Edited version of your written advice

Authorisation Number: 1013118872259

Date of advice: 18 November 2016

Ruling

Subject: Employee Share Scheme

Question 1

Is the Company entitled to a tax deduction under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') for the irretrievable (and non-refundable) cash contributions made to the trustee of an Employee Share Trust ('Trustee') to fund the subscription for, or acquisition from existing shareholders, of shares in the Company by the Employee Share Trust ('Trust') to meet the Company's obligations arising from the exercise of vested performance rights ('Rights') granted to employees under the terms and conditions of its Long Term Incentive (Rights) Plan ('LTIP')?

Answer

Yes

Question 2

Will the irretrievable cash contributions made by the Company to the Trustee be deductible to the Company under section 8-1 of the ITAA 1997 in the income year the contributions are made, if this occurs on or after the grant date of the Rights?

Answer

The irretrievable cash contributions will be deductible to the taxpayer subject to the timing limitations imposed under section 83A-210 of the ITAA 1997.

Question 3

Will the irretrievable cash contributions made by the Company to the Trustee be deductible to the Company under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997, if the contributions are made before the grant date of the Rights?

Answer

The contributions to the EST will be deductible under section 8-1 to the ITAA 1997, subject to the limitations pursuant to section 83A-210 of the ITAA 1997.

Question 4

Will the Company obtain an income tax deduction under section 8-1 of the ITAA 1997 in respect of costs incurred by the Company, other than those which are capital in nature, in relation to the implementation of the LTIP and its on-going operation and administration by the Trust?

Answer

Yes

Question 5

If the Trust satisfies its obligation under the Company's LTIP by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under sections 6-5 (ordinary income) or 6-10 (statutory income and particularly section 20-20) of the ITAA 1997, or trigger a Capital Gains Tax ('CGT') event for the Company under Division 104 of the ITAA 1997?

Answer

No, the proceeds will not be included in the assessable income of the company.

Question 6

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

Answer

No, provided that the scheme as implemented is materially identical to the taxpayer's scheme described in this ruling

Question 7

Will the irretrievable cash contributions made by the Company to fund the Trust's subscription for, or acquisition from existing shareholders, of shares in the Company constitute a fringe benefit within the meaning of this term in subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 ('FBTAA')?

Answer

No

Question 8

Will the provision by the Company of Performance Rights to employees under the LTIP at a discount (to market value) constitute a fringe benefit within the meaning of this term in subsection 136(1) of the FBTAA?

Answer

No

Question 9

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefit taxable amount to the Company by the amount of tax benefit gained from the irretrievable cash contributions made by the Company to the Trustee to fund the Trust's subscription for, or acquisition from existing shareholders, of shares in the Company?

Answer

No, provided that the scheme as implemented is materially identical to the taxpayer's scheme described in this ruling

This ruling applies for the following periods:

Income Year Ending 30 June 20XX

Income Year Ending 30 June 20YY

Income Year Ending 30 June 20ZZ

The scheme commences on:

DDMMYY

Relevant facts and circumstances

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

The taxpayer is an Australian public company listed on the Australian Stock Exchange and is the parent entity of a wholly-owned corporate group ('Group'). The Company has one class of shares on issue, namely ordinary shares ('Shares'). The Company established a trust pursuant to a trust deed between the Company and the Trustee (a trustee company) dated DDMMYY ('Trust Deed'). The Trustee is a wholly-owned subsidiary of the Company but neither the Company nor the Trustee has a beneficial interest in the Trust assets which are vested in the Trustee upon trust for the benefit of the Company's Employee Share Scheme (ESS) participants, to be applied in accordance with the provisions of this Trust Deed.

The main roles of the Trust are to:

1. Subscribe for, or acquire on-market, Shares to be held, allocated and delivered to employee participants in the Company's ESS arrangements; and

2. Facilitate the implementation and operation of these ESS arrangements, which are established pursuant (and contained as schedules) to the Trust Deed.

Since its establishment, the Trust has administered a number of ESS arrangements for the Company, including two long term employee incentive plans (LTIP) each forming a key part of the Company's executive remuneration framework and operating over a three year period aligned with the strategic planning cycle of the Company, being:

1. An initial deferred share plan approved by the Company's Board of Directors ('Board'), and implemented prior to the 2016 income year; and,

2. The current Rights plan ('LTIP'), approved by the Company's Board of Directors ('Board') and implemented in the 2016 income year.

The LTIP is limited to a small group of the Company's executive leaders ('Executives'), as determined by the Company's Remuneration Committee and approved by the Board. None of the Executives are directors of the Company and the LTIP is intended to align the interests of participating Executives with those of the Company and its shareholders by linking the Executives' remuneration to relative share price growth and the drivers most likely to influence the Company's share price.

Following the grant of Rights to an Executive, the LTIP Rules provide for the Company to make irretrievable (and non-refundable) cash contributions to the Trustee to fund the subscription for, or purchase on-market of, Shares by the Trust. The timing of the Share acquisition and the corresponding Share price payable, are at the discretion of the Trustee and in particular, the Trustee may:

1. Delay the acquisition of Shares until each Executive's Rights vest (and are automatically exercised); or

2. Acquire the Shares at an earlier stage and assign them to the Executive and hold them in the Trust, pending the vesting (and exercise) of the Executive's Rights.

The inaugural grant of Rights under the LTIP was made in the 2016 income year. Each Executive's Rights comprise three equal tranches and are subject to:

1. (Both market and non-market) performance-based vesting conditions set by the Board; and,

2. A continued employment requirement through to the Rights vesting on a staggered basis on the anniversary of their grant date, over a three year period.

The Shares which an Executive will be allocated by the Trustee on exercise of their vested Rights will be subject to further performance-based and continued employment vesting conditions (and a disposal restriction) for a subsequent 12 months following their allocation to the Executive, and will be held in the Trust during their vesting period.

The Trust is principally governed by 'the Trust deed' and the 'LTIP Rules', key features of which are summarised below:

The Trust Deed

The Company has established a trust for the purpose of operating in connection with its ESS arrangements (referred to as 'Sub Plans' in the Trust Deed) which are made available by the Company to employees from time to time.

In this respect, the Trust is managed and administered so that it satisfies the definition of an 'Employee Share Trust' in sub-section 130-85(4) of the Income Tax Assessment Act (ITAA)1997.

In accordance with the Trust Deed (and with respect to the LTIP):

1. The Company may make irretrievable cash contributions to the Trustee to enable the Trustee to subscribe for, or purchase on-market, Shares on behalf of each LTIP participant who has been granted Rights ('Participant');

2. The Trustee is prohibited from repaying to the Company (or any associated entity of the Company) any amount received from the Company as contributions for the subscription for, or the purchase of, Shares;

3. The Trustee undertakes to deal with the Shares as set out in the Trust Deed; and

4. The Company undertakes to pay/reimburse the costs involved in the implementation of its ESS arrangements (including the LTIP) and their on-going operation and administration by the Trust.

The LTIP Rules

In addition to the specific LTIP Rules and terms and conditions of the grant of Rights to the three Executives mentioned above, key features of the LTIP of relevance to this Application are as follows:

1. Under the LTIP, the Board has a discretion as to whether to issue a written invitation ('Invitation') to an Eligible Employee (defined in the Trust Deed as a permanent employee of the Company who has been invited by the CEO or the Board to participate in a Sub Plan) and a further discretion as to whether to accept an Eligible Employee's application for Rights;

2. On the Board's acceptance of an Invitation, an Eligible Employee becomes a Participant in the LTIP and is granted (for free) Rights entitling the Participant to acquire an equivalent number of Shares (typically, for free), subject to the satisfaction of the vesting conditions ('Performance Conditions') detailed in the Invitation;

3. Following the grant of rights, the company will issue or procure the issue to the participant of a certificate or statement (or both) setting out (with respect to the grant):

i. the name of the participant;

ii. the grant date;

iii. the number of rights granted;

iv. if any rights have an exercise price, the exercise price for each price and/or how the exercise has been calculated;

v. the performance measurement date for each grant;

vi. the expiry date for each grant;

vii. details of the performance conditions attached to each grant;

viii. any restriction on the number of rights that may be exercise, or that may be exercised at one time; and,

ix. the exercise date.

4. The Rights are non-transferable and will typically expire on the fifth anniversary of their grant, unless otherwise prescribed by the Board in the Invitation;

5. Subject to the Board exercising a discretion to waive the forfeiture of Rights in exceptional circumstances, unvested Rights will automatically lapse and be forfeited in a number of situations, including where a Participant:

i. Fails to satisfy the Performance Conditions; or

ii. Ceases employment with the Group; and

6. Generally, a Participant's Rights will automatically be converted into Shares (exercised) on vesting.

Relevant legislative provisions

● Section 6-5 Income Tax Assessment Act 1997

● Section 6-10 Income Tax Assessment Act 1997

● Section 8-1 Income Tax Assessment Act 1997

● Section 20-20 Income Tax Assessment Act 1997

● Section 20-30 Income Tax Assessment Act 1997

● Division 83A Income Tax Assessment Act 1997

● Section 83A-10 Income Tax Assessment Act 1997

● Section 83A-335 Income Tax Assessment Act 1997

● Section 83A-340 Income Tax Assessment Act 1997

● Section 83A-210 Income Tax Assessment Act 1997

● Section 104-155 Income Tax Assessment Act 1997

● Section 104-35 Income Tax Assessment Act 1997

● Section 109-10 Income Tax Assessment Act 1997

● Section 130-85 Income Tax Assessment Act 1997

● Part IVA Income Tax Assessment Act 1936

● Section 67 Fringe Benefits Tax Assessment Act 1936

● Section 136 Fringe Benefits Tax Assessment Act 1936

Reasons for decision

Question 1

Is the Company entitled to a tax deduction under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') for the irretrievable (and non-refundable) cash contributions made to the trustee of an Employee Share Trust ('Trustee') to fund the subscription for, or acquisition from existing shareholders, of shares in the Company by the Employee Share Trust ('Trust') to meet the Company's obligations arising from the exercise of vested performance rights ('Rights') granted to employees under the terms and conditions of its Long Term Incentive (Rights) Plan ('LTIP')?

Summary

Yes

Detailed Reasoning

The taxpayer established an employee share trust (EST) that is administered so that it satisfies the definition of an 'employee share trust' (as defined in section 130-85 of the ITAA 1997), for the purpose of administering an Employee Share Scheme (ESS).

Relevantly an ESS is defined as a scheme under which ESS interests in a company are provided to employees or associates of employees (including past or prospective employees) of: (a) the company; or (b) subsidiaries of the company, in relation to the employees' employment: section 83A-10 of the ITAA 1997.

An ESS interest is defined as: (a) a beneficial interest in a share in a company; or (b) a right to acquire a beneficial interest in a share in a company (section 83A-10 ITAA 1997). Where one of the components of a stapled security is a share in a company, the stapled security is treated as a share (section 83A-335 ITAA 1997).

As the purpose of the scheme is to facilitate the granting of rights, to employees, to acquire beneficial interests in shares in the taxpayer company, the granting of these rights meets the legislative definition of an ESS interest pursuant to section 83A-10 of the ITAA 1997.

Paragraphs 1.342 to 1.346 (inclusive) of the Explanatory Memorandum (hereinafter 'the EM') to Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 states relevantly:

1.342 A general deduction may be available in relation to the indirect provision of securities to employees under an employee share scheme, when an employer provides money to an employee share trust for the purpose of providing its employees with securities in itself. The employee share trust may acquire the securities by buying them on the market or by participating in a share issue by the employer.

1.343 An employer can generally deduct an amount of money or property (which is not a share in itself) provided to an employee share trust for the purpose of remunerating its employees under an employee share scheme.

1.344 The deduction would generally occur in the income year in which the employer incurred the loss or outgoing. However, this arrangement may allow an employer to artificially bring forward future deductions by making contributions to the trust that are in excess of its requirements under an employee share scheme.

1.345 To prevent an artificial bring forward of these deductions, the employee share scheme rules delay the deduction until the employee acquires an ESS interest. [Schedule 1, item 1, section 83A-210]

1.346 The situations in which a deduction is deferred are not limited to cases involving an employee share trust. Any arrangement in which an employer provides ESS interests under an employee share scheme indirectly by providing another entity with money or property will result in a deduction being deferred until the employee acquires the security.

Section 8-1 of the ITAA 1997, insofar as it is relevant, states:

8-1(1)

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

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

8-1(2)

However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature;

In Pridecraft Pty Ltd v. FC of T; FC of T v. Spotlight Stores Pty Ltd FCAFC 339; 2005 ATC 4001; 58 ATR 209, the Court held 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. This is consistent with the opinion expressed in ATO Interpretative Decision ATO ID 2002/1074 Income Tax - deductibility - irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme: that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made to the trustee of its employee share scheme.

As the expenditure is not on capital account, sub-section 8-1(2) of the ITAA 1997 will not prevent the taxpayer from claiming a deduction.

The taxpayer has further advised that the company will make irretrievable cash contributions to the EST to provide eligible employees with ESS interests. The irretrievable contributions the taxpayer makes to the EST are directed to enhancing the profitability of the taxpayer group's business and producing assessable income. This satisfies the first positive limb of section 8-1.

Deductibility of payments to Employee Remuneration Trusts is furthermore considered in Draft Taxation Ruling TR 2014/D1 which relevantly states:

Is the contribution necessarily incurred in carrying on a relevant business?

14. Subject to paragraph 15 of this draft Ruling, 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 ERT; 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, to the direct provision of remuneration of employees (who are employed in that business),


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

15. A contribution by an employer to the trustee of an ERT will not satisfy either limb of subsection 8-1(1) of the ITAA 1997 (and will therefore not be deductible) where that contribution is:

● intended to be applied for the benefit of the owners, controllers or shareholders of the employer (in, or by reason of, that capacity), or associates of any of them; or

● not intended, with any great certainty, to be substantially diminished in providing remuneration to employees within a relatively short period of making the contribution.

The taxpayer intends on making irretrievable contributions to the EST, for the purpose of providing ESS interests to employees pursuant to an ESS scheme. The vesting of ESS interests under the EST deed and rules is dependent on contingencies linked to employee performance. The primary purpose of the contributions is for those amounts to be applied towards the ESS within a relatively short period of time and is not intended to benefit the owners or controllers of the company, or to substantially diminish the remuneration of employees. This satisfies the second positive limb of section 8-1.

Accordingly, the irretrievable contributions the taxpayer makes to the EST, are allowable deductions under section 8-1 of the ITAA 1997. This view is consistent with the interpretative decision in ATO ID 2002/1074.

Question 2

Will the irretrievable cash contributions made by the Company to the Trustee be deductible to the Company under section 8-1 of the ITAA 1997 in the income year the contributions are made, if this occurs on or after the grant date of the Rights?

Summary

The irretrievable cash contributions will be deductible to the taxpayer subject to the timing limitations imposed under section 83A-210 of the ITAA 1997.

Detailed Reasoning

Under the taxpayer's scheme Rights will be granted which, subject to certain conditions, will be exercisable for ESS interests as defined in subsection 83A-10(1) of the ITAA 1997.

With effect from 1 July 2009, section 83A-210 of the ITAA 1997 determines the timing of a deduction for contributions made by an employer to an EST under an ESS. 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 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 the taxpayer under the ESS, in relation to the employee's employment.

The granting of the beneficial interests in the ESS interests under the taxpayers ESS includes the provision of money to the Trustee of the EST under the arrangement, for the acquisition and holding of ESS interests by the Trustee of the EST and the allocation of those ESS interests to the ESS participants. Each of these steps forms part of the interrelated components of the taxpayer's ESS. All the components of the ESS 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. Consequently, the provision of money to the Trustee to acquire the ESS interests is considered to be for the purpose of enabling the participating employees, indirectly as part of the ESS, to acquire the ESS interests. If that money is provided before the ESS interests are acquired then section 83A-210 of the ITAA 1997 will apply. However, section 83A-210 of the ITAA 1997 will not apply to a deduction for the purchase of ESS interests to satisfy the obligation arising from ESS interests already granted, and that deduction is accordingly allowable to the taxpayer in the year in which the money was paid to the Trustee of the EST, under section 8-1 of the ITAA 1997.

If any amount of money is used by the Trustee to purchase excess ESS interests intended to meet a future obligation arising from a future grant of ESS interests, the excess payment occurs before the relevant employees acquire their respective ESS interests under the scheme: see ATO ID 2010/103. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the taxpayer in the year of income when the relevant ESS interests are subsequently granted to the employees.

Question 3

Will the irretrievable cash contributions made by the Company to the Trustee be deductible to the Company under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997, if the contributions are made before the grant date of the Rights?

Summary

The contributions to the EST will be deductible under section 8-1 to the ITAA 1997, subject to the limitations pursuant to section 83A-210 of the ITAA 1997.

Detailed Reasoning

Because an ESS interest is defined as a beneficial interest in a share (or in a right to acquire the beneficial interest in a share), employees with a beneficial interest in shares in an employee share trust are taxed as though they were the legal owners of those shares. Further, to overcome trust law restrictions on identifying assets for which an employee holds a beneficial interest when they are held within a single pool of unidentifiable assets in a trust, particular shares, or rights to acquire shares, in a trust are treated as though they were beneficially owned by particular employees per section  83A-320 ITAA 1997. If a trust holds multiple classes of assets, the rules are applied separately to each class of assets.

As regards the timing of the deduction, paragraph 1.73 of the EM relevantly states:

1.73 The deduction would generally occur in the income year in which the employer incurred the loss or outgoing. However, such an arrangement may allow an employer to artificially bring forward future deductions by making contributions to the trust that are in excess of its requirements under an employee share scheme. To prevent an artificial bring forward of these deductions, the employee share scheme rules delay the deduction until the employee acquires an ESS interest.

To prevent employers from artificially bringing forward deductions by utilising an indirect arrangement (e.g. an EST) for the purpose of providing ESS interests to its employees under an ESS, section 83A-210 operates to delay the timing of the deduction until such time as the employee acquires an ESS interest: see ATO ID 2010/103.

Consequently the timing of the deductions will be limited by operation of section 83A-210 of the ITAA 1997.

Notably, where an employee acquires a beneficial interest in a right and the right later becomes a right to acquire a beneficial interest in a share, section 83A-340 of the ITAA 1997 treats the right as if it had always been a beneficial interest in the share.

This may be the case where the taxpayer acquires a right to acquire, at a future time, shares with a specified value, rather than a specified number of shares, or an indeterminate number of shares. However, the section does not apply where a right to acquire a beneficial interest in a share is granted subject to shareholder approval and an employee acquires only a right to have the matter put to the shareholders and nothing more. See: Davies v DCT [2015] FCA 773.

As stated above, if the contributions are provided before the ESS interests are acquired then section 83A-210 of the ITAA 1997 will apply. However, section 83A-210 of the ITAA 1997 will not apply to a deduction for the purchase of ESS interests to satisfy the obligation arising from ESS interests already granted, and that deduction is accordingly allowable to the taxpayer in the year in which the money was paid to the Trustee of the EST, under section 8-1 of the ITAA 1997.

If any amount of money is used by the Trustee to purchase excess ESS interests intended to meet a future obligation arising from a future grant of ESS interests, the excess payment occurs before the relevant employees acquire their respective ESS interests under the scheme: see ATO ID 2010/103. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the taxpayer in the year of income when the relevant ESS interests are subsequently granted to the employees.

Question 4

Will the Company obtain an income tax deduction under section 8-1 of the ITAA 1997 in respect of costs incurred by the Company, other than those which are capital in nature, in relation to the implementation of the LTIP and its on-going operation and administration by the Trust?

Summary

Yes

Detailed Reasoning

Generally, the costs incurred by an employer in implementing and administering an ESS that complies with Division 83A are deductible under s 8-1 ITAA 1997: see ATO ID 2014/42 and ATO ID 2002/961.

Costs incurred by the taxpayer in relation to the implementation and ongoing administration of the EST are part of the ordinary recurrent costs to the company of remunerating its employees and are, therefore, deductible under section 8-1 of the ITAA 1997.

However, it is noted that, unlike the irretrievable contributions made to the EST to acquire ESS interests, these payments do not form part of the corpus of the EST, but are assessable income of the Trustee.

Question 5

If the Trust satisfies its obligation under the Company's LTIP by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under sections 6-5 (ordinary income) or 6-10 (statutory income and particularly section 20-20) of the ITAA 1997, or trigger a Capital Gains Tax ('CGT') event for the Company under Division 104 of the ITAA 1997?

Summary

No, the proceeds will not be included in the assessable income of the company.

Detailed Reasoning

In respect of Section 6-5 of the ITAA 1997:

The contributions by the employer to the trustee of the trust will not result in the employer deriving ordinary income assessable under section 6-5 of the ITAA 1997 at the time the contributions are made or at the time the shares are provided. This is consistent with the opinion expressed in ATO ID 2007/217.

In Respect of section 20-20 of the ITAA 1997

Division 20 of the ITAA 1997 deals with amounts included to reverse the effect of past deductions and section 20-20 of the ITAA 1997 with assessable recoupments, which are described (at section 20-10 of the ITAA 1997) as 'an amount you receive by way of insurance, indemnity or other recoupment'.

The subscriptions received by the taxpayer from the EST are for ESS interests and are integral to the arrangement whereby the acquisition and holding of the ESS interests by the Trustee and the allocation of shares to the participating employees are all interrelated components of the taxpayer's employee share plans. The character of the subscriptions paid to the taxpayer for shares is not one of 'insurance, indemnity or other recoupment'.

Further, the table at section 20-30 of the ITAA 1997 showing the deductions for which recoupments are assessable does not include provision for subscriptions for funding an EST to acquire shares for employees.

In Respect of Division 104 CGT events

The issue or allotment of shares in a company constitutes an acquisition of the shares by the person to whom they were issued or allotted (section 109-10 ITAA 1997), in this case an employee of the company, but it does not constitute a CGT event to the company: see sub-section 104-35(5)(c) of the ITAA 1997(which operates as an exception to CGT event D1 where a company issues or allots equity interests or non-equity interests in the company) and sub-section 104-155(5)(c) of the ITAA 1997 (which operates as an exception to CGT event H2 where a company issues or allots equity interests or non-equity interests in the company). Therefore, moneys paid to subscribe for shares, whether paid-up capital or a premium on allotment, do not create a CGT liability for the company.

Other Considerations

Where however, under an employee share scheme, an employee is granted a right to acquire a share from an employee share trust which requires the employee to pay an amount (the exercise price) to the employer, the exercise price amount paid by the employee to the employer, will be included in the employer's assessable income under section 6-5 of the ITAA 1997, as the payment is a product of the employer's business or is incidental to the conduct of the employer's business. This is consistent with the opinion expressed in ATO ID 2010/155.

Question 6

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

Answer

No, provided that the scheme as implemented is materially identical to the taxpayer's scheme described in this ruling

Question 7

Will the irretrievable cash contributions made by the Company to fund the Trust's subscription for, or acquisition from existing shareholders, of shares in the Company constitute a fringe benefit within the meaning of this term in subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 ('FBTAA')?

Summary

No

Detailed Reasoning

Relevantly, the EST will meet the legislative requirements of an employee share trust per the meaning given under sub-section 130-85(4) of the ITAA 1997, and the EST will provide ESS interests in the taxpayer company as part of an ESS.

Certain benefits are excluded from being fringe benefits within the meaning of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). Paragraph (h) of subsection 136(1) FBTAA excludes from the definition of 'fringe benefit':

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 the Act applies.

Consequently the granting of ESS interests to the taxpayer's employees, under the ESS will not be subject to FBT because they are specifically excluded from the definition of a fringe benefit.

Question 8

Will the provision by the Company of Performance Rights to employees under the LTIP at a discount (to market value) constitute a fringe benefit within the meaning of this term in subsection 136(1) of the FBTAA?

Summary

No

Detailed Reasoning

As detailed above in the Commissioner's detailed reasoning under Question 1, the taxpayer intends on making irretrievable contributions to the EST, for the purpose of providing ESS interests to employees pursuant to an ESS scheme.

Subsection 136(1) of the FBTAA defines a 'fringe benefit', in relation to an employee as a benefit in respect of the employment of the employee, but paragraphs (h) and (ha) of subsection 136(1) of the FBTAA excludes from the definition of 'fringe benefit':

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

(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);

In the present circumstances, the sole activities of the trustee of the EST are limited to managing an ESS and the activities incidental to the administration of the trust, such that the trust is an EST within the meaning of subsection 130-85(4) of the ITAA 1997.

As the sole activities of the trustee of the EST are related to acquiring shares or rights to acquire shares in the taxpayer company for employees, the exclusions in paragraphs (h) and (ha) of subsection 136(1) of the FBTAA will apply. Therefore, contributions to the EST in respect of performance rights will be excluded from the definition of fringe benefit in subsection 136(1) of the FBTAA.

Question 9

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefit taxable amount to the Company by the amount of tax benefit gained from the irretrievable cash contributions made by the Company to the Trustee to fund the Trust's subscription for, or acquisition from existing shareholders, of shares in the Company?

Answer

No, provided that the scheme as implemented is materially identical to the taxpayer's scheme described in this ruling

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