Edited version of your written advice

Authorisation Number: 1012852057911

Date of advice: 8 September 2015

Ruling

Subject: Use of an Employee Share Trust

Question 1

Will Company A, as head entity of a tax consolidated group, obtain an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by Company A (or a subsidiary member of its tax consolidated group) to Company B as trustee of the Employee Share Trust (the Trustee) to fund the subscription for, or acquisition on-market of, ordinary shares in Company A to satisfy ESS interests issued pursuant to the Company A Senior Executive Option Plan (SEOP)?

Answer

Yes

Question 2

Are irretrievable contributions made by Company A (or any subsidiary member of its tax consolidated group), to the Trustee to fund the subscription for or acquisition on-market of ordinary Company A shares by the Trustee to satisfy ESS interests issued pursuant to the SEOP, deductible to Company A at a time determined by section 83A-210 of the ITAA 1997, where contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes

Question 3

Are irretrievable contributions made by Company A (or any subsidiary member of its tax consolidated group), to the Trustee to fund the subscription for or acquisition on-market of ordinary Company A shares by the Trustee to satisfy ESS interests issued pursuant to the SEOP, deductible to Company A under section 8-1 of the ITAA 1997 in the income year in which the contributions are made, where the contribution is made after the acquisition of the relevant ESS interests?

Yes.

Question 4

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 (as head entity of the Company A tax consolidated group) in respect of the irretrievable contributions made by Company A to the Trustee to fund the subscription for or acquisition on-market of ordinary Company A shares by the Trustee, pursuant to the SEOP?

Answer

No.

Question 5

Is the provision by Company A of ESS interests pursuant to the SEOP a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 6

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

Answer

No.

Rulings for Questions 1- 4 apply for the following period(s)

1 July 2015 - 30 June 2020

Rulings for Questions 5- 6 apply for the following period(s)

1 April 2015 - 31 March 2020

Relevant facts and circumstances

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

Company A is the head company of a tax consolidated group, is listed on the Australian Securities Exchange (ASX).

Company A's recent Annual Report states that the performance of the company depends on attracting, motivating and retaining highly skilled Directors and Executives. The company therefore, amongst other things, makes a significant proportion of executive remuneration 'at risk', dependent upon meeting performance benchmarks, and links executive rewards to shareholder value.

The 'at risk' portion of Company A's executive remuneration comprises short, medium and long term incentives. The long term incentives are delivered in the form of Options, and are only offered to those able to influence the generation of shareholder wealth, thus having a direct impact on Company A's performance against certain long term performance hurdles.

Company A's Senior Executive Option Plan

In 200X, Company A executed a Senior Executive Option Plan, which was amended in 20XX (the SEOP). The purpose of the SEOP is to encourage participation by Executives in the Company through Share ownership and attract, motivate and retain skilled Executives.

The SEOP broadly operates as follows:

• from time to time the Board may offer Options to an Executive for no consideration. The number of Options offered is determined at the discretion of the Board and in accordance with the SEOP.

• the Board may impose conditions, including performance related conditions, on the right of a Participant to exercise any Options granted.

• at the time of offering Options, may specify a period time, not to exceed 2 years, during which Shares acquired on exercise of those options may not be disposed of by the Executive.

• an Executive may nominate their Associate in whose favour they wish to renounce the Offer. The Board may, in its discretion, allow or not allow such a renunciation without giving any reason for its decision.

• 'Option' is defined as an option granted pursuant to the SEOP to subscribe for one fully paid ordinary share in the capital of Company A (Share).

• a grant of an Option does not confer on a participating Executive (Participant) any right to receive notice of, or to vote at, a meeting of Company A members or the right to receive a dividend, before the Option is exercised.

• 'Executives' are defined as including Eligible Employees, but excluding Directors who do not hold salaried employment in Company A or its related bodies corporate (the Group). An 'Eligible Employee' is defined to mean a person who is a full or part time employee of the Group, or 'such other person as the Board determines'.

• an Offer to subscribe for one or more Options under the SEOP must be in writing and include, among other things, the number of Options offered, the Option Exercise Price, and the terms /conditions /restrictions on a Participant's right to exercise the Options.

• where an Executive validly accepts the Offer, Company A will grant the Options to the Executive (now referred to as a Participant) within 10 business days, and issue them with a corresponding certificate.

• Company A will not make an Offer if, at the time of the Offer, the total number of Shares which would be issued if those Options were exercised, when aggregated with:

a) the number of Shares which would be issued were each outstanding offer with respect to Shares, units of Shares and options to acquire unissued Shares, under the Plan or any other employee share scheme to be accepted or exercised, and

b) the number of Shares issued during the 5 previous years pursuant to any employee share plan of Company A; but

c) 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 2001;

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

• a Participant may exercise their Options subject to:

• satisfying all Exercise Conditions;

• the Options being otherwise capable of exercise in accordance with the terms of the relevant offer and SEOP, and

• the Shares being quoted throughout the 12 month period immediately preceding the exercise of the Option without suspension for more than a total of 2 trading Days in that period.

• the Board has the power to make adjustments to the terms of exercise of an Option, or amend all or any of the provisions of the SEOP, provided no adjustment will be made without the consent of the Participant who holds the relevant Option, if such adjustment would have a materially prejudicial effect on them (other than an adjustment introduced to comply with legislation, correct an error, etc). Notwithstanding, if an amendment does affect a Participant, Company A must provide them with appropriate compensation, such that they remain no worse off as a result.

• subject to certain exceptions detailed below, a Participant's Options will lapse and all rights in respect of those Options will be lost immediately, if:

• the Lapsing Date has passed (7 years from the date of the grant of the Option, or such other date as the Board determines in its discretion at the time of grant of the option);

• the Exercise Conditions cannot be met, or

• a Participant ceases to be an employee or director of a member of the Group for any reason whatsoever, and the Exercise Conditions have not been met.

• however, a Participant's Options may not lapse immediately in the following circumstances:

• where a Participant ceases to be an employee or director of a member of the Group for any reason whatsoever prior to the Lapsing Date, but has met the Exercise Conditions, the Participant will be entitled to exercise their Options for a period of up to 60 days after the date they ceased employment, after which the Options will lapse immediately.

• where a Participant dies, becomes permanently disabled, retires or is made redundant before the Lapsing Date, the Participant (or their legal representative) may exercise those Options which at that date are exercisable. At its absolute discretion, the Board may resolve that the Participant may exercise those Options which are exercisable, in accordance with certain requirements contained in clause 8.6(c).

• where a Participant ceases to be an employee or director of a member of the Group, for any reason, prior to the date on which their Options become exercisable, the Board may in its absolute discretion determine that some or all of the Options do not lapse and may be exercised by the Participant, if otherwise permitted under the Rules, within such additional time as is determined by the Board. Options which are not exercised by the end of the additional period will lapse immediately.

• Company A will send a notice to each Participant setting out the number of Options which they can exercise and the period during which they may be exercised, 14 days prior to the first day of any relevant exercise period relevant to any Options they have been granted.

• in order to exercise their Options, a Participant must, among other things, pay Company A (or as they direct), an amount equal to the Option Exercise Price multiplied by the number of Options being exercised, unless there is no Exercise Price payable.

• where a Participant exercises its Options and is issued or transferred Shares under the SEOP rules, the Participant will become beneficially entitled to those Shares from their date of issue or transfer, unless, at the time of the Offer, the Board had determined a period of time in which the Participant is not entitled to dispose of those Shares. Where this occurs, Company A may take such steps as it considers necessary or appropriate to enforce that restriction.

• the SEOP is administered by the Board in accordance with the SEOP rules.

Company A Employee Share Acquisition Schemes Trust Deed

Company A established the employee share trust (EST) pursuant to the Company A Trust Deed (Trust Deed), between Company A and Company B (the Trustee).

The EST was established to be an 'employee share trust' as defined in section 130-85(4). The establishment and operation of the EST will provide Company A with:

• 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 Corporations Law requirements relating to companies dealing in their own shares.

Operation of the EST

Broadly, the EST is intended to operate as follows:

• the Trustee declares that the Fund is held by the Trustee for and on behalf of Eligible Participants and any full, part time or casual employees of Company A, on the terms and conditions of the Trust Deed. 'Fund' includes

• the settlement sum;

• Shares acquired or accepted by the Trustee;

• the Scheme Shares (any Shares held by the Trustee on behalf of a Participant);

• any income of the trust, and

• all other property and assets acquired by the Trustee which became subject to the terms of the Deed.

• an Eligible Participant is defined as a person (excluding a non-executive Director) who is a:

• full time, part time, or casual employee of the Company A;

• consultant or contractor of Company A, or

• a person that the Board considers in its absolute discretion to be appropriate for participation in an employee share scheme

and who receives an invitation from Company A to participate in an employee share scheme.

• as directed by Company A and on receipt of cash contributions from Company A to meet the cost of the Shares, the Trustee must:

• acquire Shares on market; or

• subscribe for Shares from Company A.

Those Shares will form part of the capital of the Fund. This instruction may occur at the time Options are granted or at a later time depending on Company A's capital management strategy.

• the amount of the contributions Company A will make to the Trustee will depend on:

• the number of Options granted to Executives under the SEOP;

• the number of shares held at the time by the Trustee;

• the likelihood of options vesting; and

• the exercise price payable on vesting, if any.

• in determining whether to request the Trustee to subscribe for or purchase shares on-market, matters the Company A Board will take into account include:

• Company A's current capital management strategy;

• the dilution impact any issue of new shares will have;

• the extent to which Options granted to directors which may be satisfied by the shares to be acquired have been approved by Company A's shareholders (where Options granted to directors are satisfied with shares acquired on-market, shareholder approval may not be required);

• the liquidity (trade volume) of Company A's shares

• the Board's expectations regarding Company A's share price movements and volatility over the short and longer term; and

• trading restrictions or anticipated activity that may prompt restrictions in trading of Company A shares.

• Company A's contributions to the Trustee for the acquisition of Shares (pursuant to the SEOP) are irretrievable by Company A.

• Company A does not have and shall not have any beneficial interest in any Shares acquired by the Trustee at its direction.

• if Company A, or a Participant with authority under the SEOP, directs, the Trustee must allocate Shares as Scheme Shares, provided the Trustee receives sufficient payment from Company A to buy the relevant Shares or holds sufficient Shares in the Fund.

• Scheme Shares must be held on the terms of the Trust Deed by the Trustee on behalf of the relevant Participant who is the beneficial owner of the Scheme Shares until they are transferred, disposed of or forfeited by the Participant in accordance with the SEOP. On forfeiture by a Participant, Scheme Shares will cease to be Scheme Shares and will be held by the Trustee as part of the capital of the Fund.

• from time to time Company A may suspend or cancel the operation of an employee share scheme, however this will not prejudice the existing rights of Participants.

• a Participant is presently entitled to so much of the income of the Trust for a year of income which is attributable to:

a) the Scheme Shares held by the Trustee on behalf of the Participant, and

b) the proceeds of sales arising from any sale of Scheme Shares by the Trustee on behalf of the Participant.

• the Trust Deed provides that if there is income of the trust to which no Participant is presently entitled for an income year, then subject to the SEOP rules, the balance may be applied in whole or in part:

a) to meet any reasonable costs and expenses properly incurred by Company A in relation to the establishment, administration and termination of the Trust (including, but not limited to, administration, trust, financial and audit expenses); and

b) for the benefit of a Participant, an Eligible Participant, a super fund established and maintained by Company A for its employees or any other trust established and maintained for the benefit of all or any employees of the Group.

For the avoidance of doubt, Company A will not use the balance of the Trust income to meet any costs and expenses properly incurred by Company A in relation to the establishment, administration and termination of the Trust.

• the Trust Deed further provides that where the balance is not applied as per the above dot point, it may be accumulated as an accretion to the Trust.

• prior to or on termination of the Trust, the Trustee may apply that part of the capital of the Trust to which no Participant would be entitled if the Trust were terminated at that time, for the benefit of any of the following beneficiaries as the Trustee thinks fit:

(i) all or any employees of the Group;

(ii) a Participant; or

(iii) a provident, benefit, superannuation or retirement fund established and maintained by the Company for employees or past employees of the Group.

• if the Trust is terminated the Trustee:

• must transfer to each Participant any Scheme Shares standing to their credit, and

• shall dispose of all Shares and the balance of capital or income of the Trust to which no Participant is entitled. Company A acknowledges that payment to all or any employees of the Group.

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-205

Income Tax Assessment Act 1997 Section 83A-210

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

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

Income Tax Assessment Act 1936 Section 701-1

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.

The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 the subsidiary members of a consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period they are members of the consolidated group with the head company of the group being the only entity recognised for income tax purposes.

The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997. As a consequence, the actions and transactions of the subsidiary members of the Company A tax consolidated group are treated as having been undertaken by the Australian head company of the Company A tax consolidated group (Company A).

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 Company A, the Trustee must acquire Shares to enable Company A to satisfy its obligations under the terms of the SEOP, 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 Company A or entitled Participants, in accordance with the SEOP.

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. 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. For the avoidance of doubt, Company A will not use the balance of the Trust income to meet any costs and expenses incurred by Company A in relation to the establishment, administration and termination of the Trust. On this basis, 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 Liability 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 for the sole purpose of acquiring shares for employees participating in the SEOP. The SEOP's purpose is to encourage participation by Executives in the Company through Share ownership and to attract, motivate and retain Executives. 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.

All the documentation provided indicates that Company A makes the contributions to the Trustee solely to enable the Trustee to acquire Company A Shares for Participants of the SEOP in order to remunerate and retain critical staff members. Accordingly, it is considered that there is a sufficient nexus between the outgoings (contributions made by Company A) and the derivation of Company A's assessable income.

Capital or Revenue

The amount of the contributions Company A will make to the Trustee will depend on:

• the number of Options granted to employees under the SEOP;

• the number of shares held at the time by the Trustee;

• the likelihood of Options vesting; and

• the exercise price payable on vesting, if any.

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 prima facie capital in nature, but rather revenue 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 2

The deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which Company A incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210.

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 and the contributions are made before the acquisition of the ESS interests.

Arrangement

Company A's adoption of the SEOP, the establishment of the EST, and Company A's provision of money to the Trustee, are 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 SEOP, Options issued to Participants are rights to acquire beneficial interests in Shares 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)). The SEOP 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 employee share scheme, granted to an employee in relation their employment, is itself provided under the same employee share scheme.

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 SEOP. All the components of the arrangement must be carried out so that the employee share scheme 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 SEOP, 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 (that is, the Participant) acquires the ESS interests. When it does apply, it operates by deferring the timing of the deduction to the income year in which the Participant 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 SEOP) are granted (acquired).

Question 3

For the reasons stated above in answer to Question 2, section 83A-210 will not apply if Company A makes cash contributions to the Trustee after the time that a Participant 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 4

Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise 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 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 subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies (dominant purpose).

On the basis of his analysis of these requirements, the Commissioner will not seek to make a determination under section 177F of the ITAA 1936 in respect of Company A to deny, in part or in full, any deduction claimed in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on market of, Company A Shares, pursuant to the SEOP.

Question 5

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 in subsection 136(1) of the FBTAA. 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.

The Commissioner accepts that the SEOP comprises an employee share scheme for the purposes of Division 83A, that the Options are ESS interests (see question 2 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 SEOP 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 SEOP, 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 6

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.

Recital F of the Trust Deed provides that the Trust has been established to be an 'employee share trust' as defined in subsection 130-85(4).

For the avoidance of doubt, this statement is supported by the Declaration of Trust within the Trust Deed, which provides that the Fund is held by the Trustee for and on behalf of Eligible Participants and any full, part-time or casual employees of the Company, and any contractor or consultant to the Company, on the terms and conditions in the Trust Deed.

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 employee share scheme, as defined in subsection 83A-10(2), by allocating those Shares to the Participants in accordance with the SEOP; 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 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 EST to fund the acquisition of shares in Company A.

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