Edited version of your written advice

Authorisation Number: 1013046679133

Date of advice: 18 July 2016

Ruling

Subject: Employee Share Scheme

Question 1

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

Answer

Yes.

Question 2

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

(b) If irretrievable contributions to the EST are made to facilitate grants of rights which have not yet occurred at the time of contribution, is the deduction for the Company in respect of irretrievable contributions to the EST allowed in the same year of income in which the rights in question are granted to employees, pursuant to section 83A-210 if the ITAA 1997?

Answer

(a) Yes.

(b) Yes.

Question 3

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

Answer

No.

Question 4

Is the provision of shares to employees pursuant to the Company's Employee Performance Rights Plan (PRP) arrangements subject to Fringe Benefits Tax (FBT) under the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

Are irretrievable contributions of money to the EST to fund the acquisition of Shares subject to FBT 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 proposed arrangement?

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 following documents form part of the relevant facts:

• Application for Private ruling

• Performance Rights Plan Rules (PRP)

• Employee Performance Rights Plan Trust Deed (Trust Deed).

Remuneration and Incentive Programmes

• The Company prides itself on its ongoing efforts to maintain a productive and motivated work environment. A clear factor in its successes to date can be linked to the opportunities and rewards which it provides to staff and senior employees.

• The design of effective remuneration packages is a key aspect of the Company's strategy to retain and attract high-quality staff. As the Company has grown, it has faced increased competition in attracting and retaining staff, particularly from larger or listed competitors.

• The Company is focused on rewarding staff performance by enabling the staff to participate in its future growth and profitability in order to facilitate an increase in shareholder value.

• As part of this growth strategy The Company has a long term incentive plan in place, providing grants of performance rights (Rights).

• Under the Company's existing long term incentive structure, eligible directors and employees (Participants) receive Rights under the Company's Performance Rights Plan Rules (PRP).

Operation of the Plan

The Company, at the sole discretion of the board of the Company (Board), may issue invitations to an eligible Participant to participate in the Plan.

On acceptance of the invitation by the eligible Participant, the Board, at its sole discretion, may issue Rights to eligible Participants.

The Rights will vest to the extent that "Performance Hurdles" are met during the "Measurement Period" at which point all or a portion of the Rights will be convertible into Company shares (Shares).

Rights are granted to eligible Participants for nil consideration.

Operation of the Trust

An employee share trust (EST) has been established as a separate vehicle for the sole purpose of acquiring ordinary shares in the Company for the benefit of eligible Participants under the Company's employee equity plans.

The Company's Employee Performance Rights Plan Trust (Trust) was established during the financial year ended 30 June 2010.

The Trust has been established with the sole purpose to acquire and hold Plan Shares pursuant to the Plan Rules for the benefit of Beneficiaries (Participants) of the Trust.

Contributions made to the Trust by the Company

Shares are acquired by the Trustee through contributions made by the Company to the Trustee. Shares acquired are held by the Trustee absolutely on behalf of the Participants. This arrangement is referred to as the Company Employee Performance Rights Plan (PRP).

It is the Company's intention to continue making contributions to the Trust on an annual basis.

The cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition of Shares by the Trust are irretrievable and non-refundable under the Trust Deed.

The Company will also incur costs associated with the services provided by the Trustee of the EST and various implementation costs.

Use of a Share Trust to facilitate the Plan

It is increasingly common for Australian companies to use a share trust to facilitate the provision of shares to employees as part of equity based employee incentive and retention strategies.

The applicant has provided the following commercial benefits of using a trust:

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

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

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

• the trust will be an efficient structure for giving effect to disposal restrictions / vesting conditions;

• as the trustee is the legal owner, employees have no ability to deal in shares;

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

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

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

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

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

The Company has set up the EST to allow employees to participate in the equity of the company as follows:

1. The EST has been established for the sole purpose of subscribing for or acquiring, delivering, allocating and holding shares in the Company under the Company's PRP, including outstanding awards and future awards.

2. The sole activities of the Trustee will be acquiring shares for the purpose of providing them to eligible directors and employees (Participants) at a discount and the administration of the trust.

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

4. Under the terms of the Trust Deed, eligible Participants are the 'Beneficiaries' of the EST.

5. Prior to the time of vesting, Participants are not entitled to any voting rights, dividends or Rights issues based on their participation in the PRP.

6. Under the terms of the Trust Deed, the Company will instruct the Trustee to subscribe (or purchase a number of shares specified in the notice, to be held by the Trustee as trust shares in respect of the Participant.

7. The Trustee will, in accordance with instructions received pursuant to the plan rules, acquire, deliver and allocate Shares for the benefit of a Participant provided that the Trustee receives sufficient payment to subscribe for or purchase Shares and/or has sufficient unallocated Trust Shares available.

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

9. Such contributions made to the Trust are irretrievable contributions in the form of the initial contribution and additional similar contribution as required to fund the PRP.

10. The amount of the contributions made by the company will depend on:

• the number of performance rights granted to employees under the relevant plans;

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

• the type of rights plan being administered at the time;

• the likelihood of rights vesting; and

• the employee contributions expected on vesting, if any.

11. Participants are absolutely entitled to the Shares as against the Trustee from when vesting occurs and the Shares are allocated to them. While such Shares are held in trust, the Participant may be entitled to dividend and voting rights.

12. All funds received by the Trustee from the company will constitute accretions to the corpus of the Trust and no Participant will be entitled to receive such funds.

13. The funds will not be repaid to the company (i.e. the contributions will be irretrievable). However the Trustee may apply part of the funds received to subscribe for shares in the company, which would require a payment to the company.

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

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

16. The trustee will not be permitted to offer, issue, or acquire any Share or any Rights to any Share if to do so would contravene any applicable law. It will not be permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the trust. It will not be permitted to carry out activities which result in the participants being provided with additional benefits other than the benefits that arise from the relevant plan rules.

17. It is the intention that the EST be used to administer all of the Company's employee equity awards for existing and future awards under the PRP.

18. The company will have no interest in the Shares held by the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 83A-10(1)

Income Tax Assessment Act 1997 section 83A-20

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 subsection 130-84(4)

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

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Question 1

Summary

Yes, the irretrievable cash contributions by the Company to the trustee of an employee share trust (EST) to fund the acquisition of shares in the Company are an allowable deduction under section 8-1 of the Income Tax Assessment Act (1997) (ITAA 1997).

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 (the EST) under the terms of the Trust Deed. The EST's purpose is of acquiring Shares for the benefit of employees or otherwise facilitating the operation and implementation of the PRP.

The Company will make contributions to the EST to allow the Trustee to purchase Shares on market or to subscribe for new Shares to allow Rights under the PRP 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 EST 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 EST 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 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 EST, 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 EST 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 3 years in respect of all Performance Rights on issue by the Company to eligible employees under the PRP. It is considered that the contribution made under PRP 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, we consider that the contributions to the Trustee of Trust by the Company for remunerating its employees under the PRP 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 EST 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 EST are for the purposes of procuring shares to satisfy the Company's commitments arising under the PRP. 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 Performance Rights as vesting generally occurs after three years;

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

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

• the PRP 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 EST 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

(a) Yes, the deduction for the Company in respect of the irretrievable contributions to the EST is allowed in the same year of income when the contribution is made to the EST provided it is in respect of shares that have been granted to employees or rights to acquire shares that have previously been granted to employees, pursuant to section 83A-210 if the ITAA 1997.

(b) Yes, if irretrievable contributions to the EST are made to facilitate grants of rights which have not yet occurred at the time of contribution, the deduction for the Company in respect of irretrievable contributions to the EST is allowed in the same year of income in which the rights in question are granted to employees, pursuant to section 83A-210 if the ITAA 1997.

Detailed reasoning

As discussed under question 1, the provision of money to the Trustee of the EST by the Company for the purpose of remunerating its employees under an ESS is an outgoing in carrying on the employer's business and is deductible under section 8-1 of the ITAA 1997.

The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.

Section 83A-210

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 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by a Participant under the PRP, in relation to the Participant's employment.

The Rights are ESS interests for the purposes of subsection 83A-10(1) of the ITAA 1997.

Under the PRP, participation in the Plan by eligible employees (Participants) is upon acceptance of an offer to participate in the PRP that is given to the Participant by the Company.

It is the Commissioner's view that at the time that Participants accept the offer to participate in the Plan, the Participants (as ultimate beneficiaries of the share trust) actually acquire Rights to acquire beneficial interests in the taxpayer's shares. This concurs with the view expressed in 'ATO Interpretative Decision ATO ID 2010/103 Income Tax: Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust' (ATO ID 2010/103).

The granting of the rights to acquire beneficial interests in the taxpayer's shares, 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 shares to the participating employees are all interrelated components of the employee share scheme. All the components of the scheme must be carried out so that the scheme can operate as intended.

As one of those components, the provision of money to the trustee necessarily allows the scheme to proceed.

The Company will provide money to the Trustee of the EST to enable the Trustee to acquire Company shares for the purposes of satisfying the grant of Rights under the PRP.

As noted above, the Rights are ESS interests which the Participants will acquire upon being granted them by Company. The acquisition time for the purposes of section 83A-210 of the ITAA 1997 occurs when the Rights to the Shares are granted to the Participants.

(a):

Accordingly, under section 83A-210 of the ITAA 1997, the cash contributions that the Company makes to the Trustee will be deductible in the income year in which the acquisition time arises for the Rights. This concurs with the view expressed in ATO ID 2010/103.

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

(b):

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

Finally, it should be noted that if any amount of money is used by the Trustee to purchase excess Shares intended to meet a future obligation arising from a future grant of Rights, the excess payment will occur before the employees acquire the relevant Rights (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the Company in the year of income when the relevant Rights are subsequently granted to Plan Participants.

Question 3

No, the Commissioner of Taxation will not make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to the arrangement where irretrievable contributions are made to the EST to fund the acquisition of Shares.

Detailed reasoning

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 arises that was obtained or would be obtained in connection with the scheme but for Part IVA; and

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

The Scheme

A scheme is defined in subsection 177A(1) of the ITAA 1936 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 EST, including the Trust Deed, and the payment of the irretrievable contributions to the Trustee.

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 Company 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 has provided alternate hypotheses or counterfactuals in its application.

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

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

Dominant purpose

Paragraph 177D(b) of the ITAA 1936 sets out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit:

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

(ii) the form and substance of the scheme

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out

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

(v) 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

(vi) 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

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out

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

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(b) is between the scheme as proposed and the relevant counterfactual.

(i) 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, the applicant states that those benefits include inter alia:

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

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

• the trust will be an efficient structure for giving effect to disposal restrictions / vesting conditions;

• as the trustee is the legal owner, employees have no ability to deal in shares;

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

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

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

Further, it is noted that the arrangement is being contemplated in being undertaken on an ongoing basis.

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.

(ii) The Form and Substance

The substance of the scheme is the provision of remuneration in the form of Shares to eligible employees who participate in the Plan (as well as any employees who participate in future employee share equity plans). It takes the form of payments by the Company to the Trustee who acquires the Shares and transfers them to employees.

While existence of the EST confers a tax benefit, 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 EST provides the scheme with multiple non-tax benefits and this is accepted.

(iii) The Timing of the Scheme

The scheme has been established for the purpose of incentivising, motivating and remunerating staff and increasing the efficiency of the Company on an ongoing basis. This view is supported by the fact that the scheme operates to offer Rights to Eligible Employees, with vesting over a three year period and then only on the basis that Performance Criteria are met over the Performance Period.

Thus, the contributions will be made progressively over the future years, as and when Eligible Employees as Participants, under the terms of the PRP, become eligible to the Shares.

Furthermore, the length of the scheme is not intended for a short period. The scheme is intended to remain in place into the future provided that the commercial benefits are met.

There is nothing in this factor to suggest a dominant purpose of seeking to obtain a tax benefit in relation to the scheme.

(iv) 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 EST. 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.

(v) Any Change in the Financial Position of the Company

As noted above, the Company makes irretrievable contributions to the EST and those contributions constitute a real expense with the result that the Company's financial position is changed to that extent.

(vi) Any Change in the Financial Position of other Entities or Persons

The contributions by the Company to the EST will form part of the corpus of the EST and must be dealt with by the Trustee in accordance with the terms of the Trust Deed i.e. for the acquisition of Shares 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.

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.

(vii) Any Other Consequence

Not relevant to this scheme.

(viii) 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 Beneficiaries (Participants) who participate in the employee share scheme and in particular, in this case, the Plan.

The contributions made by the Company to the Trustee are commensurate with the Company's stated aim of encouraging employees to share in the ownership and the long-term success of the Company.

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

A consideration of all the factors referred to in paragraph 177D(b) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the Company's eligible employees who participate in the scheme in a form that promotes the Company's business objectives, rather than to obtain a tax benefit.

Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made to the Trustee to acquire Shares or the costs incurred by Company in relation to the implementation and on-going administration of the Plan and the Trust.

Question 4

No, the provision of shares to employees pursuant to the Company's Employee Performance Rights Plan (PRP) arrangements is not subject to Fringe Benefits Tax (FBT) under the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

A 'fringe benefit' will only arise under subsection 136(1) of the FBTAA where benefits are provided by employers to employees or associates of employees.

Under the definition of 'fringe benefit', a benefit must also be provided 'in respect of the employment of the employee'.

No amount will be subject to FBT unless a 'fringe benefit' is provided.

Paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 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 terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10 of the ITAA 1997.

The Commissioner accepts that the PRP described in the applicant's private ruling application is an employee share scheme under which relevant ESS interests (being Rights to acquire Shares) are acquired by employees of the Company, and the acquisition of those ESS interests are in relation to those employees' employment.

The Shares acquired by the Trustee under the PRP to satisfy Rights to acquire Shares are also provided to employees under that same employee share scheme.

The Commissioner also accepts that the PRP is an employee share scheme under which the relevant ESS interests (being the beneficial interests in the Shares) are acquired by employees of the Company, and the acquisition of those ESS interests is in relation to those employees' employment.

Therefore, the granting of Rights to acquire Shares under the PRP and the granting of Shares under the PRP to employees will not be subject to FBT because they are specifically excluded from being a 'fringe benefit'.

However, Shares granted to employees under the PRP to satisfy Rights to acquire Shares are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies pursuant to subsection 83A-20(2).

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

83A-20(2) However, this subdivision does not apply if the ESS interest is a beneficial interest in a share that you acquire as a result of exercising a right, if you acquired a beneficial interest in the right under an employee share scheme.

Therefore, the providing of these Shares will not be specifically excluded from the definition of 'fringe benefit' under paragraph (h) of the definition in subsection 136(1) of the FBTAA.

Essentially, this means that Shares granted under the Plan, to satisfy Rights, are not ESS interests acquired under an employee share scheme.

Consequently, the acquisition of the Shares (as a result of exercising Rights), is not excluded from being a fringe benefit by virtue of the definition of fringe benefit in subsection 136(1) of the FBTAA.

However, for a benefit to be a fringe benefit, it must be provided in respect of the employment of the employee.

The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. The court at ATC 4158 said:

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

The situation is similar to that which existed in FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The full Federal Court noted that what 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 accepts to participate in the plan, they obtain a Right to acquire a beneficial interest in a Share in the Company and this Right constitutes an ESS interest. When this Right is subsequently exercised, any benefit received would be in respect of the exercise of the Right, and not in respect of employment.

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

Question 5

No, irretrievable contributions of money to the EST to fund the acquisition of Shares are not subject to FBT within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

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 (EST) is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides that an EST for an employee share scheme (having the meaning given by subsection 83A -10(2) of the ITAA 1997) is a trust whose sole activities are:

(a) obtaining shares or rights in a company; and

(b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of:

(i) the company; or

(ii) a subsidiary of the company; and

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

A payment of money by the Company to the EST is therefore not subject to FBT provided that the sole activities of the Trust are obtaining Shares or Rights to acquire Shares in the Company.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will also require that the Trustee undertake incidental activities that are a function of managing the PRP and administering the EST.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, ATO Interpretative Decision 2010/108 Income Tax: Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities (ATO ID 2010/108) sets out the Commissioner's views on an EST that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities.

In particular, the Commissioner considers that activities that are a necessary function of managing an employee share scheme and administering a trust will satisfy the incidental activities test. Such activities include:

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

• the receipt of dividends in respect of shares held by the EST on behalf of an employee, and their distribution to an 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 purpose of the employee share scheme;

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

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

• receiving and immediately distributing shares under a demerger.

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

The Trust has been established to be an employee share trust with the sole purpose to manage and administer Plan Shares pursuant to the Plan Rules for the benefit of Beneficiaries as outlined under the terms of the Trust Deed

Based on the above, it is accepted that the EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997.

The functions of the Trustee of the EST (acquiring, holding and allocating ESS interests) are limited to those activities mentioned in paragraphs 130-85(4)(a) and (b) of the ITAA 1997, or are merely incidental activities as referred to in paragraph 130-85(4)(c) of the ITAA 1997.

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

Question 6

The Commissioner of Taxation will not make a determination that Section 67 of the FBTAA applies to the proposed arrangement.

Detailed reasoning

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-avoidance Rules (PSLA 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.

It is clear, therefore, that the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 under the heading "Appendix, Question 18" where, on the application of section 67, 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 this case, benefits provided to the Trustee of the EST by way of irretrievable contributions to the EST, and to eligible employees by way of Rights and Shares under the PRP are excluded from the definition of a 'fringe benefit' for the reasons given in the response to questions (4) and (5) above. Therefore, as these benefits have been excluded from the definition of a 'fringe benefit' and there is also no FBT currently payable under the PRP, nor likely to be payable, the FBT liability is not any less than it would have been but for the arrangement.

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 PRP from irretrievable cash contributions made by the Company to the Trustee of the EST to fund the acquisition of Shares in accordance with the Trust Deed.

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