Edited version of your written advice

Authorisation Number: 1051261635795

Date of advice: 7 August 2017

Ruling

Subject: Employee Share Trust Scheme

Question 1

Will the provision of Performance Rights and Options by Company A or Employer Entities to employees of Company A or Employer Entities under the Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No.

Question 2

Will the irretrievable payments made by Company A or the Employer Entities to the Trustee, to fund the acquisition by the Trust of Company A shares either on market or via a new subscription of shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer

No.

Question 3

Will the Commissioner make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to Company A or the Employer Entities, by the amount of tax benefit gained from irretrievable payments made by Company A to the Trustee, to fund the acquisition by the Trust of Company A shares either on market or via a new subscription of shares?

Answer

No.

This ruling applies for the following periods:

Fringe benefits tax year ending 31 March 2018

Fringe benefits tax year ending 31 March 2019

Fringe benefits tax year ending 31 March 2020

Fringe benefits tax year ending 31 March 2021

Fringe benefits tax year ending 31 March 2022

Relevant facts and circumstances

1. Company A is an Australian resident company and is the head entity of the Company A income tax consolidated group. It operates employee share plans (the Plans) as part of its remuneration strategy.

2. Company B (the Trustee) is the trustee of Company A Employee Share Trust (the Trust) which will be used to acquire shares to satisfy awards of Performance Rights and Options issued under the Plans.

3. The purpose of the Plans is to reward, retain and motivate employees by providing an opportunity for them to receive shares whilst also aligning them to the long-term goals of the organisation and the creation of shareholder value.

4. The commercial reasons for establishing the Trust include:

● The use of an Employee Share Trust arrangement is sanctioned by the income tax law if the Trust is used for the sole purpose described in subsection 130-85(4) of the Income Tax Assessment Act 1997 (ITAA 1997).

● The provision of Company A shares and acquisition by the Trustee on behalf of the Trust assists Company A with meeting its Corporations Law requirements in relation to dealing in its own shares.

● Allows Company A to outsource the operation of its Plans to a licensed Trustee.

● Allows for the operation of disposal restrictions on the Company A shares that vest through the Plans.

● The Trust forms part of Company A’s wider capital management policy and provides capital management flexibility by allowing for on market purchases of shares using cash or a new issue of shares by Company A where cash is retained.

● The Trust provides Company A with an efficient mechanism for the administration and operation of any new employee incentive plans which it introduces in the future.

5. The participants in the Plans are employees and executives (Participants) of Company A and its wholly owned Australian subsidiaries (Employee Entities).

6. Employees and executives (including their associates) of Company A’s non-resident subsidiaries will not be Participants in the Plans.

7. All dealings between the Participants, Employer Entities and the Trustee which are conducted in accordance with the rules set out in the Plans and Trust Deed are at arms-length.

8. Under the Plans, eligible employees (Participants) are granted Rights or Options to acquire Company A shares subject to certain conditions are met.

9. The Plans broadly operates as follows:

● The Plans allows Company A to grant Performance Rights and Options to eligible employees to acquire Shares for nil consideration subject to Vesting Conditions as determined by the Board in its absolute discretion and as specified in the Offer for the Performance Right or Option.

● It is at the absolute discretion of the Board of Company A to extend an invitation to grant Performance Rights or Options to eligible employees.

● Accordingly, once all conditions on the Performance Rights or Options, as determined by the Board have been satisfied, the vested Performance Rights or Options may be exercised and Company A will instruct the Trustee to allocate Shares to the Participant’s share account.

10. Company A is not a beneficiary of the Trust and it has no interest in the shares held by the Trustee.

11. The Trust will operate as follows:

● The Trust will be managed and administered so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997).

● The Trust will be funded by irretrievable contributions from Company A and the Employee Entities for the purchase of Company A shares in accordance with the Plans.

● The funds contributed will be used by the Trustee to acquire Company A shares either on-market or via a subscription for new shares in Company A, based on written instructions from Company A.

● When the Trustee allocates Shares to the Participants share account, the shares will be held as Allocated Shares. At this point, the Participant becomes a beneficial owner of the Shares and is entitled to receive cash dividends in respect of the Shares held by the Trustee on behalf of the Participant.

● Any dividend income received by the Trustee on Unallocated Shares would be treated as assessable income and taxed in the hands of the trustee.

● The Trustee can use the after tax proceeds from dividends received on Unallocated Shares to purchase additional shares in future.

● A dividend on Unallocated Shares cannot be paid to Company A.

● The Trustee cannot pay dividends to participants on Unallocated Shares on the basis there is no present entitlement.

12. The irretrievable payments can be made by Company A (or the Employee Entities) to the Trust in respect to all the following scenarios:

● Before or at the same time as the acquisitions of relevant Performance Rights or Options by the Participant and for the purpose of satisfying acquisitions made in the same income year.

● Before the acquisitions of relevant Performance Rights or Options by the Participant and for the purpose of satisfying acquisitions to be made in a future income year (i.e. in excess of the number required to satisfy acquisitions made in the year of income)

● After the acquisitions of relevant Performance Rights or Options by the Participant.

13. Company A will incur various costs in relation to the implementation and on-going administration of the Trust. For example, Company A will incur costs associated with the services provided by the Trustee, including but not limited to:

● Employee plan record keeping;

● Production and dispatch of holding statements to employees;

● Provision of annual income tax return information for employees;

● Costs incurred in the acquisition of shares on market (e.g. brokerage costs and the allocation of such shares to participants);

● Management of employee termination; and

● Other trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust.

14. Company A may pay to the Trustee from its own resources any fees, commissions or remuneration and may reimburse such expenses incurred by the Trustee as Company and the Trustee may agree from time to time

15. In addition to the services to be provided by the Trustee, Company A has incurred and will incur various costs, including the services provided by Company A’s accounting and legal advisors.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

All references below are to the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) unless otherwise stated.

Questions 1 to 3

Single entity rule and the FBTAA 1986

The single entity rule in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) has no application to the FBTAA 1986. Accordingly, the Commissioner has provided a ruling to Company A and the Employer Entities in relation to questions 1 to 3 below.

Question 1

The provision of a Performance Right or Option under any of the Plans will not be subject to FBT on basis that the Performance Right or Option is acquired by Participants under an employee share scheme (to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies) and is thereby excluded from being a fringe benefit by virtue of paragraph 136(1)(h) of the definition of 'fringe benefit’ in the FBTAA.

The benefit that arises to an employee upon the exercise of a vested right under one of the Plans (being the provision of an ordinary share in Company A) will not give rise to a 'fringe benefit’ as defined in subsection 136(1) because a benefit has not been provided 'in respect of’ the employment of the employee.

Therefore the provision of Performance Rights and Options by Company A or Employer Entities to employees of Company A or Company A Employer Entities under the Plans will not be a fringe benefit within the meaning of subsection 136(1).

Question 2

The Trust satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 as:

● the Trust acquires ordinary shares in a company (being Company A);

● the Trust ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the Trust Deed and Plans; and

● the Trust Deed does not permit the Trustee to participate in any activities which are not considered to be merely incidental to a function of administering the Trust.

Paragraph 136(1)(ha) of the definition of fringe benefit in the FBTAA 1986 therefore excludes the irretrievable contributions received by the Trustee from being a fringe benefit.

Accordingly, the irretrievable cash payments made by Company A or the Employer Entities to the Trustee to fund the acquisition by the Trust of Company A ordinary shares either on market or via a new subscription of shares will not constitute a fringe benefit within the meaning of subsection 136(1).

Question 3

The provision of benefits to the Trustee as irretrievable cash contributions to the Trust, and to Participants as rights (Performance Rights or Options) under the Plans (and the Company A shares received on their vesting) are excluded from the definition of a fringe benefit for the reasons given in questions 1 and 2 above.

As these benefits have been excluded from the definition of a fringe benefit, no fringe benefit arises and no fringe benefits tax will be payable by using the ESS Trust arrangement. As there would be no fringe benefits tax payable without the use of the ESS Trust (and nor likely that fringe benefits tax would be payable under alternative remuneration plans), the fringe benefits tax 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 applies to increase the aggregate fringe benefits amount of Company A, or the Employer Entities, by the amount of the tax benefit gained from the irretrievable cash payments made to the Trustee, to fund the acquisition by the Trust of Company A shares either on market or via a new subscription of shares.

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