

(b) the right the right later becomes a right to acquire a beneficial interest in a *share.

Example 1: You acquire a right to acquire, at a future time:

(a)  shares with a specified total value, rather than a specified number of shares; or

(b)  an indeterminate number of shares.

Example 2: You acquire a right under which the provider must provide you with either ESS interests or cash, whichever the provider chooses.

(2) This Division applies as if the right had always been a right to acquire the beneficial interest in the *share.

In both examples, the right is a right to receive property but the precise extent or nature of that property has not yet been determined at the time of acquisition of the right. Such rights are capable of becoming a right to acquire a beneficial interest in a share because the capacity to acquire property is inherent in the nature of the right originally acquired. It merely remains to be determined whether the original right ultimately becomes a right to acquire a specific number of shares or some other form of property, such as cash.

At the time a Participant is granted a Right, the right that the Participant obtains is a right to acquire a beneficial interest in a Share, or payment of cash equivalent if performance criteria are satisfied. Therefore, the right acquired is capable of becoming a right to acquire a beneficial interest in a Share and if this happens section 83A-340 will be satisfied and Division 83A will apply as if the right had always been a right to acquire the beneficial interest in the Share.

The provision of the Right to Participants of the Plan will not be a fringe benefit as Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986, states that a fringe benefit does not include:

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

The ESS interest will not be excluded from the application of Subdivision 83A-B or 83A-C as the interest is acquired at a discount. (ATO ID 2012/68 Fringe Benefits Tax Employee Share Scheme: unlisted options to acquire shares in a company not acquired at a discount).

As the Right is taken to be a right to acquire the beneficial interest in a share (83A-340(2)) than it is an ESS interest (83A-10(1)(b)). As the ESS interest is acquired under the Plan which is and ESS (83A-10(2) to which Subdivision 83A-B or 83A-C will apply the requirements for the exclusion to fringe benefits in paragraph 136(1)(h) FBTAA will be satisfied. (ATO ID 2010/142 Fringe Benefits Tax Employee Share Scheme: indeterminate rights not fringe benefits)

• Award of an Option under the Plan-

Under subsection 83A-10(1), an ESS interest in a company is either a beneficial interest in a share in the company, or a right to acquire a beneficial interest in a share in the company.

Vesting of the Options granted to Participants under the Plan is not at the discretion of the Board, nor subject to performance hurdles. However, at the time the Options are granted to participants under Plan, they can only be exercised in cases where the exercise complies with the exercise process for vested options. Therefore, at the time the Option is granted under the Plan they are conditional. In these circumstances the Commissioner does not consider that the Participant has acquired a right to acquire Shares on grant of the Option.

At the time a Participant is granted an Option, the Option that the Participant obtains is a right to acquire a beneficial interest in a share, or payment of cash equivalent if the vesting process is complied with. Therefore, the right acquired is capable of becoming a right to acquire a beneficial interest in a share and if this happens section 83A-340 will be satisfied and Division 83A will apply as if the right had always been a right to acquire the beneficial interest in the share.

The provision of the Option to Participants of the Plan will not be a fringe benefit if paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 applies, it states that a fringe benefit does not include:

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

The ESS interest will not be excluded from the application of Subdivision 83A-B or 83A-C as the interest is acquired at a discount. (ATO ID 2012/68 Fringe Benefits Tax Employee Share Scheme: unlisted options to acquire shares in a company not acquired at a discount).

As the Option is an ESS interest is acquired under the Plan which is and ESS (83A-10(2)) to which Subdivision 83A-B or 83A-C will apply the requirements for the exclusion to fringe benefits in paragraph 136(1)(h) FBTAA will be satisfied. (ATO ID 2010/142 Fringe Benefits Tax Employee Share Scheme: indeterminate rights not fringe benefits)

Conclusion

The Commissioner accepts that the Company's Plan is an employee share scheme under which relevant ESS interests (being indeterminate Rights or Options) are acquired by Participants of the Company, and the acquisition of those ESS interests are in relation to those Participants' employment.

Therefore, the granting of the indeterminate Rights and Options at a discount under the Plan to Participants will not be subject to FBT because they are specifically not included in the definition of fringe benefits by the operation of paragraph 136(1)(h) FBTAA.

Question 6 Summary

In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the Trust, and to eligible employees by way of the provision of Options and Rights under the relevant Plan are excluded from the definition of a fringe benefit for the reasons given in the response to Question 5 above. Therefore, as these benefits have been excluded from the definition of a fringe benefit there is no FBT currently payable under the existing Plan.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies.

Detailed reasoning

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, including in a private ruling. It succinctly 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) 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.

The Commissioner will only make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement.

In Miscellaneous Taxation Ruling MT 2021 Fringe benefits tax : response to questions by major rural organisation (MT 2021) under the heading "Appendix, Question 18", on the application of section 67, the Commissioner states:

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

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.

In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the Trust, and to eligible employees by way of the provision of Options and Rights under the relevant Plan are excluded from the definition of a fringe benefit for the reasons given in the response to Question 5 above. Therefore, as these benefits have been excluded from the definition of a fringe benefit there is no FBT currently payable under the Plan.

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 the Company in relation to a tax benefit obtained under the Plan from irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the acquisition of Shares in accordance with the Trust.

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