Edited version of private ruling

Authorisation Number: 1011717603725

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Ruling

Subject: Employee Share Scheme

Question 1

Will the company as head entity of a tax consolidated group, obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997):

(a) in respect of the irretrievable cash contributions made by the company subsidiaries to the Trustee to fund the company Loan Share Plan?

Answer

Yes.

(b) in respect of costs incurred in relation to the implementation and on-going administration of the Trust?

Answer

Yes.

Question 2

Will the irretrievable cash contributions made by the company subsidiaries to the Trustee, to fund for the company Loan Share Plan, be treated as a fringe benefit within the meaning of subsection 136(1) of the Fringe benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 3

Will the acquisition of Shares by the Trustee constitute a 'fringe benefit' provided by the Employer to the Employee as defined in subsection 136(1) of the FBTAA?

Answer

No.

Question 4

Will the acquisition of a fixed interest in the Trust by the Employee at market value, represented by Shares in the company held by the Trustee, constitute a 'fringe benefit' provided by the Employer to the Employee as defined in subsection 136(1) of the FBTAA?

Answer

No.

Question 5

Will the loan provided by the Trustee to the Employee for the purpose of acquiring a fixed interest in the Trust:

(a) constitute a 'loan fringe benefit' provided by the Employer to the Employee under section 16 of the FBTAA?

Answer

Yes.

(b) If so, will the taxable value of the loan fringe benefit be reduced to nil due to the application of the 'otherwise deductible rule' under subsection 19(1) of the FBTAA?

Answer

Yes.

Question 6

Where the Shares are exchanged by the Employee for cash, will that exchange constitute a 'fringe benefit' provided by the Employer to the Employee as defined in subsection 136(1) of the FBTAA?

Answer

No.

Question 7

Where the value of the Shares falls below the market value of the Shares at the time of subscription and the Shares are surrendered to the Trustee in full satisfaction of the Employee's loan obligation, will the surrender of the Shares constitute a 'fringe benefit' provided by the Employer to the Employee as defined in subsection 136(1) of the FBTAA?

Answer

No.

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount of the company subsidiaries by the amount of tax benefit gained from irretrievable cash contributions made by the company subsidiaries to the Trustee to fund the subscription for Shares?

Answer

No.

Question 9

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 applies to deny, in part or full, any deduction claimed by the company in respect of the irretrievable cash contributions made by the company subsidiaries to the Trustee to fund the subscription for new Shares or acquisition of Shares from other shareholders by the Trust?

Answer

No.

This ruling applies for the following period

Income Tax Year ended 30 June 2011

Income Tax Year ended 30 June 2012

Income Tax Year ended 30 June 2013

Income Tax Year ended 30 June 2014

Income Tax Year ended 30 June 2015

Fringe Benefits Tax Year ended 30 March 2011

Fringe Benefits Tax Year ended 30 March 2012

Fringe Benefits Tax Year ended 30 March 2013

Fringe Benefits Tax Year ended 30 March 2014

Fringe Benefits Tax Year ended 30 March 2015

The scheme commenced on

1 July 2010

Relevant facts

The company is a privately owned company which has multiple wholly owned operating subsidiaries:

· The company is the head entity of the tax consolidated group (group) including itself and the three subsidiaries.

· All entities referred to are residents of Australia for income tax purposes.

The company Loan Share Plan

The company has established the company Long Term Incentive Plan (Plan) to attract, reward and retain high quality staff to any member of the company group.

The Plan will broadly operate as follows:

· The company subsidiaries will irretrievably contribute money to The Company Employee Share Trust (the Trust) as the need to fund the acquisition of Class B shares in The company (Shares) by employees (Participants) participating in the Plan arises.

· The company submits the amounts of the irretrievable cash contributions will be broadly equal to the fair market value of Shares to be acquired by the Trust.

· The Board of the company will determine which employees will be eligible to participate in the Plan.

· Offers will then be made to such Participants.

· Once offers are accepted, the Trustee will lend funds on an interest-free basis to those Participants who have accepted.

· Employees must use the loan funds received solely to acquire an interest in the Trust at Fair Value, with the interest corresponding to underlying Shares.

· Under the Loan Agreement, Participants irrevocably authorise the Trustee to apply the funds on behalf of the Participant by way of payment of the total Acquisition Price of the Shares to which the offer of the loan was accepted.

Under the The Company Employee Share Trust Deed (Deed) the Trustee must, by notice from the Board:

· Purchase Shares on market or off market on behalf of the relevant Participants or Participants generally;

· Subscribe for Shares on behalf of the relevant Participants or Participants generally; and

· Allocate the Shares to be held on behalf of the relevant Participants or Participants generally;

Under the Deed the subscription price of the Shares subscribed for must be the market value of the Shares on the date on which the Shares are issued to the Trustee.

The Shares will be held in the Trust for the Participants with each Participant having a beneficial interest in a number of Shares. The Trustee will be the registered legal owner of the Shares.

For the purposes of this ruling, The company has advised that dividends would generally be paid on the Shares held by the Trust at the same time and rate they are paid to ordinary shareholders of The company, except in special circumstances, and flow through to the Participants, although, unless otherwise determined by the Board prior to a loan being made, the after-tax value of the dividends would be used to repay the loans.

Participants, who leave the employ of the group prior to vesting, will be classified as either good or bad leavers which will determine how many Shares vest and the payout value.

Upon meeting the relevant vesting conditions, the directors of the company would then use their best efforts to provide liquidity so that the Participants interests in the Shares could be cashed out and the remaining balance of the related loan repaid to the Trustee. A payout value will be based on a valuation formula arrived at with the assistance of a third party valuer.

Participants are liable for the full loan balance outstanding at vesting, unless the Board exercises its discretion to waive any shortfall between the payout value of the Class B Shares and the remaining balance of the related loan at vesting.

The Plan Rules

The company long term incentive plan rules (Plan Rules) includes the following definitions:

Participant means an Eligible Person whose application to participate in this plan has been accepted;

Eligible person means:

(a) Directors and Employees who are declared by the Board in its sole and absolute discretion to be eligible to receive grants of Class B Shares under the Plan; or

(b) any other person who is declared by the Board in its sole and absolute discretion to be eligible to receive grants of class B Shares under the Plan;

Share means a fully paid ordinary share in the capital of the Company;

Class B Shares are a special class of shares in the Company, being 'Class B' shares in the capital of the company, with the features set out in Schedule 1 to these Rules;

Acquisition Price means the issue price or purchase price of Class B Shares offered for subscription to, or acquired or allocated by, the Trustee (as the case may be);

Fair Value of the Class B Shares at the Acquisition Date, or at another date as required under these Rules, will be determined by a valuation methodology approved by the Board.

The Plan Rules provides the number of Class B Shares which may be granted under this Plan must not exceed a number which exceeds ten percent (10%) of the then total issued share capital of the Company.

The Plan Rules provides unless otherwise determined by the Board in its sole and absolute discretion, the Acquisition Price for each Class B Share will be the fair Value.

The Class B Shares

Under the Plan Rules Class B Share holders do not have the right to notice of, or vote or attend at, a meeting of the shareholders of the company but do confer on the holder:

· The right to receive any dividends should the Board in its sole and absolute discretion declare any dividend on the Class B Shares;

· The right to receive a return of capital on the Class B Shares ranking equally with holders of (CCPS) in accordance with clauses of the (CCPS Terms of Issue) in the event of a winding up of the company; and

· The right to be reclassified to ordinary shares in the company upon the occurrence of a Liquidity Event at the sole and absolute discretion of the Board.

The Loan Agreement

The Trustee will provide the cash required to acquire the Shares under The Loan Agreement - The Company Long Term Incentive Plan (Loan Agreement).

The Loan Agreement is a limited recourse loan to the extent that from the 60 day anniversary of the acquisition of the Shares, the repayment obligation shall be the lesser of:

· The outstanding loan balance; and

· The Fair Value of the Shares.

The Trust

The Company Employee Share Trust (Trust) was established for the purpose of making loans to Participants to enable them to acquire Class B Shares of The company (Shares) via the Trust and hold those Shares on their behalf, under the Plan and under any other employee equity plans established by the company.

It is intended that prior to implementation of the arrangements that the trustee ownership will be changed such that the shares in the Trustee will be owned by 2 directors of the company. Further, the Trustee is currently a non-operating company.

Under the Deed, other than funds received by the Trustee from the group for the Trustee to subscribe for Shares under the Plan, funds received by the Trustee from the group will constitute accretions to the corpus of the Trust and will not be repaid to the company and no Participant shall be entitled to receive such funds.

Under the Deed and subject to the Plan Rules, Terms of Participation and the terms of the relevant Shares, a Participant will have an absolutely vested and indefeasible entitlement to all dividends in respect of all Trust Shares held by the Trustee for the Participant.

The company submits that it is increasingly common for Australian companies to use a share trust to facilitate the provision of shares to employees as part of equity based employee incentive and retention strategies. Commercial benefits of using a trust include:

· increases liquidity of employee shares in a simple flexible manner through permitting the potential sale of shares to other employees compared to the employer buying back shares from employees;

· provides a mechanism to hold shares upfront until they are needed to satisfy future equity incentive plan awards (e.g. under an acquisition transaction the acquirer may set aside shares for management to be later used for equity awards).

· allows existing shareholders the ability to keep control over company ownership.

· registration of shares in Trustee's name provides control over identity of shareholders, preventing a sale to unrelated persons.

· if the company shares ("Shares") were sold, it is easier to "mop-up" employee shareholders.

· enables gross misconduct / bad leaver provisions to be enforced in a simple manner through re-acquisition of shares by the Trust.

· allows greater control over dividend flow and voting rights (if any) as there is one legal owner of the shares, i.e. the trustee.

· enables easy recycling of shares - when shares are forfeited (i.e. due to failure to meet vesting conditions) the forfeited shares can be reused for future offers to employees.

Disposal restrictions

The Plan Rules requires that a Participant may not dispose of, grant a Security interest over or direct the Trustee accordingly in respect of all of the Shares held by the Trustee on behalf of the Participant while those Shares are held in the Plan.

Under the Plan Rules the Shares are held in the Plan until the vesting conditions have been satisfied or waived by the Board or the Board has determined that the Participant is required to forfeit their rights to, and interest in, those shares.

Forfeiture

The Plan Rules provides that an invitation may contain a term to the effect that the Shares offered and held under the Plan are subject at all times to Forfeiture Conditions.

A Participant will forfeit any right or interest in the Shares or other entitlements if the Board determines that:

The participant has committed any act of fraud, defalcation or gross misconduct, or such other circumstances as may be specified in an Invitation in relation to the affairs of the group; or

Subject to a Participant being an Early Leaver or Other leaver, the Vesting Conditions specified in the Invitation become incapable of being met and are not waived by the Board.

Vesting Conditions

A generic Invitation Letter provides the Vesting Conditions as the Participant remaining employed by the group for at least three years from the Acquisition Date.

After that date the Shares will be released from the Trust and the legal title transferred from the Trustee to the participant.

Implementation and on-going administration costs

The group will incur various costs in relation to the implementation and on-going administration of the Trust. For example, services provided by the Trustee include, but is not limited to:

· Employee Plan record keeping;

· Production and dispatch of holding statements to Employees;

· Provision of annual income tax return information for Employees;

· Management of Employee termination; and

· Other Trustee expenses including the annual audit of the financial statements and annual income tax return of the Trust.

In addition to the services to be provided to the Trust, the company has incurred various implementation costs, including the services provided by the company's accounting and legal advisors in drafting the Deed, amending Plan Rules and applying for this private ruling.

Relevant legislative provisions

Fringe benefits Tax Assessment Act 1986 Section 16

Fringe benefits Tax Assessment Act 1986 Subsection 19(1)

Fringe benefits Tax Assessment Act 1986 Section 67

Fringe benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Question 1

Will the company as head entity of the tax consolidated group (The company) obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997):

(a) in respect of the irretrievable cash contributions made by the company subsidiaries to the Trustee to fund the company Loan Share Plan?

Answer

Yes.

(b) in respect of the costs incurred in relation to the implementation and on-going administration of the Plan and the Trust?

Answer

Yes.

Detailed reasoning

Irretrievable cash contributions

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:

it is incurred in gaining or producing your assessable income; or

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:

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

it is a loss or outgoing of a private or domestic nature; or

it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

a provision of this Act prevents you from deducting it.

In Pridecraft Pty Ltd v. FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; FC of T v. Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745, 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.

The company is the head company of the group of which the wholly owned Australian subsidiaries are the employers of Participants under the Plan.

Under the single entity rule in section 701-1 of the ITAA 1997, the group are taken to be a single entity for the purposes of working out the company's income tax liability.

Although the irretrievable cash contributions are made by the subsidiaries, the effect of the single entity rule in section 701-1 of the ITAA 1997 is such that the cash contributions are taken to be made by the Head Company for income tax purposes.

The irretrievable cash contributions are incurred to improve the group operating performance and to motivate and retain high quality staff.

Therefore, the irretrievable cash contributions made to the Trustee under the Plan are directed to enhancing the profitability of the group's business and producing assessable income.

Nothing in the facts suggests that the irretrievable cash 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 Income Tax assessment Act 1936 (ITAA 1936).

Accordingly, the irretrievable cash contributions made to the Trustee to acquire Shares are allowable deductions.

Implementation and on-going administration

Under the single entity rule in section 701-1 of the ITAA 1997, the group are taken to be a single entity for the purposes of working out the company's income tax liability.

Although the operating costs associated with the administration and implementation of the Plan are incurred by the subsidiaries, the effect of the single entity rule in section 701-1 of the ITAA 1997 is such that the operating costs are taken to be incurred by the Head Company for income tax purposes.

The operating costs associated with the administration and implementation of an employee share plan is part of the ordinary employee remuneration costs.

Accordingly they are deductible under section 8-1 of the ITAA 1997 in the year they are incurred.

Question 2

Will the irretrievable cash contributions made by the company subsidiaries to the Trustee, to fund for the company Loan Share Plan, be treated as a fringe benefit within the meaning of subsection 136(1) of the Fringe benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

The Full Federal Court in Federal Commissioner of Taxation v. Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16; 2007 ATC 4236; 65 ATR 369 held that, for the purposes of determining whether there was a 'fringe benefit', it was necessary to identify, at the time a benefit was provided, a particular employee in respect of whose employment the benefit was provided.

In this case it is intended the irretrievable cash contributions are made before the Board determines which employees are eligible to participate in the Plan and therefore the contributions are provided for the benefit of a general class of employees.

It is considered that the irretrievable cash contributions provided by The company subsidiaries to the Trustee for the benefit of a general class of employees are not 'fringe benefits' provided to particular employees in respect of their employment at the time the irretrievable cash contributions are provided to the Trustee.

Question 3

Will the acquisition of Shares by the Trustee constitute a 'fringe benefit' provided by the Employer to the Employee as defined in subsection 136(1) of the FBTAA?

Answer

No.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

There is no 'benefit' that arises to a Participant upon the acquisition of Shares by the Trustee as the Shares will be acquired for market value consideration.

Question 4

Will the acquisition of a fixed interest in the Trust by the Employee at market value, represented by Shares in the company held by the Trustee, constitute a 'fringe benefit' provided by the Employer to the Employee as defined in subsection 136(1) of the FBTAA?

Answer

No.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

There is no 'benefit' that arises to Participants upon the acquisition of a fixed interest in the Trust as the Participants will acquire the interest at market value.

Question 5

Will the loan provided by the Trustee to the Employee for the purpose of acquiring a fixed interest in the Trust:

(a) constitute a 'loan fringe benefit' provided by the Employer to the Employee under section 16 of the FBTAA?

Answer

Yes.

(b) If so, will the taxable value of the loan fringe benefit be reduced to nil due to the application of the 'otherwise deductible rule' under subsection 19(1) of the FBTAA?

Answer

Yes.

Detailed reasoning

Loan fringe benefit

A loan fringe benefit means a fringe benefit that is a loan benefit. Subsection 16(1) of the FBTAA provides that a 'loan benefit' arises where a person (the 'provider') makes a loan to another person (the 'recipient') and the recipient is under an obligation to repay the whole or any part of the loan.

It is therefore considered that the loan provided by the Trustee to the Participants constitutes a benefit under subsection 16(1) of the FBTAA, as the Participants are under an obligation to repay the whole or any part of the loan under the Plan Rules.

The loan provided by the Trustee to the Participants form part of the scheme implemented by The company to confer benefits on those employees 'in respect of' their employment within the group.

The expression 'in respect of' is defined in subsection 136(1) as including 'by reason of, by virtue of, or for or in relation directly or indirectly'.

In J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 it was noted that the term 'in respect of employment', includes benefits where '… there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment…'

It is considered that the loan provided by the Trustee to the Participants has a sufficient or material connection with their employment. The loan benefit therefore constitutes a fringe benefit under subsection 136(1) of the FBTAA.

The otherwise deductible rule

As a beneficiary of the Trust, the Participant will be entitled to deduct interest expenses incurred in acquiring fixed interests in the Trust under section 8-1 of the ITAA 1997 if they are presently entitled to any part of the Trust.

The loan is made to the Participants for the purpose of acquiring fixed interests in the Trust. The interests held by the Participants entitle them to receive distributions of the net income of the Trust Fund, comprising dividends.

Accordingly, subsection 19(1) of the FBTAA will apply to reduce the taxable value of the loan fringe benefit to nil.

Question 6

Where the Shares are exchanged by the Employee for cash, will that exchange constitute a 'fringe benefit' provided by the Employer to the Employee as defined in subsection 136(1) of the FBTAA?

Answer

No.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

There is no 'benefit' that arises to a Participant upon the exchange of their Shares for cash.

Question 7

Where the value of the Shares falls below the market value of the Shares at the time of subscription and the Shares are surrendered to the Trustee in full satisfaction of the Employee's loan obligation, will the surrender of the Shares constitute a 'fringe benefit' provided by the Employer to the Employee as defined in subsection 136(1) of the FBTAA?

Answer

No.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA. It must have the following features:

· be a 'benefit' provided during a year of tax;

· to an employee or an associate of an employee;

· by the employer, an associate of the employer, an arranger or a person to whom paragraph (ea) applies;

· in respect of the employment of the employee; and

· where none of the exclusions listed in the definition apply.

When the relevant Employees surrender their Shares to the Trustee in full satisfaction of a limited recourse loan, and the value of the Shares allocated is less than the balance of the outstanding loan, a benefit is considered to arise to the Participant.

However, the benefit that arises upon discharge of the loan is not considered to be provided 'in respect of the employment' of the Participant, but as a result of them exercising rights under the terms of the Plan.

Under the terms, the Participants obtain the right to exchange their interest in the company Shares and have the amounts payable to them set off as full and final satisfaction of the debt outstanding on the loan. If this right is subsequently exercised, any benefit would be in respect of the exercise of this right, and not in respect of employment.

Thus, the benefit that arises to a Participant upon surrender of their interests in the Shares does not give rise to a fringe benefit as the benefit is not provided to them 'in respect of' their employment relationship.

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount of the company subsidiaries by the amount of tax benefit gained from irretrievable cash contributions made by The company subsidiaries to the Trustee to fund the subscription for Shares?

Answer

No.

Detailed reasoning

Law Administration Practice Statement PS LA 2005/24 (PS LA 2005/24) has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 provide as follows:

145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

It is clear, therefore, that the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 under the heading "Appendix, Question 18" where, on the application of section 67, the Commissioner states:

…As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement...

Further, paragraph 151 of PS LA 2005/24 provides:

151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

In this case, benefits provided to the Trustee or to Participants are considered either not to be fringe benefits as that term is defined in the FBTAA or the taxable values are reduced to nil by the operation of the otherwise deductible rule for the reasons given in the questions above.

Therefore the FBT liability is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of a group employer in relation to a tax benefit obtained under the Plan.

Question 9

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 applies to deny, in part or full, any deduction claimed by the company in respect of the irretrievable cash contributions made by the company subsidiaries to the Trustee to fund the subscription for new Shares or acquisition of Shares from other shareholders by the Trust?

Answer

No.

Detailed reasoning

Part IVA of the ITAA 1936 contains a number of anti-avoidance provisions. These provisions give the Commissioner the discretion to cancel a tax benefit that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by the taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1).

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

· a 'tax benefit', as identified in section 177C, was or would, but for subsection 177F(1), have been obtained;

· the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and

· having regard to section 177D, the scheme is one to which Part IVA applies.

Regard must be had to the individual circumstances of each case in making a determination under section 177F of the ITAA 1936 to cancel a tax benefit.

In this case, costs in respect to the implementation and on-going administration of the Trust and the irretrievable cash contributions to the Trust to acquire Shares on behalf of Participants will be deductible to the company under section 8-1 of the ITAA 1997. These deductions claimed by the company could be considered to be a 'tax benefit' as that term is defined in section 177C of the ITAA 1936.

Given the broad definition of the term 'scheme' in section 177A of the ITAA 1936, some or all of the steps involved in the Plan could be considered to constitute a scheme to which Part IVA might apply.

An element that must be considered for Part IVA to apply is whether a taxpayer has entered into, or carried out a scheme or part thereof, for the dominant purpose of obtaining a tax benefit having regard to the following objective factors in paragraph 177D(b) of the ITAA 1936:

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

(ii) the form and substance of the scheme;

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

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

(v) 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;

(vi) 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;

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi).

The manner in which the scheme was entered into or carried out

In this case it is accepted that each part of the Plan is undertaken for commercial reasons and is explicable by reference to ordinary business dealings. The Plan was established to attract, reward and retain high quality staff to any member of the company group.

The Trust was established to make loans to employees of the company group to enable them to acquire Shares via the Trust and hold those Shares on their behalf.

The establishment of a Trust and the making of irretrievable cash contributions to the Trustee is not a contrived or artificial arrangement and are explicable by reference to ordinary business dealings and commercial arrangements. The company submits that it is increasingly common for Australian companies to use a share trust to facilitate the provision of shares to employees as part of equity based employee incentive and retention strategies. Commercial benefits of using a trust include:

· increases liquidity of employee shares in a simple flexible manner through permitting the potential sale of shares to other employees compared to the employer buying back shares from employees;

· provides a mechanism to hold shares upfront until they are needed to satisfy future equity incentive plan awards (e.g. under an acquisition transaction the acquirer may set aside shares for management to be later used for equity awards).

· allows existing shareholders the ability to keep control over company ownership.

· registration of shares in Trustee's name provides control over identity of shareholders, preventing a sale to unrelated persons.

· if the company shares were sold, it is easier to "mop-up" employee shareholders.

· enables gross misconduct / bad leaver provisions to be enforced in a simple manner through re-acquisition of shares by the Trust.

· allows greater control over dividend flow and voting rights (if any) as there is one legal owner of the shares, i.e. the Trustee.

· enables easy recycling of shares - when shares are forfeited (i.e. due to failure to meet vesting conditions) the forfeited shares can be reused for future offers to employees.

The form and substance of the scheme

The form and substance of the scheme are that irretrievable cash contributions will be paid to the Trustee which cannot be refunded to a The company group company and the funds will be used to obtain Shares that are held on behalf of Participants for the purposes of attracting, rewarding and retaining high quality staff.

The Commissioner agrees that the substance and form of the Plan suggests that it has been implemented for reasons that are not predominately motivated by obtaining a tax benefit.

The timing and duration of the scheme

The irretrievable cash contributions made by subsidiaries of the company to the Trustee enable the Trustee to acquire Shares in The company on a recurring basis as the need arises.

The Plan was not established to provide a substantial year-end deduction to the company and nor with a contribution to the Trustee sufficiently large enough to fund the Trust for several years.

It is accepted that the timing and duration of the scheme does not contribute to any tax benefit received by the company in relation to the scheme.

The effects of the scheme: the tax results, financial changes and other consequences of the scheme

The company has made the following submissions with regard to the tax results, financial changes and other consequences of the scheme:

The company will obtain a tax deduction for the irretrievable cash contributions it makes to the Trustee under section 8-1 of the ITAA 1997. It is expected that a deduction would normally be available in these circumstances;

The irretrievable cash contributions subsidiaries of The company make to the Trustee form part of the corpus of the Trust;

Employees who participate in the Plan will be taxed at an appropriate point in time according to the capital gains tax provisions, depending on the Participant's particular circumstances. The Participants will be assessable on dividends received and ultimately on any profit on disposal of Shares under the capital gains tax regime; and

There are no other consequences to consider.

The Commissioner agrees that this analysis of the tax results, financial changes and other consequences of the scheme points to a commercial purpose as opposed to a dominant tax purpose in the arrangement.

The nature of the connection between the taxpayer and any other person

The connection between the company, the Trust and Participants will be embodied in the legal rights and obligations created by the Trust Deed and the Plan Rules.

The Trustee, whilst being a related entity, is under a fiduciary obligation to act in the interests of the Participants. As part of the scheme, the Trustee holds Shares in the company for the benefit of Participants. The relevant parties' relationship is governed by the rules of the Plan and the Trust Deed which are based on arm's length principles.

Conclusion

From the above objective analysis of all the factors referred to in paragraph 177D(b) of the ITAA 1936, the dominant purpose of entering into the scheme is not to gain a tax benefit but to obtain commercial benefits. Therefore the Commissioner will not seek to apply Part IVA of the ITAA 1936 to deny, in part or in full, any deduction claimed by The company in respect of the irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition of, The company's Shares by the Trustee or the costs incurred by the company group in relation to the implementation and on-going administration of the Plan and the Trust.