Edited version of private ruling

Authorisation Number: 1011618396712

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Fringe Benefits Tax - Foreign Mutual Investment Fund

Question 1

Are Foreign Mutual Investment Fund units provided to Australian employees of Overseas Parent Company pursuant to the Standard Plan Share Offer, fringe benefits as defined by subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

Yes.

Question 2

Are Foreign Mutual Investment Fund units provided to Australian employees of Overseas Parent Company pursuant to the Investment Plan Share Offer, fringe benefits as defined by subsection 136(1) of the FBTAA 1986?

Answer

Yes.

This ruling applies for the following period:

1 April 2010 - 31 March 2011

Relevant facts and circumstances

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

The arrangement that is the subject of this Ruling incorporates numerous documents that were provided to the Commissioner on a commercial 'in-confidence' basis. Those documents form part of the arrangement that is the subject of this Ruling.

Standard Plan

1. The Standard Plan Share Offer for Australian employees (the Standard Plan) is an arrangement under which Australian resident employees of Australian Head Company (a subsidiary of Overseas Parent Company), together with other employees of the Overseas Parent Company, can invest in securities concerning a portfolio of shares in the Overseas Parent Company. Participating employees who choose to subscribe in the Standard Plan will initially receive units in a transitional Foreign Mutual Investment Fund (Fund). The manager of the transitional Fund will then subscribe for Overseas Parent Company shares on the participating employees' behalf.

2. The Subscription Price for each unit in the transitional Fund will be at a discount to the Reference Price. The 'Reference Price' will be the average trading price of Overseas Parent Company shares on an overseas securities exchange over a 20 day trading period.

3. The Standard Plan will have a Reservation Period of 15 days (prior to the determination of the Subscription Price) during which employees will be invited to submit Reservation Orders. After the Subscription Price is determined, the Standard Plan will have a Revocation and Subscription Period of 3 days, during which employees may revoke their Reservation Orders or, only if they have not reserved, submit new subscriptions. There will be no minimum subscription in the Standard Plan. However, the maximum amount of the employee's total investment under the Standard Plan must not exceed a certain percentage of their estimated gross annual compensation.

4. The transitional Fund manager will subscribe for ordinary shares in the capital of Overseas Parent Company pursuant to a capital increase in the company. After the capital increase, the transitional Fund will be merged into a unified Fund, hereinafter referred to as the Standard Plan Fund. The Overseas Parent Company shares held by the transitional Fund will be transferred to the Standard Plan Fund custodian in the name of the Standard Plan Fund.

5. In consideration for their investment, participating employees will initially be allotted units in the transitional Fund. At the merger of the transitional Fund with the Standard Plan Fund, employees will be issued with units in the Standard Plan Fund corresponding in value to their units in the transitional Fund. When a unit is issued, one unit will be equivalent to the value of one Overseas Parent Company share. However, from that time the value of a unit will be the Net Asset Value (NAV) as defined under the Standard Plan Fund Regulations. The NAV of the units will be calculated on each trading day using the fluctuating closing price of the Overseas Parent Company shares of an overseas securities exchange. Under the Standard Plan, dividends received will be reinvested in Overseas Parent Company shares and the unit holders will be credited with additional units on account of their entitlements to income of the Standard Plan Fund.

6. Employees will not get access to funds or Overseas Parent Company shares during a Lock up Period of approximately five years. Australian participating employees or their legal beneficiaries may only choose to redeem the investment before that time in the event of death, disability or cessation of employment with the Overseas Parent Company group.

7. If the investment is redeemed prematurely, the unit holders will be paid an amount (X) from the Standard Plan Fund's portfolio that the units represent in accordance with the following calculation:

X = A × B

C

Where:

A = number of units tendered for redemption

B = NAV upon redemption

C = share price used to value the portfolio on the date of the NAV calculation.

To effect payment of this amount, the Fund manager may sell Overseas Parent Company shares and transfer the sale proceeds to a nominated bank account.

8. At the expiration of the Lock up Period, the unit holder has two options:

a) the unit holder may opt to keep the Overseas Parent Company shares in the Standard Plan - the shares will continue to fluctuate in line with the performance of Overseas Parent Company's share price; or

b) the unit holder may opt to redeem the units - the unit holder may request cash equal in value to the amount of the number of units owned multiplied by the NAV on the redemption date, before the deduction of any fees or charges (once again, to effect payment of this amount, the Fund manager may sell Overseas Parent Company shares and transfer the sale proceeds to a nominated bank account).

9. The investment in the Standard Plan is not subject to any form of guarantee. If the Overseas Parent Company's share price has fallen below the Subscription Price when the units are redeemed, the full investment will not be recovered.

10. However, if the share price rises or remains stable compared with the Reference Price, the unit holder will receive the value of the initial investment, the benefit of an initial discount to the Reference Price, the benefit of any price increase above the Reference Price and the benefit resulting from the reinvestment of any dividends into the Standard Plan Fund.

11. Unit holders will not have a shareholder's title to the dividends. The dividends will be paid to the custodian bank which receives them in that capacity. The unit holders entitlement to income under the Standard Plan's fund regulations will not be a claim for immediate payment of the dividends received by the custodian but a right to have that money reinvested in the Standard Plan Fund on their behalf and in recognition to be allocated additional units.

Investment Plan

12. The Investment Plan Share Offer for Australian employees (Investment Plan) is an arrangement under which Australian resident employees of Australian Head Company, together with other employees of the Overseas Parent Company group, can invest in securities concerning a portfolio of Overseas Parent Company shares. Participating employees who subscribe to the Investment Plan will receive units in the Investment Plan Fund. The Investment Plan Fund manager will then subscribe for Overseas Parent Company shares on the employee's behalf.

13. The Subscription Price for each unit in the Investment Plan Fund will be at a discount to the Reference Price. The Reference Price will be the average trading price of Overseas Parent Company shares on an overseas securities exchange over a 20 day trading period.

14. The Investment Plan will have a Reservation Period of 15 days during which employees will be invited to submit Reservation Orders. After the Subscription Price is determined, the Investment Plan will have a Revocation and Subscription Period of a further 3 days during which employees may revoke their Reservation Orders or, if they have not reserved, submit new subscriptions. There will be no minimum subscription and employees may personally invest in the Investment Plan Fund up to a percentage of their estimated gross annual compensation. The amount invested would be effectively multiplied under a proposed Swap Agreement between the Investment Plan Fund and the Bank. Therefore, the employee's actual contribution will comprise a small percentage of the amount to be used by the Investment Plan Fund to subscribe for Overseas Parent Company shares. The balance of the funds will be provided by the Bank. However, the maximum amount of the employee's total investment under the Investment Plan and the Standard Plan, including contributions made on their behalf by the Bank, cannot exceed a specified percentage of their estimated gross annual compensation.

15. The Investment Plan Fund manager will subscribe for ordinary shares in the capital of Overseas Parent Company pursuant to a capital increase in the company. This increase will be reserved to company employees of Overseas Parent Company on a worldwide basis. The Overseas Parent Company shares will be held by the Fund custodian in the name of the Investment Plan Fund.

16. In consideration for their investment, employees will be allotted units in the Investment Plan Fund. When a unit is issued, one unit will be equivalent to the value of one Overseas Parent Company share. However, from that time the value of a unit will be the Net Asset Value (NAV) as defined under the Fund Regulations. It will be calculated by dividing the net assets in the Investment Plan Fund by the number of units issued. The calculation will usually be made on the 15th day and last trading day of each month.

17. Employees will not get access to funds or Overseas Parent Company shares during a Lock up Period of approximately five years. Australian member employees may only choose to redeem the investment before that time in the event of death, disability or cessation of employment with the Overseas Parent Company group.

18. The Fund Regulations will provide the employee with a Guaranteed Net Asset Value for each unit subscribed for in the Investment Plan Fund. The guarantee ensures that upon redemption of units, either before the Investment Plan Fund's maturity or at the Expiration Date, the employee has the right to participate in a portion of the increase in market value above the Reference Price of the Overseas Parent Company shares. In addition, the employee benefits from a guarantee in foreign currency of his or her personal contribution to the Subscription Price.

19. Under the Swap Agreement, the Bank will guarantee to the Investment Plan Fund that where units are presented for redemption, either before or after the Expiration Date, the NAV shall be equal to the defined Guaranteed Net Asset Value. If the NAV happens to be less, then the Bank will pay to the Investment Plan Fund a sum representing an amount equal to the difference.

20. If the investment is redeemed prematurely, the unit holders will be paid an amount (X) from the Investment Plan Fund's portfolio that the units represent in accordance with the following calculation:

X = A × B

C

Where:

A = number of units tendered for redemption

B = NAV upon redemption

C = share price used to value the portfolio on the date of the NAV calculation.

21. To effect payment of this amount, the Investment Plan Fund manager may sell Overseas Parent Company shares and transfer the sale proceeds to a nominated bank account. At the expiration of the Lock up Period, the unit holder may opt to redeem his or her units for cash. In that event, cash is withdrawn from the Investment Plan Fund (the Investment Plan Fund manager may sell Overseas Parent Company shares to provide that cash) and the Investment Plan Fund manager sends the amount equivalent to the value of the units redeemed directly to the unit holder's nominated bank account.

22. If the units are not redeemed by the Expiration Date, the Fund's assets for the Investment Plan will automatically be transferred to the Standard Plan Fund. This transfer is made on the basis of the NAV of the two Funds on the maturity date. The unit holder is then allocated units in the Standard Plan Fund of the equivalent value.

23. Under the Investment Plan, unit holders will renounce their right to receive any sums equivalent to dividends paid on the Overseas Parent Company shares held by the Fund custodian on behalf of the Investment Plan Fund. As dividends are received, the Investment Plan Fund manager will be required to pay the Bank the equivalent amount of the dividends less any Investment Plan Fund expenses in Overseas Parent Company shares under the terms of the Swap Agreement.

24. In addition, upon the Expiration Date, the Bank will be entitled to receive the difference (where such difference is positive) between the total value of the Investment Plan Fund's assets and the aggregate Guaranteed Net Asset Value to which unit holders are entitled at that date. In effect, the payment to the Bank would include the following:

a) the amount initially provided by the Bank;

b) the difference between the Subscription Price and the Reference Price; and

c) the specified proportion of any excess of the value of the Investment Plan Overseas Parent Company shares over the Reference Price.

25. The Bank will be entitled to the above payments in return for its contribution to the subscription payable by the Investment Plan Fund manager and for guaranteeing the unit holders' entitlements.

26. If the market value of Overseas Parent Company shares rises above the Reference Price, it may be expected that the value of the obligations under the Swap Agreement will also increase. However, the Net Asset Value should also increase and unit holders will be entitled to a specified percentage of the increase in value of all Overseas Parent Company shares subscribed for by the Investment Plan Fund on their behalf.

Value of Investment Plan Fund Assets on Redemption

27. If the Overseas Parent Company share price remains unchanged or falls, the employee's investment is maintained at the value of the guaranteed initial investment in the Investment Plan Fund.

28. If an Australian resident unit holder does not redeem his or her units on the maturity date, the unit holder's entitlements will be transferred from the Investment Plan to the Standard Plan. This would involve a transfer made on the basis of the Net Asset Value for units under both the Standard and Investment Plan Funds at that time. The unit holder will then receive an allocation of units in the Standard Plan in satisfaction of rights under the Investment Plan.

Legal form and structure of arrangements

29. Both Plan Funds for Australian employees will each use a mutual fund to hold the shares acquired under the Plan. The legal form and structure of the Fund was described by the Commissioner in Class Ruling 2003/53 Income Tax: Saint Cobain Group Savings Plan for Australian employees.

30. Each of these Funds, in legal form, is created and governed by an overseas law.

33. The mechanics of investment are such that the participating employee pays the subscription price for the Fund units (his/her contribution) to the Fund and the Fund manager then subscribes for a number of shares, in this case in Overseas Parent Company, at a discounted price and holds those shares in the Fund.

34. The number of units in the Fund allotted to the employee on subscription is equal to the number of shares subscribed for by the Fund manager and issued to the Fund by Overseas Parent Company.

35. The Fund custodian holds the Overseas Parent Company shares issued to the Fund in the name of the Fund.

36. The shares held in the name of the Fund are managed as a single portfolio. There is no allocation of individual shares to individual unit holders.

37. The principal entitlements of the unit holders, per the Fund regulations, are:

a) collectively, the unit holders are entitled to the net assets of the Fund;

b) individually, the unit holder's interest is a fraction of the net assets of the Fund having regard to the number of units held and the total number of units allocated;

c) the value of a unit ('net asset value') is calculated by dividing the Fund's net assets at market value by the number of units allocated;

d) periodically, the number of units in the Fund is adjusted having regard to the market price of the Overseas Parent Company share on a foreign securities exchange. Thus a unit holder may hold a different number of units, with a different unitary value, pre and post adjustment but the unit holder's fractional interest in the Fund is always preserved;

e) Standard Plan Fund revenue is reinvested and reflected by the issue of additional units or fractions of units to the unit holders (Investment Plan Fund dividend income is paid to the Bank pursuant to the Swap Agreement);

f) unit holders may apply for redemption of their units subject to the conditions of the Standard and Investment Plan Share Offers. In the case of Australian employees of Overseas Parent Company group subsidiaries subscribing in response to the offer this means that they must hold their units until the earlier of:

- the end of the holding period;

- cessation of employment;

- death; or

- total and permanent disablement;

g) the period under (f) is referred to as the 'Lock-up Period';

h) unit holders (or their beneficiaries) are entitled to continue to hold units in the Fund after occurrence of any of the above redemption conditions;

i) when applying for redemption of units, the unit holder is entitled to request a payment in cash - if no preference is indicated the Fund regulations permit the manager to satisfy the redemption by a cash payment; and

j) the redemption value of a unit is the 'net asset value' calculated on the day that the request is received by the Fund manager or the next trading day, depending on whether receipt is before or after noon and whether or not the day of receipt is a trading day - a fee may be payable to the Fund.

38. The net assets of the Fund consist substantially of Overseas Parent Company shares at market value. The value of the net assets of the Fund varies from the value of the share portfolio due to the inclusion in the balance sheet of relatively small amounts of cash/debit balances and creditors from time to time as necessitated by redemption applications.

39. The profit and loss statement for the Fund confirms that certain management fees and administration costs are met out of revenue. The surplus is capitalised.

40. The Fund is not a separate legal entity. It consists of assets held and managed for the unit holders in accordance with the objectives of the Standard and Investment Plans. The structure adopted for this purpose is made up of a Supervisory Board, a Management Company and a Custodian. The functions of each are specified in the regulations of the Fund.

41. The Supervisory Board consists of representatives of the Overseas Parent Company group and the unit holders. It must meet at least once a year to review the annual reports of transactions and performance of the Fund. It has the overall responsibility of defending and asserting the interests of the unit holders. It may change the Management Company and the Custodian.

42. The Management Company's function is to assemble and manage the portfolio, retain liquid funds in order to meet redemptions, represent unit holders' interests in dealings with third parties and prepare accounts, reports and information concerning the operations of the Fund.

43. The Custodian is responsible for the custody of the assets of the Fund. It processes the purchase, exchange and sale of securities comprising the portfolio. It ensures that the rights attaching to the securities are exercised. It also carries out the collections and payments of money resulting from the management of the Fund.

44. A Statutory Auditor appointed by the Board and approved by the regulatory authority audits the accounts of the Fund.

45. The term of the Fund under its regulations is 99 years. This term may be extended by the Supervisory Board.

46. The Supervisory Board also has the power to decide on any conversion, merger, demerger or liquidation of the Fund.

47. In the event of a merger or demerger, the assets of the Fund shall be transferred to a new Fund(s) and the unit holders' entitlement recalculated on the basis of the net assets of the new Fund(s).

48. Liquidation may only take place when all units are redeemable. In that event the Management Company has the power to liquidate the assets and distribute the proceeds to the unit holders. Unclaimed amounts are to be held for the statutory period of 30 years and then the Management Company shall liquidate the units and transfer the amount to a foreign treasury.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986, subsection 136(1)

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

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

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

Income Tax Assessment Act 1997, Division 83A

Income Tax Assessment Act 1997, section 83A-10

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

Income Tax Assessment Act 1997, section 83A-320

Income Tax Assessment Act 1997, section 83A-340

Income Tax Assessment Act 1997, subsection 83A-340(1)

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

Taxation Administration Act 1953, Part IVAAA

Taxation Administration Act 1953, Schedule 1, section 12-35

Reasons for decision

Question 1

49. A fringe benefit is defined in subsection 136(1) of the FBTAA 1986. The definition of a fringe benefit covers a wide range of circumstances under which an employer may confer (directly or indirectly) a benefit on an employee. Subsection 136(1) of the FBTAA 1986 defines the term 'benefit' as including:

…any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

50. Therefore the provision of units in the Fund(s) to employees (or their associates), that are provided at a discount to what would otherwise be the market value of those units will constitute the provision of a fringe benefit within the meaning of the FBTAA 1986.

51. However, subsection 136(1) of the FBTAA 1986 also details a number of exceptions to what would otherwise constitute the provision of a fringe benefit. The most relevant ones are:

a. a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936);

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 (ITAA 1997)) to which Subdivision 83A-B or 83A-C of that Act applies;

c. a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the ITAA 1997);

Salary or wages: paragraph (f)

52. Subsection 136(1) of the FBTAA 1986 defines salary or wages as meaning:

…a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income…

53. Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) sets out the payments from which an amount must be withheld. It provides that an entity must withhold:

… an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

54. Therefore, as employee participants receive a discount on what would otherwise be the market value of a Fund unit entitlement, and those entitlements can only be redeemed in cash, it is arguable that such a payment represents either 'salary, wages [or a] … bonus' from which an amount must be withheld.

55. It is submitted that under the terms of the Standard Plan, the cash payment should not be characterised as 'salary and wages' because:

a the legal rights that a participant receives under the Standard Plan are rights against the Fund. This body is a mutual fund with independent management and regulation, and should properly be seen as independent and distinct to any employee/employer relationship. The Australian Head Company's obligation to pay salary and wages are both incurred and discharged well before any cash entitlement resulting from a Fund unit arises.

b a Fund unit entitlement is more correctly characterised as a form of independent investment by the individual participants as:

i. employees co-contribute their own money to the subscription price, i.e. they are free to use those funds in any way they see fit (including other forms of investment) if they did not wish to participate in the Standard Plan

ii an employee participant will see their entitlements rise and fall in line with the fund's performance, and this performance may not directly reflect the employer's performance

56. It is accepted that a cash payment received by a participant who disposes of a unit entitlement in an Fund will not constitute a payment of salary and wages. Further, such payment will not be a 'bonus' as its receipt will be dependant on numerous factors which are unrelated to the individual employee participant's working role. These include the choice to participate in the Standard Plan and the underlying performance of the Overseas Parent Company (and its subsidiary entities).

Acquisition of an ESS interest: paragraph (h)

57. Under paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 (paragraph (h)), a benefit that is 'constituted by the acquisition of an ESS interest under an employee share scheme' is excluded from the definition of fringe benefit. As stated in paragraph 1.98 of the Explanatory Memorandum that accompanied Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 (the EM):

The employee share scheme tax laws do not apply if the employee is not provided with ESS interests.

58. If the units in the Fund are not ESS interests, then the provision of those units at a discount to employees of Australian Head Company, are not excluded from being a fringe benefit on the basis of paragraph (h).

59. Subsection 83A-10(1) of the ITAA 1997 defines an ESS interest as a beneficial interest in:

a a share in the company; or

b a right to acquire a beneficial interest in a share in the company

60. It is acknowledged that the assets of the Fund will primarily (if not entirely) consist of shares in the Overseas Parent Company (the parent entity of Australian Head Company), and to that extent could be regarded as being ESS interests. However, notwithstanding the fact that the Fund holds shares in the Overseas Parent Company as part of its 'net assets', those shares are separate and distinct to the Fund units held by each of the employee participants. The nature of the Fund and its unit entitlements are fundamentally different to both a share entitlement in a company and a unit entitlement in a trust. As stated in paragraph 53 of Class Ruling CR 2003/53: Income tax: Saint Gobain Group Savings Plan for Australian Employees, an Fund is:

a collective investment vehicle that is neither a separate legal entity nor a trust according to French law, [the body] is analogous in some respects to a partnership and the unit holder's interest is comparable to the interest of a partner in a partnership.

61. Further, the under the constitute documents of the Fund a unit holder has the following:

a a collective entitlement to the net assets of the Fund;

b an individual fractional interest in the net assets of the Fund, having regard to the number of units held and the total number of units allocated;

c a right to have the unit valued by reference to the market value of the net assets of the fund;

d a right to have their fractional interest in the Fund preserved by reference to the market value of the Fund's net assets (for the Overseas Parent Company's shares as determined under an overseas securities exchange);

e a right to additional units so as to reflect the Standard Fund revenue that is reinvested;

f a right to have their units redeemed for cash, subject to the conditions of the Standard Plan Share Offers.

g a right (which includes a unit holder's beneficiary) to continue to hold units in the Fund after occurrence of any of the redemption conditions;

h a unit holder does have an entitlement to vote a proportion of the underlying shares that are related to that unit holder's interest in the Fund.

62. Having regard to the above factors, in particular the 'collective' nature of the Fund with its tripartite governing structure, as well as the possibility that the unit price will vary from that of the underlying share and the inability to pay dividends in cash or shares (a unit holder may only receive additional units), the distinct nature of the Fund and the unit entitlements therein become apparent.

63. There remains the possibility that a Fund unit entitlement may be regarded as a form of 'indeterminate right' under section 83A-340 of the ITAA 1997. Subsection 83A-340(1) of the ITAA 1997 provides that a taxpayer will be taken to have acquired a beneficial interest in a share, where they acquire a beneficial interest in a right and that right subsequently becomes a beneficial interest in a share. The EM makes it clear that the right must eventually constitute an ESS interest, when it states (at paragraph 1.367):

In such circumstances, that right will be considered to have been an ESS interest from the time that the original right to an employment benefit was acquired, if and when it becomes clear that the right to the employment benefit will result in the receipt of a definite number of ESS interests.

64. As stated in the description of the scheme, employee participants in the Standard Plan can only redeem their Fund unit entitlements in cash. As such, employee participants will never receive shares in Overseas Parent Company (or its subsidiaries) which means that the Fund unit entitlement (the employment benefit) will never convert into ESS interests.

65. Having regard to the nature of an Fund, and the characteristics of the rights of Fund unit holders, then with the exception of a form of 'voting right' (which arguably is consistent with having a form of 'beneficial interest' in the underlying share), employees of the Australian Head Company who acquire units in an Fund as a consequence of participating in the Standard Plan, will not be taken to have acquired an ESS interest for the purposes of Division 83A of the ITAA 1997.

Acquisition of money or property by an employee share trust: paragraph (ha)

66. An employee share trust is defined by reference to subsection 130-85(4) of the ITAA 1997. This provision requires that the body must be 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).

67. As already identified, the Fund will hold Overseas Parent Company shares, and in so doing it is arguable that the body may be facilitating the provision of a beneficial interest in those shares under an employee share scheme to employees (and their associates) of Overseas Parent Company (and it subsidiaries). However, it is also evident that employee participants under the Standard Plan who receive a unit entitlement in a Fund do not have a beneficial interest in the shares held by the Fund, nor do they have a right to acquire such an interest in that holding. The property right that a unit holder in a Fund may have in particular assets, for example shares, cannot be substituted for the entire chose in action.

68. In other words, the relevant benefit is that arising from the provision of the units, not a benefit associated with the underlying property of the Fund. This means that the benefit in question is not 'a benefit constituted by the acquisition by a person of a share or right …'. For this reason when an employee participant under the Standard Plan acquires a unit entitlement in a Fund, that acquisition and subsequent redemption for a cash payment will not be exempted from Australian fringe benefits tax on the basis of the exception set out in paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986.

69. Finally, whilst acknowledging some similarities in the use of a Fund in the current scheme to that of employee share trusts in more typical arrangements, it must be stated that the nature of an Fund is fundamentally different to that of the equitable trust. This difference is highlighted in paragraphs 51 to 55 of CR 2003/53, where the Commissioner identifies that the nature of an Fund interest is:

… a contractual arrangement formed with the intention of creating a situation of common ownership for an investment portfolio. ... the unit holder's interest under the Fund's regulations is, in essence, a fractional interest in net assets with rights to a share of reinvested income. This interest (a chose in action) is not identical with the inherent or underlying interest that a unit holder may have in shares in that are part of the net assets. It is considered that, even if under French law the unit holders may be regarded as co-owners, the interest in shares cannot be severed and dealt with separately for the purpose of the application of the Australian taxation law.

The FCPE concept, being a collective investment vehicle that is neither a separate legal entity nor a trust according to French law, is analogous in some respects to a partnership and the unit holder's interest is comparable to the interest of a partner in a partnership. … [emphasis added]

70. Whilst section 83A-320 of the ITAA 1997 displays a clear intent to look through a trust structure and ascribe a beneficial interest to particular beneficiaries of that trust, the EM that accompanied the enactment of that provision makes it clear that entities such as a properly constituted overseas Fund are intended to be outside the scope of the provisions, where at paragraph 1.278 it states:

These rules apply to both Australian trusts and to foreign entities that are treated in a consistent manner to Australian trusts. Entities that have similar characteristics to employee share scheme trusts but are treated in a manner more consistent with a different Australian entity are not covered by these rules.

71. Having regard to the distinctions that arise between an entity that would satisfy the requirements of an employee share trust under the ITAA 1997, and a properly constituted overseas Fund (which the Commissioner has previously determined to be similar in nature to a partnership), it is evident that the transfer of Overseas Parent Company shares to a Fund to be held on behalf of Australian employee participants in the Standard Plan would not constitute the acquisition of money or property by an employee share trust. This means that paragraph (ha) would not operate to exempt this transaction from Australian fringe benefits tax.

72. The Commissioner is satisfied that the Fund units that are provided to Overseas Parent Company group employees who are residents of Australia (for Australian taxation purposes) in accordance with the terms of the Standard Plan are fringe benefits as defined under subsection 136(1) of the FBTAA 1986.

Question 2

73. Both the Standard Plan and the Investment Plan operate in a similar way, with one main exception. Under the Investment Plan an employee participant must agree to forgo any benefit that would otherwise accrue to the Investment Plan Fund as a result of receiving dividends paid by Overseas Parent Company that are referrable to their unit entitlement. Under the terms of the Swap Agreement with the Bank, these benefits accrue to the Bank until the expiration of the 'Lock-Up period'. In exchange for the Banks participation an employee participant in the Investment Plan receives:

(a) a contribution from the Bank (paid to the Fund) to subscribe for units

(b) a guarantee that from the date of subscription until the expiration of the 'Lock-Up period', the Bank will guarantee their personal contribution to the units

(c) a guarantee that from the date of subscription until the expiration of the 'Lock-Up period', the Bank will guarantee that in the event that the Investment Plan Fund is presented with units for redemption, and the Net Asset Value at that time is less than the defined Guaranteed Net Asset Value, the Bank will pay to the Investment Plan Fund a sum representing an amount equal to the difference

(d) a right to participate in a portion of the increase in market value above the Reference Price of the Overseas Parent Company shares at the Expiration Date. This amount is determined after the Bank has received:

i) repayment of its initial contribution

ii) the entire discount (the difference between the Reference Price and the Subscription Price) on all of the shares purchased in relation to the employee participant's Fund unit entitlement in the Investment Plan Fund under the terms of the Swap Agreement

iii) a percentage of the increase in value of the Overseas Parent Company shares above the reference price as determined at withdrawal time

74. Having regard to these differences, a similar analysis and explanation as set out for the Standard Plan in question 1 applies equally to the Investment Plan.

75. Further, as discussed in relation to the Standard Plan, the benefit provided will not constitute salary or wages, the acquisition of an ESS interest, or the acquisition of money or property by an employee share trust. As such the benefit provided is not excluded under subsection 136(1) of the FBTAA 1986.

76. The Commissioner is satisfied that the Fund units that are provided to Overseas Parent Company group employees who are residents of Australia (for Australian taxation purposes) in accordance with the terms of the Investment Plan are fringe benefits as defined under subsection 136(1) of the FBTAA 1986.