Edited version of your written advice

Authorisation Number: 1013125492765

Date of advice: 17 November 2016

Question 1

Will the provision of shares by each employing entity of You under the Share Plan give rise to an obligation on the provider to give a statement to the Commissioner and an individual in accordance with section 392-5 of the Tax Administration Act (TAA) 1953 and in which financial years will any such obligation arise for You to report under section 392-5?

Answer

Yes when the shares are issued and when the deferred taxing point for the shares arises under section 83A-115.

Question 2

Is the provision of shares under the TDSP a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

Question 3

Will You (as the head company of the income tax consolidated group) be eligible for a deduction under section 8-1 of the ITAA 1997 for the irretrievable contributions you make to the Trustee of the Share Plan Trust (“EST”) in respect of a share granted under the Share Plan?

Answer

Yes.

Question 4

Will the irretrievable contributions to the EST be deductible in the year of income when the relevant shares are granted to employees and an irretrievable cash contribution has been made to the EST to acquire the shares in You?

Answer

Yes.

Question 5

Will the Commissioner 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 You in respect of the irretrievable cash contributions made by You to the Trustee of the EST to fund the subscription for or acquisition of shares in You by the EST?

Answer

No.

This ruling applies for the following periods:

Income tax year ended 30 June 2017

Income tax year ended 30 June 2018

Income tax year ended 30 June 2019

The scheme commences on:

1 July 2016

Relevant facts and circumstances

In this ruling capitalised terms (except to the extent that they are proper nouns) are specifically defined in the documents provided.

Background and general context

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.

You are an Australian Private company that is the parent entity of a number of wholly-owned subsidiaries. You currently operate an Employee Share Plan (ESP) and would like to start another one. As part of the remuneration process and strategy of You, the Plans aim to recognise both short-term and long-term performance by rewarding eligible participants with Shares in You, allowing them to share in both the value and growth of the business.

ESP

The Plan provides eligible Employees whose annual adjusted taxable income is no more than $180,000 with Shares up to a maximum discount of $1,000 per annum access to the exempt taxation concession available under Section 83A- 35, Division 83A, of the Income Tax Assessment Act 1997.

TDSP

The TDSP will have two types of participation. The first participation is expected to be offered to management personnel. The second participation will be open to employees who would not benefit from participation in the existing ESP as their incomes are higher than $180,000. Shares other than those granted under an eligible salary sacrifice arrangement will vest after a minimum employment service of one year. The shares will carry a disposal restriction not allowing the employee to dispose of the shares within a set number of years.

Share Acquisition

As You are a private company shares are only available from existing shareholders or from new subscriptions from the company.

You propose to contribute sufficient funds to the trust so that the trust is able to acquire the number of shares necessary to meet its obligations and that, over time, those contributions will be used for the purposes of the trust. In the normal course of events, various factors will need to be considered which will affect the timing of these contributions; however it will typically occur as follows:

1. You make a contribution to the trust

2. The trustee acquires shares in You by subscription or from existing shareholders.

3. Grants of shares are made at or at about that time

Plan Rules

The Plan Rules set out the terms and conditions of the Plan, as well as outlining details of the operation of the Plan.

The purpose of the Plan is to allow the Board to subscribe for shares in You, resulting in various benefits to both the employees and the company.

As outlined in the Plan Rules, a share is a fully paid ordinary share in You. The Board will issue invitations to eligible employees which will contain relevant information regarding the shares at the time of the Invitation. This information will include vesting and performance conditions.

The minimum employment condition for vesting will be no less than one year and the performance conditions will likely include the following:

1. Business unit profitability

2. Market share achievement

3. Achieving sales targets

4. Achievement of franchisor standards requirements

The plan rules allow for the directors to grant shares under the Plan as follows:

1. Allow for the grant of shares which will be subject to a disposal restriction of a number of years, for which the employee can salary sacrifice up to $5,000 per year.

2. Allow for the issue of shares which have vesting and disposal conditions to be set by the directors. If the employee does not meet the vesting conditions, the shares are forfeited and retained by the trustee in the trustee's name.

An employee who applies for, or accepts a grant of shares, is deemed to have agreed to be bound by the Plan Rules and the terms and conditions set out in the Invitation Letter and the company constitution.

Unless the Board determines otherwise, a grant of shares is personal to the eligible employee and cannot be transferred to other persons or entities. Once allocated, the participant has beneficial ownership of the Shares and both legal and beneficial ownership once the shares are transferred to the participant but any dealings of the shares are restricted by the Plan Rules any other relevant Company or Group Policies.

Legal ownership of the Plan shares may be transferred to the participant in accordance.

Subject to Plan Rules all Shares granted under these Plan Rules are subject to the Company's Buy Back and Cancellation Policy, which states that the participant must hold their shares for the a number of years or when they cease to be an employee of the company and that the Company may buy-back or undertake a capital reduction of the participant's shares.

Employee Share Trust

In order to facilitate the Plans, You have established the EST by way of declaration of trust by the trustee. Parties to the Trust Deed are You and the Trustee.

You provide the following reasons for implementing the Plans by way of the EST:

● the trust will be a separate vehicle set up for the sole purpose of acquiring shares to be delivered to employees as part of remuneration programmes;

● the trust is an arm's length vehicle for acquiring and holding shares in You;

● the trust will facilitate the acquisition of shares by the trustee either by purchasing them from existing shareholders or by subscribing for new shares;

● the trust will be an efficient structure for giving effect to disposal restrictions/vesting conditions (particularly in relation to shares). As the trustee is the legal owner, employees have no ability to deal in the shares;

● the trust provides the flexibility to acquire and hold shares that will be allocated to employees under its employee Share Plan and facilitates the forfeiture of shares when vesting conditions are not met. The trust is also able to hold shares for reallocation. This enables easy recycling of shares;

● the trust assists the company with meeting Corporations Act requirements in relation to dealing in its own shares;

● the trust can provide one single vehicle for the administration of the group's Share Plans;

● 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 other incidental activities.

According to the Trust Deed, the EST broadly operates as follows:

● The Trust Deed allows You and your subsidiaries to make contributions to the EST to allow the Trustee to acquire shares for The Plans, or request that the Trustee apply capital of the Trust for the purpose of acquiring the shares.

● The Trust Deed provides that the Trustee subject to receiving sufficient payment or having sufficient capital may be directed (at the election of the Board) to either purchase shares or subscribe for shares.

● The Trustee will be the legal owner on acquisition of shares, and when allocated to the participant, the employee will become the beneficial owner of the shares from that point in time.

● While the shares in You are held in trust, the Participant will be entitled to dividends, franking credits and voting rights.

● All funds received by the Trustee from You will constitute accretions to the corpus of the trust and no participant will be entitled to receive such funds.

● The Trustee, at the direction of the participant can sell shares that the participant is entitled to. The Trustee will apply the proceeds first to brokerage fees and the balance to the participant.

● You are not a beneficiary under the Trust Deed, and any funds it contributes to the trust cannot be refunded, repaid or returned to the company other than by way of the trustee paying the issue price where it subscribes for shares in the company.

● You will have no interest in the shares held by the trust.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 66

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Division 83A-B

Income Tax Assessment Act 1997 Division 83A-C

Income Tax Assessment Act 1997 Division 83A-105

Income Tax Assessment Act 1997 Division 83A-110

Income Tax Assessment Act 1997 Section 83A-205

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Subsection 701-1(1)

Income Tax Assessment Act 1997 Subsection 703-15(2)

Income Tax Assessment Act 1997 Subsection 960-100(3)

Income Tax Assessment Act 1997 Subsection 960-100(4)

Income Tax Assessment Act 1997 Subsection 8-1(1)

Income Tax Assessment Act 1997 Subsection 8-1(2)

Income Tax Assessment Act 1997 Section 995-1

Taxation Administration Act 1953 Section 392-5

ATO view documents

ATO Interpretative Decision ATO ID 2010/61

Law Administration Practice Statement PS LA 2005/24

Other references (non-ATO view, such as court cases)

Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288

Charles Moore and Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147

Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113

Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339

Ronpibon Tin No Liability v The Federal Commissioner of Taxation(1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431

Spotlight Stores Pty Ltd and Anor v. Commissioner of Taxation [2004] FCA 650

W. Nevill And Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67

Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009

Reasons for decision

(a) Will the provision of shares by each employing entity of You under the Share Plan give rise to an obligation on the provider to give a statement to the Commissioner and an individual in accordance with section 392-5 of the Tax Administration Act (TAA) 1953 and in which financial years will any such obligation arise for You to report under section 392-5?

The provision of shares by You to Your employees under the Share Plan will give rise to an obligation to provide a Statement to the Commissioner and to an individual at both the time the shares are allocated to the employee participant and at the earlier of when the employee ceases employment or the time when the shares are no longer subject to disposal restrictions.

Detailed reasoning

Division 83A of the ITAA 1997 provides for the taxation of shares and rights acquired under an employee share scheme.

a) Section 392-5 of the TAA 1953 states that an entity must give a statement to the Commissioner and to an individual for a financial year if:

(a) both of the following subparagraphs apply:

(i) the provider provides *ESS interests to the individual during the year;

(ii) Subdivision 83A-B or 83A-C of the Income Tax Assessment Act 1997 (about employee share schemes) applies to the interests; or

(b) all of the following subparagraphs apply:

(i) the provider has provided ESS interests to the individual (whether during the year or during an earlier year);

(ii) Subdivision 83A-C of the Income Tax Assessment Act 1997 (about employee share schemes) applies to the interests;

(iii) the *ESS deferred taxing point for the interests occurs during the year.

b) An employee share scheme (ESS) interest in a company is defined in subsection 83A-10(1) to mean a beneficial interest in the share of the company or a right to acquire a beneficial interest in a share of the company. An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees, of the company or subsidiaries of the company in relation to the employees' employment. The ordinary shares offered under the Share Plan by You provide the employee or their associates, with a beneficial interest in a share, that is, an ESS interest.

c) Subdivision 83A-B includes a discount received by a taxpayer on an ESS interest they acquire under an employee share scheme in their assessable income for the financial year in which they acquire the interest.

d) Section 83A-20 provides that Subdivision 83A-B applies to an ESS interest if an employee acquires the interest under an employee share scheme at a discount, unless Subdivision 83A-C applies to the interest.

e) The term 'discount' is not defined for the purposes of Division 83A of the ITAA 1997. However, the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 states at paragraph 1.102 that the term 'discount' is:

... the market value of the ESS interest less any consideration paid, or to be paid, by the employee.

f) The shares that are granted under the Share Plan are provided for no consideration. Therefore the Commissioner accepts that the shares are acquired at a discount.

g) Unless Subdivision 83A-C applies to the shares, Subdivision 83A-B will apply and the shares will be subject to tax on acquisition.

h) Subdivision 83A-C includes in the assessable income of an employee for the year in which the deferred taxing point for the interest occurs an amount (the discount amount) which is calculated as the market value of the interest at the deferred taxing point less the cost base of the interest.

i) Section 83A-105 provides that Subdivision 83A-C applies and Subdivision 83A-B does not apply to an ESS interest that is a beneficial interest in a share if all of the following conditions are satisfied:

1. Subdivision 83A-B would apart from this section apply to the interest.

2. When the employee acquires the interest they are employed by the company.

3. When the employee acquires the interest all the interests available for acquisition under the employee share scheme relate to ordinary shares.

4. When the employee acquires the interest the predominant business of the company is not the acquisition, sale or holding of shares, securities or other investments.

5. Immediately after the employee acquires the interest they do not hold a beneficial interest in more than 10% of the shares in the company and are not in a position to cast or control the casting of more than 10% of the maximum number of votes that might be cast at a general meeting of the company.

6. At the time you acquire the interest at least 75% of the permanent employees of your employer who have completed at least 3 years of service (whether continuous or non-continuous) with your employer and who are Australian residents are, or at some earlier time had been, entitled to acquire:

● ESS interests under the scheme; or

● ESS interests in your employer; or a holding company of your employer;

● under another employee share scheme.

7. When the employee acquires the interest there is a real risk that under the conditions of the scheme they will forfeit or lose the interest (other than by disposing of it, exercising the right or letting the right lapse) or forfeit or lose the beneficial interest in the share (other than by disposing of it).

j) The Share Plan provides for the granting of ordinary shares in the parent company to the Australian subsidiary's employees and their associates at a discount. Neither the parent company nor any of its subsidiaries is a share trading or investment company. The Trust Deed restricts the amount of ordinary shares issued to any particular employee to a maximum of 10% of the parent company's stock. Accordingly no Australian employee holds or controls the right to cast more that 10% of the votes at an annual general meeting of the parent. Each of your employees have been or will have been entitled to acquire ESS interests under the Share Plans.

k) With six of the seven conditions above satisfied we must consider whether a real risk of forfeiture exists for the shares as required in paragraph 83A-105(3)(a) which states:

i. (b) if the ESS interest is a beneficial interest in a share there is a real risk that, under the conditions of the scheme, you will forfeit or lose the ESS interest (other than by disposing of it).

l) Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009 which inserted Division 83A, explains the real risk of forfeiture test at paragraph 1.156 as follows:

'The 'real risk of forfeiture test' does not require employers to provide schemes in which their employee share scheme benefits are at a significant or substantial risk of being lost. However, real is regarded as something more than a mere possibility. Something is not a real risk if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility. '

m) It is further explained at paragraph 1.158 of the Explanatory Memorandum that the 'real risk of forfeiture' test is intended to provide for deferral of tax when there is a real alignment of interests between the employee and employer, through the employee's benefits being at risk.

n) Real risk of forfeiture in a scheme may include conditions where retention of the ESS interests is subject to performance hurdles or a minimum term of employment. In cases where an employee share scheme has both employment and performance conditions to be met, and one of these conditions satisfies the 'real risk of forfeiture' test, it is not necessary to consider whether the other condition also satisfies the test.

o) Where there is some doubt whether a condition will satisfy the 'real risk of forfeiture' test then the other condition will also be examined.

p) ATO Interpretative Decision ATO ID 2010/61 Income tax: Employee share scheme: real risk of forfeiture-minimum term of employment and good leaver provisions provides the Commissioner's view of when the conditions of a scheme determine that rights will be forfeited. The Commissioner's view espoused in the ATO ID would apply equally where the test is applied to shares. When an employee acquires rights under an employee share scheme, the Commissioner considers that there is a real risk of forfeiture if, under the conditions of the scheme, the employee will forfeit or lose the rights if they cease employment before the vesting date of the rights where that date is 12 months or more from the date the rights were granted. He elaborates on the real risk of forfeiture by stating:

'In considering whether a condition in a scheme imposes a real risk of forfeiture, regard should be had to whether a reasonable person would consider that there is a genuine connection between the forfeiture condition and aligning the interests of the employee and employer. If the risk of forfeiture is over a very short period of time to gain access to a relatively long period of deferral the risk will not be considered real.'

q) The Share Plan does not allow an employee to dispose of the share other than by selling back to You. All shares are non-transferable. The minimum employment condition for vesting will be no less than one year and the performance conditions whilst not yet finalised likely include the following:

1. Business unit profitability

2. Market share achievement

3. Achieving sales targets

4. Achievement of franchisor standards requirements

The above performance conditions may apply and once a grant of shares is made to an employee, a minimum twelve month service period must elapse before the shares will vest. We therefore consider the Share Plan to be a tax-deferred scheme with a real risk of forfeiture.

r) As Subdivision 83A-C applies to the shares granted under the TDSP and Subdivision 83A-B does not apply, participants in the TDSP will need to include in their assessable income the market value of the shares at the deferred taxing point reduced by the cost base of the shares in the income year in which the deferred taxing point occurs in accordance with section 83A-110.

s) Once the employee fulfils the 12 months service condition there is no real risk of forfeiture of the share. However the employee is unable to dispose of the share.

t) Subdivision 83A-C will also apply to a share scheme where all the above necessary conditions are met but instead of the shares being subject to a “real risk of forfeiture”, the shares are acquired under a salary sacrifice arrangement that meets the conditions set down in subsection 83A-105(4)

Salary sacrifice arrangement

u) The Share Plan will also allow employees to salary sacrifice income for shares. As such, section 83A- 105(4) of the ITAA 1997, detailing the “salary sacrifice arrangements” test, should also be considered. The conditions that must be satisfied and the application to You are detailed below.

v) The ESS interest is provided in the following circumstances (section 83A-105(4)(a)):

- the taxpayer agreed to acquire the ESS interest in return for a reduction in salary that would not have otherwise happened, or

- the ESS interest forms part of the employee's remuneration package, and it is reasonable to conclude that the taxpayer's salary would be greater if the ESS interests were a part of the package.

w) As employees of You elect to participate in the salary sacrifice scheme to acquire the shares, and it is participation in this scheme only that results in a reduction of salary, the first condition listed above is satisfied.

x) The following 83A-105(4)(b) conditions at the time the share is acquired are discussed below.

i. The discount equals the market value of the shares

● Under the scheme, You do not require employees to pay any amount to acquire the shares. As such the shares are acquired for nil consideration and this condition is satisfied.

ii. All of the ESS interests available for acquisition under the scheme are ESS interests that satisfy the real risk of forfeiture test in section 83A-105(3) or are beneficial interests in shares, or both.

● The Share Plan only allows shares to be granted to employees. Therefore at any point in time, including the time of acquisition, only shares will be available to be acquired. Although the shares acquired through a salary sacrifice will not be subject to vesting and performance conditions this condition will still be satisfied.

iii. The governing rules of the scheme must expressly state that Subdivision 83A-C applies to the scheme (section 83A-105(4)(b)(iii)).

● The Plan Rules states that the above subdivision applies and therefore satisfies this condition.

iv. The total *market value of the *ESS interests in your employer and any holding company (within the meaning of the Corporations Act 2001) of your employer:

(i) that you acquire during the year under any employee share scheme or schemes; and

(ii) to which both this Subdivision and this subsection apply;

does not exceed $5,000.

● You will allow employees to salary sacrifice up to $5,000 per year under the scheme. Where this limit is enforced the final condition will be satisfied.

y) In summary, all grants made under the Share Plan i.e. those subject to a real risk of forfeiture and those subject to a salary sacrifice agreement, will meet the required tests in section 83A-105(1) and thus all grants made under the Share Plan will be eligible for deferred taxation.

Deferred taxing point

x) The Share Plan restricts the employee from disposing of the non-transferable share for a period from the grant date which may be up to 15 years from the grant date. The test of whether a disposal restriction is genuine is an objective one. Generally where a disposal restriction will only apply until such time as the participating employee requests that the restriction be lifted such a restriction will not be considered to be genuine. However where the restriction would only be lifted in exceptional circumstances it may not prevent the restriction from being considered to be genuine. Where the power to lift any such restrictions is subject to a discretionary power the determination of whether the restriction is genuine will be dependent upon how the restriction is applied in practice.

y) The second deferred taxing point as mentioned in section 83A-115(5) is the time when the employee ceases working for you.

z) Provided that the disposal restrictions are genuine the deferred taxing point will be the earlier of the date when the employee ceases working with you or when the 15 year disposal restriction has ceased.

(b) Is the provision of shares under the Share Plan a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

The provision of shares by You to Your employees under the Share Plan will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA1986.

Detailed reasoning

a) 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.

b) 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'.

c) However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. Paragraph (h) of the definition of 'fringe benefit' states that a fringe benefit does not include:

b. …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.

d) Division 83A will apply, broadly, if an ESS interest is acquired at a discount, under an employee share scheme. If Division 83A applies, then either Subdivision 83A-B or 83A-C will apply.

e) Division 83A-10(1) states that an ESS interest in a company is a beneficial interest in;

c. A share in the company; or

d. A right to acquire a beneficial interest in a share in the company.

f) A participant's beneficial interest in a share will constitute an ESS interest as it constitutes a right to acquire a beneficial interest in a share to be held on their behalf by the Trustee.

g) The term 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 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 ….

in relation to the employees' employment.

h) For the purposes of subsection 83A-10(2) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 defines the term 'scheme' as follows:

(a) any arrangement; or

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

i) Your Share Plan is an employee share scheme as it constitutes an arrangement that is operated in accordance with the Plan Rules and incorporates the use of the EST operated in accordance with the Trust Deed.

j) Under the plan, a share is provided to participants - being employees of You in relation to their employment.

k) The shares will be acquired at a discount as the participants will acquire it for no consideration.

l) The Commissioner accepts that the Share Plan is an employee share scheme that the shares are ESS interests and that Subdivision 83A-B or 83A-C applies to those interests.

m) Accordingly, the acquisition of ESS interests (being the Share) pursuant to the Share Plan 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.

(c) Will You (as the head company of the income tax consolidated group) be eligible for a deduction under section 8-1 of the ITAA 1997 for the irretrievable contributions it makes to the Trustee of the Share Plan Trust (“EST”) in respect of a share granted under the Share Plan?

The irretrievable cash contributions made by You to the Trustee of the Trust to fund the subscription for, or acquisition of off-market shares in You will be deductible under section 8-1.

Detailed reasoning

a) Subsection 701-1(1) of the ITAA 1997 provides that an entity that is a subsidiary member of a consolidated group is taken to be a part of the head company for the period during which it is a member for working out the tax liability or loss of the head company. This is known as the single entity rule.

b) As a consequence of the single entity rule, transactions that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company. That is, they are ignored for the purposes of income tax.

c) Also as a consequence of the single entity rule, the actions and transactions of a subsidiary member are treated as having been undertaken by the head company. Therefore, a transaction carried out by a subsidiary member of the consolidated group with a non-member is taken to be a transaction between the head company of the group and the non-member.

d) Subsection 960-100(3) of the ITAA 1997 provides that a legal person can have a number different capacities in which the person does things, and subsection 960-100(4) of the ITAA 1997 provides that if a provision refers to an entity of a particular kind, it refers to that entity in its capacity as that kind of entity, not to that entity in any other capacity. For example, a provision that refers to a company does not cover a company in its capacity as trustee, unless it also refers to a trustee.

e) Thus, the Company in its capacity as the trustee of the Share Plan Trust is for tax purposes a separate entity from it in its capacity as a company.

f) Subsection 703-15(2) of the ITAA 1997, which lists the types of entities that can be members of a consolidated group does not include an entity in its capacity as a trustee to be a member. Therefore, the Company in its capacity as a trustee cannot be a subsidiary member of the consolidated group.

g) When the Company accepts the payment, it is accepting it in its capacity as the trustee for a non-member and not in its capacity as a company.

h) Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. Broadly, the provision provides an entitlement to a deduction from assessable income for any loss or outgoing, to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, subsection 8-1(2) of the ITAA 1997 prevents such a deduction to the extent that it is a loss or outgoing of capital, or of a capital nature, is a loss or outgoing of a private or a domestic nature, is incurred in gaining or producing exempt income, or is prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

Losses or outgoings

i) Pursuant to the Trust Deed, the Trustee is not obliged to subscribe for or acquire shares in You unless it is provided with all the funds (contributions) required to enable it to subscribe for or acquire shares in You in accordance with the Trust Deed. The Trustee will, in accordance with instructions received pursuant to the Share Plan, acquire, deliver and allocate Your shares for the benefit of participants provided that the Trustee receives sufficient payment to subscribe for or purchase such shares and/or has sufficient unallocated trust shares available. These contributions made to the Trustee by You will be irretrievable and non-refundable. On this basis, it is concluded that the irretrievable contributions made by You or any subsidiary member of Your income tax consolidated group are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997.

Relevant nexus

j) Your purpose in establishing and making irretrievable contributions to the Trustee of the EST is to provide benefits to certain eligible employees in the form of shares in You.

k) All the documentation provided indicates that the contributions are made to the Trustee of the EST solely to enable the Trustee to acquire shares in You for eligible employees of the business.

l) Accordingly, there is a sufficient nexus between the outgoings (contributions made by You) and the derivation of Your assessable 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 and Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147).

Capital or Revenue

m) Contributions will be recurring and be made from time to time to acquire shares to be granted under the Share Plan (in accordance with the Trust Deed and the terms of the Plan). Therefore, to this end, it is concluded that the contributions are not prima facie capital in nature, but rather revenue outgoings incurred by the company in carrying on its business. In support of this conclusion, the Court held in Pridecraft Pty Ltd v Federal Commissioner of Taxation FCAFC 339; 2005 ATC 4001; 58 ATR 210; Spotlight Stores Pty Ltd v Federal Commissioner of Taxation [2004] FCA 650; 2004 ATC 4674; 55 ATR 745 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 confirms the view expressed in ATO ID 2002/1074 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.

Apportionment

n) 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.

o) 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.

p) 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.

q) 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.

r) In this case, the outgoings incurred by You 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

s) 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.

t) Therefore, when You make irretrievable contributions to the Trustee to fund the acquisition of Your shares in accordance with the Trust Deed, those contributions will be an allowable deduction to You under section 8-1.

(d) Will the irretrievable contributions to the EST be deductible in the year of income when the relevant shares are granted to employees and an irretrievable cash contribution has been made to the EST to acquire the shares in You?

a) The deduction for the irretrievable cash contributions under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which You incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.

Section 83A-210 of the ITAA 1997 provides that if:

(a) at a particular time, you provide another entity with money or other property:

i. under an arrangement; and

ii. for the purpose 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 purpose 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.

b) Section 83A-210 of the ITAA 1997 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an 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.

c) As discussed above in Question 2 there is a relevant connection between the contributions provided by You to the Trustee and the acquisitions of shares by the employee under the Share Plan and in relation to their employment. However where the provision of the shares (i.e. the ESS interests) occurs in a later year than that of the contribution to the trust, section 83A-210 will operate to delay the deduction until the income year in which the shares are allocated to the employees.

e) As such the irretrievable contribution by You to the trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which the shares are allocated to the employees.

(e) Will the Commissioner 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 You in respect of the irretrievable cash contributions made by You to the Trustee of the EST to fund the subscription for or acquisition of shares in You by the EST?

The Commissioner will not seek to make a determination under Part IVA of the ITAA 1936 in relation to the scheme.

Detailed reasoning

a) 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 of the ITAA 1936, 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.

The Scheme

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

i. 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

ii. any scheme, plan, proposal, action, course of action or course of conduct

c) It is considered that this definition is sufficiently wide to cover the arrangements including provision of ESS interests under the Share Plan, the creation of the EST (including the Trust Deed), and the payment of the irretrievable cash contributions to the Trustee.

Tax Benefit

d) 'Tax benefit' is defined in subsection 177C(1) of the ITAA 1936 of which the relevant paragraph is:

e) 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:

iii. 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;…

f) In order to determine whether a tax benefit would be derived by You from this scheme, subsections 177CB(2) and (3) of the ITAA 1936 provide that there are two alternate bases on which the existence of a tax effect can be demonstrated, referred to as the annihilation and reconstruction approaches respectively. These approaches are:

b. 177CB(2) A decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme).

c. 177CB(3) A decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme.

g) A decision that a tax effect 'would have' occurred if the scheme had not been entered into or carried out, must be made solely on the basis of a postulate comprising all of the events or circumstances that actually happened or existed, other than those that form part of the scheme (subsection 177CB(2) of the ITAA 1936). When postulating what would have occurred in the absence of the scheme, the scheme must be assumed not to have happened, that is, it must be 'annihilated' or extinguished. However, the alternative postulate must incorporate all the events or circumstances that actually happened or existed.

h) A decision that a deduction 'might reasonably be expected not to have been allowable' if the scheme had not been entered into or carried out, must be made on the basis of a postulate that is a reasonable alternative to the scheme (subsection 177CB(3) of the ITAA 1936). Whether a postulate is a reasonable alternative to a scheme must be worked out having particular regard to the substance of the scheme and its results and consequences for the taxpayer, and disregarding any potential tax results and consequences (see subsection 177CB(4)). This approach (reconstruction) is a way to identify a tax benefit in relation to a scheme that also achieves substantive non-tax results and consequences. In these cases, simply annihilating the scheme would be inconsistent with the non-tax results and consequences sought by the participants in the scheme.

i) Within the above statutory parameters, the Applicant examined predictions of events for the purpose of concluding upon a postulate that is a reasonable alternative to the entering into or carrying out of the Scheme. It stated:

d. Rather than entering into the Scheme, other alternatives include:

Alternative 1: The Taxpayer could remunerate employees via payments of salary, bonuses or superannuation contributions (i.e. cash equivalent amounts based on the value of the Shares) rather than grant Shares. Under this alternative, payments of the additional cash amounts would be deductible to the Taxpayer.

Alternative 2: The Taxpayer could issue new Shares directly to Participants. Under this alternative, the Taxpayer would be entitled to a tax deduction for costs incurred in issuing and transferring the Shares, but is unlikely to receive a deduction for the cost / value of the Shares issued.

j) Accordingly, if You issued new shares directly to participants, You would not receive a deduction for the same amount as under section 8-1 in respect of issuing the shares; any deduction received would be limited to that allowable under section 83A-205. Therefore by using an EST, a tax benefit is created through the greater deduction You would receive under section 8-1 for the irretrievable cash contributions You make to the Trustee.

Dominant purpose

k) Subsection 177D(2) of the ITAA 1936 sets out certain factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit. For Part IVA to apply, subsection 177A(5) of the ITAA 1936 requires the purpose of obtaining a tax benefit to be the 'dominant purpose' for undertaking the scheme.

l) In considering whether Part IVA applies, it is necessary to compare the following factors from paragraph 177D(2)(b) between the scheme as proposed and the relevant alternate action:

(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).

i. The Manner of the Scheme

m) The inclusion of the EST in the scheme does give rise to a tax benefit, but the applicant contends that the presence of the EST provides other commercial benefits.

n) Further, it is noted that the arrangement is not deliberately and intentionally established close to the end of Your income year nor is it intended that You will provide large up-front payments to provide for the EST's operations for several years into the future (as happened in Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210.) Rather, You will fund the EST on a recurring basis as the need arises.

o) The manner of the scheme does not support a dominant purpose of obtaining a tax benefit.

ii. The Form and Substance

p) The substance of the scheme is the provision of remuneration in the form of shares in You to participants who participate in the Share Plan. It takes the form of payments of payments by You to the Trustee who acquires shares in You and transfers them to participants.

q) While existence of the EST confers a tax benefit, it cannot be concluded that it is the only benefit provided as outlined above. You have 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

r) As noted above, the scheme has not been established at a time to provide a substantial year-end deduction to You nor with a contribution sufficiently large to fund the EST for several years, but by recurring (periodic) contributions. 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

s) The result of the scheme is to provide You with allowable deductions for the contributions You make to the Trustee. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of You to achieve a business outcome. You have argued that the Share Plans are an integral part of the overall remuneration strategy of You which are likely to result in improved employee performance and ultimately will improve Your operating performance. This is the intended outcome and 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

t) As noted above, You make irretrievable contributions to the Trustee and those contributions constitute a real expense with the result that Your financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with an EST as part of the scheme than would be the case if You provided shares to participants directly, there is nothing pointing to a dominant purpose of obtaining a tax benefit.

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

u) The contributions by You to the Trustee 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 in You to provide to participants under the Share Plan. You are not a beneficiary of the EST and its contributions cannot be returned to it in any form except where the Trustee acquires shares from You by subscribing for new issues at market value.

v) Therefore, the contributions made by You amount to a real change to the financial position of the Trustee. The financial position of participants in the schemes will also undergo a real change. There is nothing pointing to a dominant purpose of obtaining a tax benefit.

vii. Any Other Consequence

w) Not relevant to this scheme.

viii. The Nature of any Connection between the Company and any Other Persons

x) The relationship between You and the participants of the Share Plan is one of employer/employee. The Trustee is under a fiduciary obligation to act in the interests of the employees who participate in employee share schemes and in particular, in this case, the Share Plan. The contributions made by You to the Trustee are commensurate with Your stated aim of recognising the ongoing ability of employees and their contribution to the long term performance and success of You. There is nothing to suggest that the parties to the employee share scheme are not acting at arm's length to one another. There is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit.

y) Accordingly provided that the scheme as implemented is materially identical to the scheme described in this ruling it is considered that Part IVA of the ITAA 1936 would not apply in respect of your arrangement.

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