Edited version of your written advice

Authorisation Number: 1051389857113

Date of advice: 27 June 2018

Ruling

Subject: Employee share scheme – company

Question 1

Will the Company obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by the Company to the Trustee of an employee share trust to fund the subscription for, or acquisition on-market of, the Company’s shares by the Trustee to satisfy the Awards issued under the Plan?

Answer

Yes.

Question 2

Will the Company obtain an income tax deduction pursuant to section 8-1 of the ITAA 1997 in respect of the costs incurred in relation to the on-going administration of the Plan and the Trust?

Answer

Yes.

Question 3

If the contributions are made in the same income year or an income year after the income year in which the employee acquired the relevant employee share scheme interest, will the contributions made by the company to the Trustee of the Trust to fund the acquisition of the Awards be deductible by the company at a time determined by section 83A-210 of the ITAA 1997?

Answer

No.

Question 4

Will the Commissioner make a determination under section 177F that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for, or acquisition on-market of, the Company's shares by the Trustee to satisfy the Awards or costs incurred by the Company in relation to the on-going administration of the Plan and the Trust?

Answer

No.

Question 5

Is the provision of a Right, Option or Share in satisfaction of an Award to an employee under the Plan a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)

Answer

No.

Question 6

Will the contribution of funds by the Company to the Trust in order to subscribe for or acquire on-market the Company shares be a fringe benefit within the meaning of that term in subsection 136(1) of the FBTAA?

Answer

No.

Relevant facts and circumstances

1. The taxpayer is a company listed on the Australian Securities Exchange (ASX).

The Equity Incentive Plan (“the Plan”)

2. The Company established the Plan to remunerate eligible employees with equity based compensation and align the interests of employees more closely with the interests of shareholders.

3. The Plan is available by invitation only to selected senior executives and other employees (Participants) who, through management and conduct of the Company’s business operations, directly generate assessable Australian income for the Company.

4. Under the Plan, Company employees may be eligible to Plan Awards (“Awards”).

5. The Plan is administered by the Board of the Company in accordance with the Plan.

6. The key attributes of the Plan for the purposes of this ruling are:

● Trust funds - both the initial settlement and any additional contributions made – cannot be refunded, repaid or returned to any Company other than by way of the Trustee paying the issue price where it subscribes for Shares in the Company.

● Awards are granted to Participants by the Board in its absolute discretion and upon such additional terms and Vesting Conditions as the Board determines.

● for eligible employees, vesting of their Awards is generally subject to performance against financial and/or non-financial performance conditions as well as requirements to remain employed with the Company for a specified period of time.

● the amount payable upon vesting and conversion of a Right under the Plan is nil.

● the amount payable (i.e. Exercise Price) upon vesting and conversion of an Option will be determined by the Board at the time the Option is granted.

● after vesting of Awards, the Trustee will transfer ownership of the requisite number of Shares to the Participant.

● Participants will not be restricted in relation to their shareholding once transfer has occurred other than in accordance with the Company’s share trading policy.

● the Trustee has the authority to acquire Shares, as instructed by the Company, for the purpose of satisfying grants made pursuant to the rules of the Plan by way of an on-market purchase of Shares in the Company, subscription for Shares in the Company, or through a combination of both.

● the Company will not have any legal or beneficial entitlement to any of the Shares forming part of the Trust fund at any time, and may not acquire such an interest.

● the Trustee can, if required, acquire and hold Shares in the Company as Unallocated Shares, i.e. Shares which are not allocated to a Trust Participant and to which no Participant has a beneficial entitlement at the time of purchase.

● the Trustee has the discretion to use any capital receipts, dividends, distributions or other entitlements received in respect of any Unallocated Shares to acquire more Shares to allocate to Participants, or to distribute to beneficiaries of the Trust prior to final allocation of those Shares.

● to the extent that there is no one presently entitled to the income of the Trust, the Trustee will pay tax on this income.

● Shares held in the Trust are registered in the name of the Trustee. This will continue until either transfer of legal title to a Participant in accordance with the Trust Deed, or disposal on behalf of the Participant in accordance with the Trust Deed.

● transfer of the legal title to a Share held by the Trust can only occur upon the date when one of the following events occurs:

● transfer of legal title is required or permitted under the Trust Rules; or

● the Trust is terminated.

● the Trustee does not have the power to do anything that may cause the Trust to fail to meet the definition of an Employee Share Trust in section 130-85(4) of the ITAA97.

7. The Purpose of the Plan is to allow the Board to make Offers to Eligible Employee to acquire securities in the Company and to otherwise incentives employees.

8. The Plan provides that the Company may, from time to time, in its absolute discretion invite eligible employees to participate in a grant of Incentive Securities, which may comprise any one or more Awards.

9. The Plan provides that the Board will advise each Eligible Employee of the following minimum information in connection with an Offer:

● the type or types of Incentive Securities being offered;

● the number of Incentive Securities being offered, or the method by which the number will be calculated;

● the amount (if any) that will be payable for the grant of Incentive Securities;

● any Vesting Conditions or other conditions that apply, including any Vesting Period;

● when Incentive Securities may Vest;

● the procedure for exercising an Option (including any Exercise Price that will be payable) following Vesting and the period(s) during which it may be exercised;

● where the Board has made a determination pursuant to rules

● the circumstances in which the Rights and/or Options will lapse;

● the circumstances in which the Shares allocated to Eligible Employee

● how Incentive Securities may be treated in the event that the Eligible Employee ceases employment

● any restrictions on dealing in relation to a Restricted Share or Share allocated to the Eligible Employee

● any circumstances in which a Participant’s entitlement to Incentive Securities may be reduced or extinguished pursuant to rule 6(b).

10. Where an Eligible Employee has accepted an Offer to participate in a grant of Awards, the Plan respectively provides that unless the Board determines otherwise, no payment is required for the grant of the Award.

11. The Plan provides that an Award will vest to the extent that Performance Conditions are met during the Performance Period.

12. Shares issued under the Plan will rank equally in all respect with other Shares for the time being on issued by the Company.

13. The Participant is entitled to receive all dividends and other distributions or benefits payable to the Participant or to the Trustee in respect of the Shares.

The Employee Share Trust (the Trust)

14. Pursuant to the Trust Deed, the Company established the Trust for the purpose of obtaining and administering Shares for the benefit of employees participating in the Plan. It is also intended that the Trust will be available to facilitate the requirements of any future equity plans that Company implements.

15. The Plan Rules, together with the Trust Deed, set out the requirements and circumstances under which the Company can issue Awards to Participants, as well as the Trustee’s rights and obligations in administering the Trust in execution of the Plan.

16. The powers and activities of the Trustee are limited by a clause of the Trust Deed which provides that

The Company and the Plan Trustee agree that the Trust will be managed and administered so that it satisfies the definition of ‘employee share trust’ for the purposes of section 130-85(4) of the ITAA 1997.

17. The Trust Deed states that the company must pay all Trust Expenses. The Trust Deed provides that the Plan Trustee is not entitled to receive from the Trust any remuneration in respect of its performance of its obligations as trustee of the Trust. The Company must pay to the Plan Trustee, from the Company’s own resources, such fees and reimburse such expenses incurred by the Plan Trustee as the Company and the Plan Trustee agree in writing.

18. The Participant is entitled to receive all dividends and other distributions or benefits payable to the Participant or to the Trustee in respect of the Shares.

19. The Company incurred some costs in relation to the on-going administration of the Plan and the Trust. The Trust Deed provides that the Company must pay all Trust expenses.

20. The Trustee’s actions to purchase Shares on market, or subscribe for new Shares in the Company will take into consideration the Corporations Act requirements and the Trustee Act 1925 (NSW) requirements and at all times the Trustee will make decisions in accordance with the terms of the Trust Deed, the rules of the Plan and in fulfilment of the Trustee’s fiduciary duty to beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-5

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

Income Tax Assessment Act 1997 section 83A-20

Income Tax Assessment Act 1997 section 83A-210

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

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

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Question 1

Subsection 8-1(1) of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing the employer’s assessable income; or

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

However, under subsection 8-1(2) of the ITAA 1997, an employer cannot deduct a loss or outgoing under this section to the extent that:

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

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing the employer’s exempt income or non-assessable non-exempt income;

(d) a provision of ITAA 1997 or Income Tax Assessment Act 1936 (ITAA 1936) prevents the employer from deducting the amount.

According to the Plan Rules and the Trust Deed, the way in which the Trust has been established and operates appears consistent with an ERT arrangement.

An employer is entitled to a deduction under section 8-1 of the ITAA 1997 for an irretrievable cash contribution made to the trustee of an ERT where it is either:

● incurred in gaining or producing assessable income (‘first limb’) or

● necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (‘second limb’)

to the extent the contribution is not private or domestic in nature, is not of capital or of a capital nature, does not relate to the earning of exempt income or non-assessable non-exempt income and deductibility is not precluded by another provision of the ITAA 1997 or the ITAA 1936.

Contribution must be incurred

To qualify for a deduction under section 8-1 of the ITAA 1997, a contribution to the trustee of an ERT must be incurred.

A contribution is incurred only when the ownership of that contribution passes from an employer to the trustee of the ERT and there is no circumstance in which the employer can retrieve any of the contribution – Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339 (Pridecraft) and Spotlight Stores Pty Ltd & Anor v. FC of T [2004] FCA 650 (Spotlight) (paragraph 76 of TR 2017/D5).

In the present case, the Company has established an employee share trust (the Trust) under the terms of the Trust Deed. The Trust is being established for the purpose of acquiring and holding Plan Shares and holding any other Trust Property for the benefit of Participants in accordance with the Trust Deed.

In accordance with the Trust Deed, the Company will make contributions to the Trust to allow the Trustee to purchase Shares on market or to subscribe for new Shares to allow Awards under the Plan to be satisfied. The Trust Deed does not confer on the Company any security interest, proprietary right or proprietary interest (whether legal or beneficial) in Shares acquired by the Trustee under the Trust Deed. The Trust Deed makes it clear that the contributions are irretrievable.

Accordingly, the contributions made by the Company to the Trust will be irretrievable and non-refundable to the Company. Therefore, it is considered that the irretrievable contributions made by the Company to the Trustee of the Trust will be incurred for the purposes of section 8-1(1) of the ITAA 1997.

Contribution must be incurred in gaining or producing assessable income or necessarily incurred in carrying on a relevant business

Further, to be deductible under section 8-1 of the ITAA 1997, a contribution must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. In order to satisfy the second limb of section 8-1 of the ITAA 1997, there must be a relevant connection between the outgoing and the business. An outgoing will have the relevant connection with business when it is ‘desirable or appropriate in the pursuit of the business ends of the business’ (Ronpibon Tin NL and Tongkah Compound NL v. FC of T (1949) 78 CLR 47 (Ronpibon) and Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation (1980) FCA 150 (Magna Alloys).

A contribution will be desirable or appropriate in the pursuit of the business ends of the business where the employer reasonably expects the business of the employer to benefit in the form of improved employee performance, morale, efficiency or loyalty.

The Company is carrying on an income producing business and has engaged employees in the ordinary course of its business. The Company introduced the Plan as part of its remuneration arrangement to incentivise both senior executives and other eligible employees. Awards granted under the Trust will only vest when the Vesting Conditions are met subject to expiry conditions.

Awards are offered to selected employees by invitation only to participate under the Plan in recognition of their seniority and importance to the success of the Company.

The purpose of the Trust is to provide employees with an incentive plan which recognises their ongoing contribution to the achievement by the Company of its financial and strategic goals and to encourage Participants to improve the performance of the Company and its total return to Shareholders and to provide a means of attracting and retaining skilled and experienced employees.

The irretrievable cash contributions by the Company to the Trustee of the Trust are part of the overall employee remuneration costs of the Company for the long term success of the Company. There is a sufficient connection between the Company‘s contributions and the benefits to be derived by the business for the purposes of subsection 8-1(1) of the ITAA 1997. This is consistent with the view taken 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.

Contribution must not be capital or of a capital nature

Notwithstanding that the positive limbs of subsection 8-1(1) have been satisfied, a deduction is not available if the relevant contribution to the Trust is capital or capital in nature under subsection 8-1(2).

On weighing up the facts and circumstances of this case, it is considered that the contributions by the Company to the Trustee of the Trust are revenue in nature.

Therefore, the contributions made by the Company are not considered capital in nature, or any capital component is small or trifling such that the Commissioner would not seek to apportion the deduction.

No other provision of the ITAA 1936 or ITAA 1997 prevents the Company from deduction of the contribution.

Accordingly, the irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the acquisition of shares to satisfy the Awards issued under the Plan will be an allowable deduction to the Company under section 8-1 of the ITAA 1997.

Question 2

As discussed in Question 1, the Company is entitled to a deduction under section 8-1 of the ITAA 1997 for any loss or outgoing necessarily incurred in carrying on its business for the purpose of gaining or producing its assessable income to the extent they are not capital or capital in nature.

The Company will incur various costs in relation to the on-going administration of the Trust. In accordance with the Trust Deed, the Company must pay all Trust expenses.

The Trust was established to facilitate the operation of the Plan which is an integral component of the Company’s key employee remuneration strategy. The costs incurred for the purpose of administering the Trust form part of the ordinary employee remuneration costs. They are costs necessarily incurred by the Company in carrying on its business for the purpose of gaining or producing its assessable income. The costs are revenue and not capital or capital in nature on the basis that they are regular and recurrent employment expenses.

The view that the costs incurred by the Company are deductible under section 8-1 of the ITAA 1997 is consistent with ATO Interpretative Decision ATO ID 2014/42 Income Tax: employer costs for the purpose of administering its employee share scheme are deductible (ATO ID 2014/42) in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer.

Accordingly, the Company will obtain income tax deductions pursuant to sections 8-1 in respect of costs incurred in relation to the on-going administration of the Trust.

Question 3

As determined under question 1, the provision of money to the Trustee of the Trust by the Company for the purpose of remunerating its employees under the Plan is an outgoing in carrying on the business and is deductible under section 8-1 of the ITAA 1997.

The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.Section 83A-210 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 purposes of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and

(b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest;

then, for the purposes of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time.

Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by a Participant under the Plan, in relation to the Participant's employment.

An ‘arrangement’ is defined in section 995-1 of the ITAA 1997 as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

The implementation of the Plan and the establishment of the Trust constitute an ‘arrangement’ for the purposes of subparagraph 83A-210(a)(i) of the ITAA 1997.

An ‘ESS interest’ in a company is defined in subsection 83A-10(1) of the ITAA 1997 as a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. The Awards granted to Participants under the Plan are ESS interests for the purposes of subsection 83A-10(1) of the ITAA 1997 as they are a right to acquire a beneficial interest in a share in 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, or associates of employees (including past or prospective employees) of the company; or subsidiaries or the company in relation to the employees’ employment.

The Plan is an employee share scheme under which Awards are granted to Participants in relation to their employment. Under the Plan, Awards are granted by to Participants upon acceptance of an offer to participate in the Plan that is given to the Participant by the Company.

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

The provision of money to the Trustee necessarily allows the scheme to proceed. The Company will provide money to the Trustee of the Trust to enable the Trustee to acquire shares for the purposes of satisfying the grant of Awards under the Plan. As noted above, the Awards are ESS interests which the Participants will acquire upon being granted them by the Company. The acquisition time for the purposes of section 83A-210 of the ITAA 1997 occurs when the Awards are granted to the Participants.

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

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

Question 4

Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision.

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-avoidance Rules (PSLA 2005/24) deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936.

Part IVA gives the Commissioner the power to cancel a ‘tax benefit’ that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This power is found in subsection 177F(1) of the ITAA 1936.

Before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are:

● there must be a scheme within the meaning of section 177A of the ITAA 1936;

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

● having regard to the matters in paragraph 177D(2) of the ITAA 1936, the scheme is one to which Part IVA applies.

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

Question 5

A liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA 1986 which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer in a year of tax. The fringe benefits taxable amount is calculated under the FBTAA 1986 by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a fringe benefit is provided.

As far as is relevant in this case, the term ‘fringe benefit’ is defined in subsection 136(1) of the FBTAA 1986 to mean benefits provided by an employer, to employees, in respect of the employment of the employee.

Paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include:

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

The terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10 of the ITAA 1997.

The Commissioner accepts that the Plan described in the applicant's private ruling application is an employee share scheme under which relevant ESS interests are acquired by employees of the Company, and the acquisition of those ESS interests are in relation to those employees' employment. The Shares acquired by the Trustee under the Plan to satisfy Awards to acquire Shares are also provided to employees under that same employee share scheme.

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

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

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

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

Therefore, the providing of these Shares will not be specifically excluded from the definition of 'fringe benefit' under paragraph (h) of the definition in subsection 136(1) of the FBTAA. Essentially, this means that Shares granted under the Plan, to satisfy Rights or Options, are not ESS interests acquired under an employee share scheme.

Consequently, the acquisition of the Shares is not excluded from being a fringe benefit by virtue of the definition of fringe benefit in subsection 136(1) of the FBTAA. However, for a benefit to be a fringe benefit, it must be provided in respect of the employment of the employee.

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

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

The situation is similar to that which existed in FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The full Federal Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.

When an employee accepts an offer to participate in the Plan, they obtain a right to acquire a beneficial interest in a Share in the Company and this right constitutes an ESS interest. When this right is subsequently exercised or satisfied, any benefit received would be in respect of the exercise of the right, and not in respect of employment.

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

Question 6

Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include:

a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997);

Subsection 130-85(4) of the ITAA 1997 states:

An employee share trust, for an employee share scheme, is a trust whose sole activities are:

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

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

(i) the company; or

(ii) a subsidiary of the company; and

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

Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

● the Trust acquires Shares in the Company; and

● the Awards are ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of the Company) are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust Deed and the Plan Rules.

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

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental, as set out in ATO ID 2010/108 Income Tax – Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities, include:

● the opening and operation of a bank account to facilitate the receipt and payment of money

● the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee

● the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme

● dealing with shares forfeited under an employee share scheme including the sale the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme

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

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

● receiving and immediately distributing shares under a demerger.

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

For the purpose of the Trust the powers of the Trustee are set out under the Trust Deed. The Trust Deed specifically states that “… the Trust will be managed and administered so that it satisfies the definition of ‘employee share trust’ for the purposes of section 130-85(4) of the ITAA 1997”. These terms collectively make it clear that the Trustee can only use the contributions received exclusively for the acquisition of Shares for eligible employees in accordance with the Plan. To this end, all other duties or general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the Shares for the sole benefit of Participants in accordance with the Plan.

Therefore, the Trust is an employee share trust as the activities of the Trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 as concluded above, and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Accordingly, as paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 excludes the contributions to the Trustee of the Trust from being a fringe benefit, the Company will not be required to pay FBT in respect of irretrievable cash contributions made to the Trustee of the EST to fund the acquisition of Shares in accordance with the Trust Deed.

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