Edited version of private advice

Authorisation Number: 1051787728477

Date of advice: 7 December 2020

Ruling

Subject: Employee share trust - deductions and fringe benefits

Question 1

Is the Company entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made to the Trustee of the Employee Share Trust (the Trustee) to fund the subscription for, or acquisition of, shares under the Company Executive Rights and Options Plan and the Company Employee Share Option Plan (the Plans)?

Answer

Yes.

Question 2

Is the Company entitled to a deduction under section 8-1 of the ITAA 1997 for the costs it incurs, other than those which are capital in nature, in relation to the implementation and on-going administration of the Trust?

Answer

Yes.

Question 3

Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction under section 8-1 of the ITAA 1997 claimed by the Company in respect of:

a)    irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, the Company's shares by the Trustee to satisfy the rights granted under the Plans; or

b)    costs incurred by the Company in relation to the implementation and on-going administration of the Plans and the Trust?

Answer

No.

Question 4

Will the irretrievable cash contributions made by you to fund the subscription for, or acquisition of your shares by the Trustee of the Trust constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

Will the provision of ESS interests to your employees under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

This ruling applies for the following period: XXXX

Relevant facts and circumstances

The Company) is an Australian resident company.

The Plans

The Company has established the Employee Share Option Plan and the Executive Rights and Options Plan (the Plans), as part of its remuneration strategy:

The Company Employee Share Option Plan is effective from XXXX, and is open to an eligible employee, i.e. a full-time or part-time employee of the Company and its subsidiaries (a Group Company), including a director of a Group Company holding a salaried employment in any Group Company, whom the Board determines is to receive an offer of an option to subscribe for a fully paid ordinary share in the Company (Share).

The Company Executive Rights and Options Plan is effective from XXXX and is open to an eligible person, i.e. a full time or part-time employee (including executive directors but excluding non-executive directors), a part-time employee of a Group Company or a contractor to a Group Company or a person who will prospectively fill one of the foregoing roles, who are invited to make an application for a right or option that entitles them to a fully paid ordinary share in the Company when the that right or option is validly exercised.

The vesting or exercise of options or rights held by the eligible employee or eligible person (the Participant) under the Plans is subject to relevant conditions and periods.

The purpose of the Plans:

The Company Executive Rights and Options Plan

•         enable the Company to provide variable remuneration that is performance focussed and linked to long-term value creation for shareholders;

•         enable the Company to compete effectively for the calibre of talent required for it to be successful;

•         ensure that Participants have commonly shared goals; and

•         assist Participants to become Shareholders.

The Company Employee Share Option Plan

•         provide a means by which eligible employees can participate in the future growth and profitability of the Group;

•         provide an incentive to eligible employees to contribute to the growth and profitability of the Group; and

•         provide a means to attract and retain a high quality of employees;

by providing eligible employees with the opportunity to acquire options, and ultimately shares, in accordance with these rules.

The Employee Share Trust Deed (including the Variation to the Trust Deed)

The Company established the Employee Share Trust (the Trust) and executed the trust deed (the Trust Deed).

The purpose of the Trust is to facilitate the allocation of Shares to Participants upon the exercise of options or rights under the Plans for the benefit of the Participants as beneficiaries of the Trust.

The Company will pay all expenses, costs, fees and charges incurred in establishing and operating the Trust.

The Trustee has agreed to act as the first trustee of the Trust and to receive funds from the Company and apply the funds in accordance with the Trust Deed and to deal with any shares in the Company held in the Trust as set out in the Trust Deed.

Contributions must be used by the Trustee to acquire Shares in the ordinary course of trading on the ASX or by off-market purchase or to subscribe for new Shares issued by the Company, as directed from time to time by the Board. Under no circumstances may the Trustee repay to the Company or any Associated Company any amount received as contributions for the subscription or acquisition of Shares.

The Trustee will allocate the beneficial interest in the Shares to Participants as required under the Deed and by the Plan Rules to the extent that they are relevant to the Trustee. The Plan Trustee shall ensure that each Share held for the benefit of a Participant is identified in the books and records of the Trust as being held on account of that Participant.

The assets, investments and other property of the Trust will be vested in the Trustee upon trust for the benefit of the Participants, to be applied in accordance with the provisions of this Deed.

The Company has no proprietary right or interest, charge or lien in the Company shares acquired by the Trustee in accordance with the Trust Deed. No member of the Group (the Company and its Associated Entities) has, or is able to acquire, a beneficial interest in the assets of the Trust.

The Trustee must not levy any fees or charges for operating or administering the Plan

or the Trust, either payable directly by Participants or indirectly out of the assets of the Plan or the Trust.

Subject to the Trust Deed, the Trustee has the power to do all acts, matters and things that in its reasonable opinion are necessary, expedient or desirable to give effect to, and to carry out the trusts, authorities, powers and discretions conferred upon the Trustee, having regard to all acts and things which the trustee is required to do or may do under Trust Deed and the Plans Rules for the sole purpose of administering the Plans, and the powers conferred on the Trustee may only be exercised for the purposes of the Trust and the Plans.

The Trustee is not entitled to receive from the Trust any fees, commission or other remuneration in respect of its office.

The Company will indemnify the Trustee for liabilities incurred by the Trustee and claims made against the Trustee in connection with the performance of its functions under the Deed.

The Plan Trustee must not hold fractions of Shares. Any Shares remaining after the allocation of whole Shares to a Participant may be retained by the Plan Trustee pending future allocation when Plan Shares are exercised and are to be settled in Shares. If the Plan Trustee sells Shares then under no circumstances may the Plan Trustee pay these proceeds of sale or other remaining funds to the Company or any Associated Company.

Additional funds that are derived through unallocated Shares need to be applied for the purpose of the Trust, i.e. to acquire shares and allocate them to Participants in satisfaction of their options and rights.

If the Trust terminates, any residual capital amounts must be applied to a provident, benefit or superannuation or retirement fund established or maintained by the Company or in any other manner that would not result in the Trust ceasing to be an "Employee Share Trust" within the meaning of section 995-1 of the ITAA 1997. On termination of the Trust, no amount can be paid to the benefit of the Company.

The scheme includes the granting of the rights or options under the Plans, the provision of funds to the Trust and the acquisition and allocation of Shares by the Trustee to satisfy the rights or options all being interrelated components of an employee share scheme to which Division 83A of the ITAA 1997 will apply.

This scheme description incorporates, and should be read with, the following documents:

•         The Rules for the Plans;

•         The Trust Deed (as amended).

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA,

Income Tax Assessment Act 1936 section 177A,

Income Tax Assessment Act 1936 subsection 177D(2),

Income Tax Assessment Act 1936 subsection 177F(1),

Income Tax Assessment Act 1997 section 8-1,

Income Tax Assessment Act 1997 Division 83A,

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 83A-340

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

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

Fringe Benefits Tax Assessment Act 1986 paragraph (f) of subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 paragraph (h) of subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 paragraph (ha) of subsection 136(1)

Reasons for decision

Question 1

Summary

Irretrievable contributions made by the Company to the Trustee are deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

An employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an employee share trust that is either:

•         incurred in gaining or producing assessable income ('first limb') or

•         necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income ('second limb').

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

Contribution to the trustee of an employee share trust

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

In broad terms, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance (TR 94/26).

A contribution made to the trustee of an employee share trust is incurred only when the ownership of that contribution passes from an employer to the trustee of the employee share trust and there is no circumstance in which the employer can retrieve any of the contribution - Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339 (Pridecraft); Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650 (Spotlight).

The Company will establish the Trust under the terms of the Trust Deed. The Trust's purpose is to acquire Company Shares for the benefit of eligible employees or eligible persons and otherwise facilitating the operation and implementation of the Plans.

The Company will make irretrievable contributions to the Trust to allow the Trustee to purchase Shares in the Company or subscribe for new Shares issued by the Company to allow options and rights under the Plans to be satisfied. Under the Trust Deed, contributions made by the Company to the Trustee are not repayable to the Company and the Company can make no claim for return of the contributions. The Trust Deed does not otherwise confer on the Company any interest in the property of the Trust.

Therefore, it is considered the contributions made to the Trust by the Company will be incurred at the time the contributions are made.

For the purpose of gaining or producing assessable income

Further, to be deductible under section 8-1 of the ITAA 1997, a contribution must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

In order to satisfy the second limb of section 8-1 of the ITAA 1997, there must be a relevant connection between the outgoing and the business. An expense will have the relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' (Ronpibon Tin NL and Tongkah Compound NL v. FC of T (1949) 78 CLR 47 (Ronpibon); Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation (1980) 49 FLR 183 (Magna Alloys)).

Taxation Ruling TR 2018/7 Income Tax: employee remuneration trusts sets out the Commissioner's current view on a broad scope of taxation consequences for employers, trustees and employees who participate in an employee remuneration trust arrangement (ERT). It explains how the taxation law applies when a contribution is made by an employer to the trustee of an ERT and benefits paid or provided by the trustee of the ERT to employees.

The way in which the Trust has been established and operates is in line with the elements of an ERT arrangement - relevantly, a trust being established to facilitate the provision of benefits to employees of an employer. The trustee provides the benefits at the direction of, or by arrangement with, the employer. It is a trust that obtains shares in a company to satisfy the exercise of rights or options acquired under an employee share scheme and on exercise allocates and holds those shares for the benefit of employees of the company. Although, TR 2018/7 does not apply to employee share schemes where either Subdivision 83A-B or Subdivision 83A-C of the ITAA 1997 applies, the principles discussed regarding the deductibility of contributions are equally applicable.

Paragraph 9 of TR 2018/7 explains that a contribution is deductible to the employer under section 8-1 of the ITAA 1997 where all of the following apply:

•         it is an irrevocable payment of cash, made at a time when the employer carries on a business for the purpose of gaining or producing assessable income

•         it is made because the employer reasonably expects their business to benefit from the contribution via an improvement in employee performance, morale, efficiency or loyalty, and

•         it is intended to be permanently and entirely dissipated in remunerating employees of that business within a relatively short period of the contribution being made (other than employees who are engaged in affairs of capital of the business).

Paragraph 10 of TR 2018/7 sets out the considerations that are relevant to establishing a sufficient connection between a contribution and the benefit to the employer's business such that the expenditure may be deductible:

•         the nature and timing of the benefits to be derived by the employer and the employees

•         employee awareness of the scheme, and

•         whether the scheme and the contribution addresses (or has the capacity to address) the business-related need, function or complaint.

The Company is carrying on a business and when it makes a contribution to the Trust, its primary purpose is for the contribution to be applied to the acquisition of Shares to be held for, and allocated to, employees to satisfy the exercise of rights or options granted to the Participants under the Plans as remuneration. The granting of the rights or options under the Plans, the provision of funds to the Trust and the acquisition and allocation of Shares by the Trustee are all interrelated components of an employee share scheme to which Division 83A of the ITAA 1997 applies and all must be carried out to allow the scheme to operate as intended and enable the direct provision of remuneration to the employees.

Therefore, the contributions to the Trust is an employee remuneration cost incurred in carrying on the business for the purpose of deriving assessable income and is deductible under section 8-1 of the ITAA 1997.

The contribution must not be of a capital nature

Where a contribution satisfies the positive limbs of subsection 8-1(1), it may not be deductible to an employer under subsection 8-1(2) to the extent that such contribution 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.

On the facts, nothing has suggested that the contributions are private or domestic in nature, or are related to producing exempt income or non-assessable non-exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

Whether an outgoing is capital or revenue in nature can generally be determined by reference to the test articulated by Dixon J in the leading case on the capital/revenue distinction, Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337. In that case Dixon J stated that:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay...

TR 2018/7 indicates when a contribution made to the trustee of an ERT may be of a capital nature. Relevantly paragraphs 16 to 19 of TR 2018/7 state:

16. A contribution is not deductible under section 8-1 of the ITAA 1997 to the extent it secures a capital advantage for an employer, unless that advantage is small or trifling.

17. A capital advantage is considered to be small or trifling (and therefore disregarded) when, within a relatively short period of a contribution (which secures the capital advantage) being made to the ERT, so much of the trust fund as comprises that contribution is permanently and entirely dissipated in remunerating employees.

18. A contribution is of a capital nature and not deductible under section 8-1 of the ITAA 1997 to the extent it is to be applied in remunerating employees who are engaged in affairs of capital of the business.

19. When considering the character of expenditure, it is critical to consider the advantage sought by the payer from a practical and business point of view.[26] Where a contribution is made to an ERT to secure any of the following benefits (without limitation), it is likely to be capital expenditure by the employer:

•         to acquire an asset that is likely to generate an enduring or permanent improvement to employee goodwill (for example, an acquisition of a holiday house for use by employees)

•         to provide loans, on a continuous basis, to employees

•         to acquire shares and/or equity in the employer or a holding company of the employer in circumstances where it is not intended to divest legal and beneficial ownership of these shares to employees within a relatively short period of the contribution being made, or

•         to acquire arm's length investments where the intention is to derive a return to be paid to employees, whilst keeping the capital of the trust fund intact.

In this case, irretrievable contributions are provided by the Company, as an employer, to the Trustee. That the contributions may ultimately and in substance be applied by the Trustee to subscribe for shares in the Company for the benefit of Participants, would not render the contributions an investment in the Company such that the Company could be considered as having acquired an asset or advantage of an enduring nature which is capital or of a capital nature, in whole or in part.

As previously discussed, the contributions to be made to the Trustee by the Company are to be used to acquire Shares to be held for, and allocated to, employees to satisfy the exercise of options and rights granted to the employees under the Plans as remuneration. All the components of the scheme operate together to achieve the intended purpose of attracting, motivating, rewarding and aligning the interests of employees with that of the Company within the statutory scheme established under Division 83A. The advantage sought is of a revenue nature and any capital advantage is small or trifling.

Consequently, irretrievable contributions made by the Company to the Trustee are deductible under section 8-1 of the ITAA 1997.

Question 2

Summary

The Company is entitled to an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the Trust,

Detailed reasoning

The Company incurs various costs in relation to on-going administration of the Trust. For example, the Company will incur costs associated with the services provided by the Trustee of the Trust.

The costs incurred by the Company in relation to the implementation and on-going administration of the Trust are deductible under section 8-1 of the ITAA 1997 as either:

•         costs incurred in gaining or producing the assessable income of the Company; or

•         costs necessarily incurred in carrying on the business of the Company for the purpose of gaining or producing the assessable income of the Company.

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

Consistent with the detailed reasoning above, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. The costs are therefore not excluded from being deductible under paragraph 8-1(2)(a) of the ITAA 1997.

Accordingly, the Company is entitled to an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the Trust.

Question 3

Summary

The Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny in part or in full any deduction claimed by the Company for the irretrievable contributions made to the Trustee of the Trust as the Company did not enter the Plans for the dominant purpose of obtaining a tax benefit.

Detailed reasoning

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (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 (as defined in subsection 177C(1) of the ITAA 1936) 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.

On the basis of an analysis of these requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny in part or in full any deduction claimed by the Company for the irrevocable contributions made to the Trustee of the Trust to fund the subscription for, or acquisition of, Shares to satisfy exercise of right or options pursuant to the Plans.

The Scheme

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

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

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

It is considered that this definition is sufficiently wide to cover the proposed employee arrangement under the Plans, which consists of the creation of the Trust, including the Trust Deed, and the payment of the irretrievable cash contributions to the Trustee, the acquisition of Shares by the Trustee, and the allocation of Shares to the Participants.

Tax Benefit

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

Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

...

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out...

In order to determine the tax benefit that would be derived by the taxpayer from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the company might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration.

The applicant considers the following as alternate actions in Attachment 1 to the private binding ruling application:

Alternative 1:

The Company could renumerate employees via payments of salary bonuses or superannuation contributions (that is, cash equivalent amounts based on the value of the shares) rather than through the grant of rights or options and delivery of Shares. Under this alternative, payments of the cash amounts would be deductible to the Company.

Alternative 2:

The Company could fund the purchase of Shares from existing Shareholders in the name of the Participant at the time the rights or options vest or are exercised. Under this alternative, a tax deduction would be available to the Company for the purchase price of the Shares.

Alternative 3:

The Company could issue new Shares directly to Participants when the rights or options are exercised. In such a case, the Company would not receive a deduction for the cost/value of the Shares issued.

It is noted that if the Company sought to establish an alternative scheme whereby it issued shares in itself directly to employees as remuneration, it would not be entitled to a deduction for the value of the shares unless section 83A-205 of the ITAA 1997 was satisfied. Under 83A-205 the deduction would be equal to the amount allowable as a reduction available to the individual employee under subsection 83A-35 of the ITAA 1997 (which is capped at $1,000).

A comparison between the scheme and alternative 1 and 2 would likely reveal no tax benefit because the deductible amounts under both of them would be the same or similar from the Company's perspective.

However, a tax benefit (for the purposes of subsection 177A(1) of the ITAA 1936) may be available where the scheme is compared to the alternatives discussed above under Alternative 3 as any deduction that the Company would be entitled to where shares are issued directly to employees is likely to be lower than that available under the Plans. Therefore, a tax benefit may be considered to have been obtained.

In the event that the alternatives under Alternative 3 were considered a reasonable alternative to entering into the scheme, the Commissioner has considered if the scheme was entered into for the dominant purpose of obtaining a tax benefit.

Dominant purpose

Pursuant to subsection 177D(1), paragraphs 177D(2)(a) to (h) of the ITAA 1936 set out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit:

a)    the manner in which the scheme was entered into or carried out;

b)    the form and substance of the scheme;

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

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

e)    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;

f)      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;

g)    any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

h)    the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

Subsection 177A(5) of the ITAA 1936 requires the purpose to be the dominant purpose. Therefore, in considering whether Part IVA applies or not, the necessary comparison to be made in relation to the factors listed in subsection 177D(2) is between the scheme as proposed and the relevant counterfactual.

a) The manner of the scheme

The Company contends that the presence of the Trust provides other commercial benefits.

In particular, benefits include:

•         The Trust will provide flexibility for the Company to satisfy its obligations under the Plans by facilitating the acquisition of Shares from existing participants or through a new issue of Shares, providing flexibility relating to capital management, the ability to 'recycle' shares and to satisfy Corporations law and financial services requirements.

•         The Trust establishes independent records and accounts for participating employees and using a single vehicle for employee share schemes allows for consolidation of administration.

It is accepted that the Trust provides benefits to the operation of the scheme that would not be available if the Shares were provided directly by the Company as in the relevant counterfactual.

(b) The form and substance of the scheme

The substance of the scheme is the provision of remuneration in the form of rights or options to eligible employees who participate in the Plans. The scheme includes the granting of the rights or options under the Plans, the provision of funds to the Trust and the acquisition and allocation of Shares by the Trustee to satisfy the rights or options all being interrelated components of an employee share scheme to which Division 83A of the ITAA 1997 will apply.

While the inclusion of the Trust in the scheme confers a tax benefit (when compared to some of the alternatives considered), it cannot be concluded that it is the only benefit provided as outlined above. The Company has argued that the form of the arrangement with the Trust provides the scheme with non-tax benefits and this is accepted.

(c) The timing of the scheme

The scheme has not been established at a time to provide a substantial year-end deduction to the Company nor with a contribution sufficiently large to fund the Trust for several years, but by recurring contributions. There is nothing in these facts to suggest a dominant purpose of seeking to obtain a tax benefit in relation to the scheme.

(d) The result of the scheme

The result of the scheme is to provide the Company with allowable deductions for the contributions it makes to the Trust. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of the Company to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances.

(e) Any change in the financial position of the Company

As noted above, the Company makes irretrievable contributions to the Trust and those contributions constitute a real expense with the result that the Company's financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with the Trust as part of the scheme than would be the case if the Company invoked alternatives to the scheme that involved providing Shares to Participants directly, there is nothing artificial, contrived or notional about the Company's expenditure.

(f) Any change in the financial position of other entities or persons

The contributions by the Company to the Trust will form part of the corpus of the Trust and must be dealt with by the Trustee in accordance with the terms of the Trust Deed i.e. for the acquisition of Shares to provide to Participants in the Plans. The Company is not a beneficiary of the Trust and its contributions cannot be returned to it in any form except where the Trustee acquires Shares from the Company by subscribing for new issues at market value.

The financial position of Participants in the Plans will change as a result of participating in the scheme. However, this will be the case regardless of whether the Shares are acquired through the Trust or provided directly by the Company.

Therefore, the contributions made by the Company amount to a real change to the financial position of the Trustee. The financial position of Participants in the schemes will also undergo a real change. There is nothing artificial, contrived or notional about these changes.

(g) Any other consequence

Not relevant to this scheme.

(h) The nature of any connection between the Company and any other persons

The relationship between the Company and the Participants in the scheme is one of employer/employee. The Trustee is independent of the Company and is under a fiduciary obligation to act in the interests of the employees who participate in employee share schemes and in particular, in this case, the Plans. There is nothing to suggest that the parties are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit.

Conclusion

The Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny in part or in full any deduction claimed by the Company for the irretrievable contributions made to the Trustee of the Trust.

While the Company receives a tax benefit by making the contributions under the Plans, the Company did not enter the Plans for the dominant purpose of obtaining a tax benefit.

Question 4

Summary

The irrevocable cash contributions the Company makes to the Trustee of the Trust, to fund the subscription for, or acquisition of, the Shares in accordance with the Trust Deed will not constitute a fringe benefit under subsection 136(1) of the FBTAA.

Detailed reasoning

The term 'fringe benefit' is defined in subsection 136(1) of the FBTAA to include benefits provided by an employer, an associate of the employer or an arranger with the employer, to employees, in respect of the employment of the employee but does not include benefits listed in paragraphs (f) to (s) of the definition.

Paragraph (ha) of the definition of a fringe benefit in subsection 136(1) of the FBTAA excludes the following benefit from being a fringe benefit:

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); ....

The Trust is an ERT

It is accepted that the Trust is an employee share trust as defined in subsection 130-85(4) of the ITAA 1997.

Subsection 995-1(1) of the ITAA 1997 provides that the meaning of 'employee share trust' is defined as having the meaning given by subsection 130-85(4).

Subsection 130-85(4) provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2)) 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).

The Plans are employee share schemes within the meaning of subsection 83A-10(2) of the ITAA 1997 because each is a scheme under which rights to acquire Shares in the Company are provided to employees in relation to the employee's employment.

Under the Plans, the Company has also established the Trust to acquire Shares and to allocate the shares to employees to satisfy the rights or options acquired under the Plans. The beneficial interest in the Share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights or options are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997.

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

•         the Trust acquires Shares in the Company,

•         the Trust ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those Shares, are provided under an ESS, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those Shares to the employees to satisfy the right or options in accordance with the Plans and Trust Deed.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require the Trustee to undertake incidental activities that are a function of managing the employee share scheme and administering the Trust.

Having regard to the terms of the Trust Deed and the Plans, there are no activities that the Trust will undertake that are not incidental to the activities mentioned in paragraphs 130-85(4)(a) and (b). In particular, the Trust does not provide any additional benefits to Trustee's such as financial assistance.

This conclusion is consistent with ATO Interpretative Decision 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.

In considering the relevant documents, the Trust Deed, the Variation to the Trust Deed and the Plans, it is considered that the Trust is an employee share trust.

Accordingly, the irrevocable cash contributions the Company makes to the Trustee of the Trust, to fund the subscription for, or acquisition of, the Shares in accordance with the Trust Deed will not constitute a fringe benefit under subsection 136(1) of the FBTAA.

Question 5

Summary

When an employee of the Company participates in the Plans, they obtain a right or option that is a right to acquire a beneficial interest in a share in the Company (ESS interest)). When the right or option is exercised, any Share received to satisfy the right or option would be in respect of the exercise of the right or option, and not in respect of employment.

Detailed reasoning

As discussed above, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the definition in subsection 136(1) of the FBTAA.

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; or ....

The Plans are employee share schemes and the rights or options are ESS interests (within the meaning of subsection 83A-10(1) of the ITAA 1997) to which Subdivision 83A-B or 83A-C of the ITAA 1997 will apply.

Therefore, any granting of the rights or options at a discount under the Plan to Participants will not be a 'fringe benefit' because it is excluded by paragraph 136(1)(h) of the FBTAA.

The provision of Shares by the Trustee

As mentioned above, in general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee.

When an employee of the Company participates in the Plans, they obtain a right or option that is a right to acquire a beneficial interest in a share in the Company (ESS interest)). When the right or option is exercised, any Share received to satisfy the right or option would be in respect of the exercise of the right or option, and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

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