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Authorisation Number: 1011676839863

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Ruling

Subject: Employee Share Trust

Question 1

Will the irretrievable contribution of funds by the Taxpayer to the Trust be a fringe benefit pursuant to subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No.

Question 2

Are the irretrievable contributions made by the Taxpayer to the trustee of the Trust, to acquire shares, by subscribing for those shares or purchasing them on market, an allowable deduction to the Taxpayer pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Will the deduction for the Taxpayer in respect to irretrievable contributions to the Trust be allowed in the year of income when the contribution is made to the Trust provided it is in respect of rights to acquire shares that have previously been granted to employees?

Answer

Yes

Question 4

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the employee share arrangements, whereby the Taxpayer as head company of the tax consolidated group makes a contribution to the Trust?

Answer

No

This ruling applies for the following periods:

Year ended 31 July 2011

Year ended 31 July 2012

Year ended 31 July 2013

Year ended 31 July 2014

Year ended 31 July 2015

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Taxpayer is the head company of a consolidated group.

The Taxpayer has previously established a number of employee share schemes as part of its long-term strategy to help attract, motivate and retain employees and to encourage participation by employees of the company through share ownership.

The Taxpayer has recently reviewed its remuneration arrangements. It has been decided to provide employees with performance rights (being a right to acquire a share at a future point in time for nil consideration).

The Taxpayer intends to use an employee share trust (the Trust) to support the performance rights that may be granted in the future and those performance rights previously granted and not vested.

At present, the Taxpayer conducts its long term incentive plan under an employee share plan.

In future years, it is expected the taxpayer will continue to grant performance rights to employees, although the terms of the long term incentive plan do enable the board to utilise options, cash or shares if it considers these to be more appropriate. The plan rules have been attached to the application.

The Taxpayer proposes to fund the Trust as per its Trust Deed. The Trust Deed will enable the trustee to fulfil its obligations which will ensure the Taxpayer has met its obligations to its employees to deliver shares to employees when the rights are vested. The Trust Deed will provide for the Taxpayer making irretrievable contributions to the Trust for the purposes of the Trust acquiring shares to deliver to eligible participants to satisfy the rights they have been granted under the relevant plan.

The Taxpayer will continually contribute sufficient funds to the Trust so the Trust is able to acquire the number of shares necessary to meet its obligations and that, over time, those contributions will be used for the purposes of the Trust. The purpose and sole activities of the Trust will be to provide shares and/or options (being rights to acquire shares) to employees at a discount, provide shares in respect of a right being exercised, other incidental activities including distributing dividends to employees, or in meeting the administrative costs of the Trust.

The Taxpayer will contribute funds to the Trust when it grants rights to employees, and at various times throughout the vesting period so that the trust can acquire shares needed when the rights are subsequently exercised.

The trustee of the Trust will have the discretion to buy the shares on-market, or to subscribe to a new issue of shares by the Taxpayer. The shares will be acquired at market value whether they are acquired on-market or by subscribing for new shares.

The trustee's decision to purchase shares on market or subscribe for new shares in the Taxpayer will depend on a number of factors including:

· corporation law requirements;

· relevant brokerage costs;

· liquidity of company shares at the relevant time;

· likely impact on company's share price where shares purchased on market; and

· whether the company will facilitate a subscription of shares at the relevant time.

The decision by the trustee will be made in accordance with the Trust Deed and in fulfilment of the trustee's fiduciary duty to beneficiaries. Generally, the trustee will have a preference to subscribe for shares to be issued by the Taxpayer for reasons of cost and administrative ease. The Taxpayer will either facilitate the trustee's request by issuing new shares, or deny the request which would require the trustee to purchase on-market. In making this decision, the Taxpayer will take into account a number of factors, and in particular, the relevant capital management implications.

The Taxpayer will not be a beneficiary under the Trust Deed and any funds it contributes to the Trust cannot be refunded, repaid or returned to the Taxpayer (other than by way of the trustee paying the issue price when it subscribes for shares in the Taxpayer). Further, the Taxpayer will have no interest in the shares held by the Trust.

The contributions made to the Trust are irretrievable contributions in the form of the initial contribution and additional contributions as required to fund the Trust. The amount of the contributions made by the Taxpayer will depend on:

· the number of rights granted to employees;

· the number of shares held at that time by the trustee;

· the type of share or option plan being administered at the time,

The shares acquired by the trustee at any time will be registered in the name of the trustee as legal owner of the shares. No employee will have beneficial entitlement to the shares in the Trust or the income of the Trust at anytime, unless the trustee exercises its discretion to distribute same. This discretion will be exercised under the terms of the Trust Deed and in fulfilment of the trustee's fiduciary duty to beneficiaries.

To the extent that the Trust derives interest or dividend income from the holding of shares, that is in excess of the costs of the Trust, such income may be used to acquire more shares to deliver to employees, may be distributed to employees who have become beneficially entitled to the income (For instance, where their rights have been exercised but the shares not yet delivered), or may be distributed to other beneficiaries at the discretion of the trustee in accordance with the Trust Deed. To the extent that there is no one presently entitled to the income of the Trust, the trustee will pay tax on this income.

All of the shares acquired by the Trust will be ordinary shares in the Taxpayer.

The employee share and rights plans operated by the Taxpayer with the participation of the Trustee will at all times be operated in accordance with the requirements of Division 83A of the ITAA 1997.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 8-1

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-210

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

Reasons for decision

Question 1

Summary

The irretrievable contribution of funds by the Taxpayer to the Trust will be excluded from being a fringe benefit pursuant to the definition of fringe benefit in paragraph 136(1)(ha) of the FBTAA 1986.

Detailed reasoning

Question 1

The definition of fringe benefit in subsection 136(1) of the FBTAA 1986 provides that a benefit will be a fringe benefit when that benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee unless the benefit is expressly excluded from being a fringe benefit.

A benefit constituted by the acquisition of money or other property by an employee share trust is specifically excluded from the definition of fringe benefit by the operation of paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986.

However, the exclusion will only apply to a trust whose sole activities are that of an employee share trust as defined in subsection 130-85(4) of ITAA 1997, being:

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

(b) ensuring that Employee Share Scheme (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

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

In this case, the trustee's powers and obligations are such that the activities of the Trust will be limited to receiving funds from the company for the purpose of acquiring shares, holding those shares until they vest in the employee, then transferring them to the employee. The trustee can also carry out administrative and clerical functions that are incidental or essential to the operation of the Trust.

The Commissioner 's view on whether irretrievable contributions made to an employee share trust are a fringe benefit were outlined in ATO Interpretative Decision ATO ID 2002/960 Fringe benefits tax - Employer contributions to trustee of its employee share schemes are not a fringe benefit.

ATO ID 2002/960 applied to the former paragraph 136(1)(hb) of the definition of fringe benefit in the FBTAA 1986. However, the ATO ID conclusion that irretrievable contributions to a trust are not fringe benefits on the basis that the sole activities of the trustee is the obtaining of shares or rights from the employer company and providing those shares or rights to employees of the employer, is applicable to the facts of this case.

Additionally, the Courts have confirmed that no fringe benefit arises where a contribution is made to a trust for the benefit of employees generally and not a single employee in Indooroopilly Children's Services v. FC of T (2007) 158 FCR 325.

Conclusion.

The contribution of funds by the Taxpayer to the Trust is excluded as a benefit under the definition of fringe benefit under paragraph 136(1)(ha) of the FBTAA 1986.

Question 2

Summary

Irretrievable contributions made by the Taxpayer to the trustee of the Trust will be an allowable deduction to the Taxpayer pursuant to section 8-1 of the ITAA 1997.

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. It provides:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

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

Subsection 8-1(2) of the ITAA 1997 then provides:

However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a 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 your exempt income or your non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

Losses or outgoings

Pursuant to the Trust Deed, the Taxpayer must provide the trustee with all the funds (contributions) the trustee requires so as to enable it to acquire shares in the Taxpayer.

The trustee will, pursuant to the Plan Rules, acquire, deliver and allocate shares for the benefit of participants provided that the trustee has received sufficient payment to subscribe or purchase shares.

These contributions made by the Taxpayer to the trustee of the Trust will be non-refundable to the Taxpayer. On this basis, the contributions to the Trust are made to support the Taxpayer's employee share, option and right plan arrangements.

Relevant nexus

The purpose of the Taxpayer in establishing and making irretrievable contributions to the trustee of the Trust is to provide benefits to certain eligible employees in the form of shares.

All the documentation provided indicates that the contributions are made to the trustee of the Trust solely to enable the trustee to acquire shares for eligible employees of the Taxpayer.

Accordingly, there is a sufficient nexus between the outgoings the Taxpayer's contributions to the trustee of the Trust) and the derivation of its assessable income (Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay's) Ltd v FCT (1935) 54 CLR 295; (1935) 3 ATD 288, Ronpibon Tin NL v FCT (1949) 78 CLR 47.

Capital or Revenue

The Taxpayer's contributions will be recurring and made from time to time as and when the Taxpayer's shares are to be subscribed for or acquired pursuant to the Trust Deed. Therefore, it is concluded that the contributions are not capital in nature, but incurred by the Taxpayer in carrying on its business. In support of this conclusion, the Court held in Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001, FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674 that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature.

This confirms the view of the Commissioner expressed in ATO Interpretative Decision ATO ID 2002/1074 that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made to the trustee of its employee share scheme.

There is also no evidence to suggest that the contributions are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

Conclusion

Irretrievable contributions made by the Taxpayer to the trustee of the Trust are an allowable deduction to the Taxpayer pursuant to section 8-1 of the ITAA 1997.

Question 3

Summary

The deduction for the Taxpayer in respect to irretrievable contributions to the Trust will be allowed in the year of income when the contribution is made to the Trust provided it is in respect of rights to acquire shares that have previously been granted to employees.

Detailed reasoning

As outlined above, the provision of funds to the trustee of the Trust by the Taxpayer for the purpose of remunerating its employees under its Employee Share Plan is an outgoing in carrying on the Taxpayer's business and is deductible under section 8-1 of the ITAA 1997.

The deduction under section 8-1 of the ITAA 1997 will generally be allowable in the year in which the company 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 purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and

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

then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of money or other property, you are taken to have provided the money or 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 the company under the relevant employee share plan in relation to the employee's employment.

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either 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 Commissioner's view on the timing of deductions for money provided to the trustee of an employee share trust is provided in ATO Interpretative Decision ATO ID 2010/103. Consistent with ATO ID 2010/103, the granting of the beneficial interests in the rights, the provision of money to the trustee under the arrangement, the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees are all interrelated components of the employee share scheme. All the components of the scheme must be carried out so the scheme can operate as intended. As one of those components, the provision of money to the trustee necessarily allows the plan to proceed. Consequently, the provision of money to the trustee is considered to be for the purpose of enabling the participating employees, as part of the scheme, to acquire the options.

In ATOID 2010/103, the Commissioner concluded that a deduction is allowable at the time the options are granted to the employees and only to the extent of that amount of the money provided to acquire shares to satisfy the obligations.

Consequently, as the Taxpayer is proposing to grant rights to executives in the future, any contribution made to the trust in respect of those rights will be an allowable deduction in the year the contribution is made.

However, if an amount of money is used by the trustee to purchase excess shares intended to meet a future obligation arising from a future grant of rights, the excess payment occurs before the employees acquire the relevant rights (ESS interests) under the scheme. Section 83A-210 will apply in that case and the excess payment will only be deductible to the company in the year of income when the relevant rights are subsequently granted to the employees.

To the extent that the shares may be so acquired before the employees acquire a beneficial interest in the shares section 83A-210 of the ITAA 1997 will operate to deny a deduction until that beneficial interest is acquired.

Question 4

Summary

Part IVA of the ITAA 1936 will not apply to the employee share arrangements as described in the facts of this case.

Detailed reasoning

Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise the discretion under subsection 177F(1) of the ITAA 1936, three requirements must be met. There are:

· a scheme within the meaning of section 177A

· a tax benefit that was obtained or would be obtained in connection with the scheme but for Part IVA

· having regard to the matters in paragraph 177D(b), the scheme is one to which Part IVA applies.

The Scheme

The definition of scheme in subsection 177A(1) of the ITAA 1936 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 present arrangement, which consists of the creation of the Trust, including the trust deed as well as the rules of the Employee Share Plan and the payment of the irretrievable contributions by the Taxpayer to the trustee.

Tax Benefit

'Tax benefit' is defined in subsection 177C(1) of the ITAA 1936 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 taxpayer might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration.

The applicant has provided the following possible counterfactual:

The commercial alternative to this arrangement is one in which more conventional forms of remuneration would be provided in a different form such as increased salary, bonuses or deductible superannuation payments. Under these alternatives, identical or similar level of deductible expenses would arise to that which will arise under the present arrangement. Therefore, it is contended that there is no tax benefit and Part IVA should not apply to the current arrangement.

The Taxpayer would have been entitled to a deduction and therefore no tax benefit would arise under the proposed trust arrangement.

Dominant purpose

The applicant has claimed the current arrangements are entered into as a result of the following:

· the Taxpayer has undertaken a detailed review of its operations, capital management structure and remuneration framework

· the remuneration review identified that pressures in retaining staff are significant

· to address the staff retention issue, the company requires its employee share plan to appropriately reward employees. It also considers the flexibility to distribute dividends arising on shares held within the trust during the vesting period to be a feature that may be useful in the future to increase motivation and align the interests of employees and shareholders;

· a trust is the most practical vehicle to be used to acquire shares at the time rights are granted to employees, and throughout the vesting period, and accumulate dividend income during the vesting period for the purpose of acquiring further shares, meeting the costs of the plan or distributing dividends to employees;

· a trust provides the opportunity to improve cash flow management through the flexibility to control the timing of contributions being made to the trust to enable it to acquire shares the Taxpayer can better forecast the number of shares that will be required at the end of the vesting period vis-à-vis when market value options were used meaning it can more accurately determine the appropriate contributions to be made;

· a trust provides the flexibility to acquire and warehouse shares that will be delivered to employees under its employee share and option plans;

· a trust aligns with the capital management strategy of the Taxpayer - it can enable the shares that will be delivered to employees to be acquired on-market or by subscribing. The decision between acquiring on market and subscribing for shares can take into account:

· the most effective manner to utilise cash for shareholder benefit;

· the competitive environment - the emergence of international entrants, the ongoing activity in the retail sector and the impact of the recent global financial crisis mean the Taxpayer needs to be able to respond quickly to any changes in the competitor market; and

· dilutionary pressures including the impact on earnings per share.

· a trust gives an employee the knowledge that the shares, and any incidental dividend income, will be held by a trust that is independent of the employer and has a fiduciary obligation to act in the interests of its beneficiaries which will include the employees;

· the trust can better manage the forfeiture of rights and shares;

· trusts are used widely in the marketplace and recognised as an effective method of administering employee share plans-the manner in which the company intends to operate the trust is specifically outlined in paragraph 1.72 of the Explanatory Memorandum to Division 83A which states that 'a general deduction may be available in respect of the indirect provision of securities to employees under an employee share scheme. An employer may provide money to an employee share trust for the purpose of providing its employees with securities in itself. The employee share trust may acquire the securities by buying them on market or by participating in a share issue by the employer',

· using a trust enables easier administration of the long term incentive plan because the holding and accounting of the shares are separated from the company;

· the arrangement is not being entered into at, or close to, year end;

· the company will not be making an upfront contribution that is intended to provide for the trusts operations for several years into the future - the Taxpayer will be funding the trust typically at the time the rights are granted and at various times throughout the vesting period; and

· the contributions are irretrievable contributions and reflect a genuine non-capital outgoing on part of the Taxpayer to achieve a business outcome.

Conclusion

A consideration of all the above factors leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the Taxpayer's employees who participate in the plan in a form that promotes the Taxpayer's business objectives, rather than to obtain a tax benefit. Accordingly, 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 Taxpayer in relation to the irretrievable contributions made to the Trust under the scheme.