Edited version of private ruling

Authorisation Number: 1011779674322

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Ruling

Subject: Employee Share Scheme

Issue 1

Question 1

Will the Company obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by the Company to the CPU Share Plans Pty Ltd as Trustee of the Employee Share Trust (Trust) to fund the subscription for or acquisition on-market of the Company shares by the Trust?

Advice/Answers

Yes.

Question 2

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

Advice/Answers

Yes.

Question 3

Are irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition on-market of the Company shares by the Trust, deductible to the Company at a time determined by section 83A-210 of the ITAA 1997?

Advice/Answers

Yes.

Question 4

If the Trust satisfies the relevant Equity Plan obligations by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax event under Division 104 of the ITAA 1997?

Advice/Answers

No.

Question 5

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 to the Trustee of the Trust to fund the subscription for or acquisition on-market of the company's shares by the Trust?

Advice/Answers

No.

Question 6

Is the provision of performance rights, options or shares by the Company to the Company employees under the Company Option Plan or the proposed the Company Rights Plan a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Advice/Answers

No.

Question 7

Will the irretrievable cash contributions made by the Company to the Trustee of the Trust, to fund the subscription for or acquisition on-market of the Company shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA 1986?

Advice/Answers

No.

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to the Company, by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee of the Trust, to fund the subscription for or acquisition on-market of the Company shares?

Advice/Answers

No.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

Proposed to commence during the year ended 30 June 2011

Relevant facts

The Company is an ASX listed company with diverse businesses.

The Company has established an employee share plan to allow employees to share in the ownership of the company and to promote the long term success of the company as a goal share by all employees.

The Company's Equity Plans presently consist of an Option Plan, however the Company is considering introducing a Rights Plan in the near future:

· Option Plan - eligible employees identified by the Board may be granted Options, pursuant to the Rules, which can be used to subscribe for, acquire or be allocated shares once the exercise date has been reached.

· Rights Plan (Intends on being introduced in the near future) - under which eligible employees identified by the Board may be granted performance rights, which will vest subject to meeting pre-determined conditions set by the Board.

Option Plan

The Company has an Option Plan which was introduced for the benefit of selected full-time or part-time employees (Participant) of the Company group.

Under this Plan, the Board may determine which employees are entitled to participate in the Option Plan and may offer such number of Options in accordance with these Rules as it sees fit. The Board will take into consideration the Employee's grade level and, where applicable, market data regarding the quantum of long term incentive plans.

Each Option entitles the Participant on exercise of the Option to subscribe for and be allotted one Share at the Exercise Price.

An Option not exercised during the Exercise Period will lapse on the date that is the earlier of:

· The Last Exercise Date;

· A date determined by the Board;

· When a Participant ceases employment subject to rules in the Plan Rules; and

· At any other time as specified in the Offer or acceptance of the Offer of Options.

Rights Plan

Company A is considering establishing a Rights Plan in the near future to assist in the attraction, retention and motivation of Company employees. The purpose of the Rights plan will be as follows:

· to provide Participants with an incentive plan which recognises ongoing contribution to the achievement by the Company of long term strategic goals;

· to align the interests of Participants and Security Holders through the sharing of a personal interest in the future growth and development of the Company as represented in the price of the Company securities; and

· to provide a means of attracting and retaining skilled and experienced employees.

Subject to the determination by the Board as to the satisfaction of Performance Conditions, Performance Rights will automatically be converted into Company Shares on a one-for-one basis (at no cost to the Eligible Employee) and registered in the Eligible Employee's name on the Vesting Date. The Company will instruct the Trustee to notify that Participant that the Trustee holds Securities on that Participant's behalf.

The Performance Rights issued under the Performance Rights plan will have a nil exercise price.

Operation of the Trust

The Trust is a sole purpose trust to subscribe for, acquire, allocate, hold and deliver shares under the Company Option or Rights Plan for the benefit of Company employees.

In respect of any shares to be provided under the Company Option or Rights Plan, the Company may direct the Trustee to purchase shares to be held on behalf of the participant, or subscribe for shares and the Company must issue shares to be held on behalf of the participant. The Trustee will allocate shares under an Option or Rights Plan on behalf of the relevant participant or participants.

The Trust Deed provides that the subscription price for each of the must be the market value of the Shares on the date on which the Shares are issued to the Trustee.

Shares acquired by the Trustee will be transferred to the relevant participant, where required to do so, or permitted, by the relevant Plan Rules and/or relevant Terms of Participation as soon as reasonably practicable.

The Trustee can sell shares on behalf of a participant where permitted under the relevant Plan Rules and/or relevant Terms of Participation at the direction of the participant.

By way of example, the Trust is intended to facilitate the provision of equity based incentives via the following steps:

1. The Company grants a Performance Right or Option to Eligible Employees.

2. The Company will, following validation that the vesting criteria have been satisfied and the relevant Options/Rights have been exercised (see step 4 below):

· Contribute the required funds to the Trust to enable the Trust to either purchase Shares on-market, or subscribe for Shares, at market value in the Company; and

· Send a written notice to the Trustee giving directions as to how shares are to be acquired (i.e. on-market or new subscription).

3. The Trustee will then use the cash and act upon the written instructions to acquire the Shares. Where the Trustee subscribes for new Shares, the Company will receive cash consideration equal to the market value of the Shares. Where the Trustee acquires Shares on-market, the Trustee will disperse the funds for the Shares acquired to the vendor shareholder, such that the Company will not receive any cash.

4. On exercise of an Option or vesting date of the Performance Right, the Eligible Employees contribute the exercise price, if any, to the Company

5. The shares acquired will be allocated to the Participant concerned. The Shares can continue to be held in the name of the Trustee albeit that the Participant will have a beneficial interest in the Shares with rights to vote and receive dividends, etc. At the same time, restrictions can be imposed on sale of the shares through the requirements of the participant to provide the Company with a withdrawal notice.

The receipt of the subscription price will be accounted for as an addition to the share capital of the Company in its books and records.

In summary, commercial benefits of using the Trust include:

· Greater flexibility for the Company to accommodate the long term incentive arrangements both now and into the future as the group continues to expand operations and therefore employee numbers.

· Capital management flexibility for the Company, in that the Trust can use the contributions made by the Company either to acquire shares in the Company on market, or alternatively to subscribe for new shares in the Company.

· Providing an arm's-length vehicle through which shares in the Company can be acquired and held in the company on behalf of the relevant employee. This assists the Company to satisfy corporate law requirements relating to a company dealing in their own shares.

Contributions made to the Trust by the Company

The amount of the cash contributions made by the Company to the Trust is equal to the fair market value of Shares to be acquired by the Trust. In addition, where the employees are required to pay an exercise price for the Shares in accordance with the Option Plan Rules, the employees will contribute the amount that is required to be paid to the Company.

It is noted that Company A proposes to use the Trust to allocate shares under all employee share schemes that it operates at the present time or may offer in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Subsection 8-1(1).

Income Tax Assessment Act 1997 Subsection 8-1(2).

Income Tax Assessment Act 1997 Section 20-20.

Income Tax Assessment Act 1997 Section 25-5.

Income Tax Assessment Act 1997 Subdivision 83A-B.

Income Tax Assessment Act 1997 Subdivision 83A-C.

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

Income Tax Assessment Act 1997 Subsection 83A-10(2)

Income Tax Assessment Act 1997 Subsection 83A-20(2)

Income Tax Assessment Act 1997 Division 104.

Income Tax Assessment Act 1997 Subsection 104-35(1).

Income Tax Assessment Act 1997 Paragraph 104-35(5)(c).

Income Tax Assessment Act 1997 Subsection 104-155(1).

Income Tax Assessment Act 1997 Subsection 104-155(5)(c).

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

Income Tax Assessment Act 1997 Paragraph 130-85(4)(a).

Income Tax Assessment Act 1997 Paragraph 130-85(4)(b).

Income Tax Assessment Act 1997 Paragraph 130-85(4)(c).

Income Tax Assessment Act 1997 Subsection 130-90(1).

Income Tax Assessment Act 1997 Subsection 995-1(1).

Income Tax Assessment Act 1936 Part IVA.

Income Tax Assessment Act 1936 Section 177A.

Income Tax Assessment Act 1936 Section 177C.

Income Tax Assessment Act 1936 Paragraph 177D(b).

Income Tax Assessment Act 1936 Section 177F.

Income Tax Assessment Act 1936 Subsection 177F(1).

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1).

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(h).

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

Fringe Benefits Tax Assessment Act 1986 Section 67.

Reasons for decision

Issue 1

Question 1

Summary

The Company can claim an income tax deduction pursuant to section 8-1 of the ITAA 1997 in respect of the irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition on-market of the Company shares by the Trust.

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.

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.

This is consistent with the view outlined in ATO Interpretative Decision 2002/1074 that irretrievable contributions of money or other property made by it to the Trustee of the employee share scheme will be deductible under section 8-1 of the ITAA 1997.

The irretrievable cash contributions are incurred to improve the Company' operating performance and to motivate and retain high quality staff. Therefore, the irretrievable cash contributions made to the Trustee under the Equity Plans 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.

Question 2

Summary

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

Detailed reasoning

As detailed is question 1, you can deduct an amount under section 8-1 of the ITAA 1997 if the expense is incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

In respect of costs in administering an employee share trust, ATO Interpretative Decision ATO ID 2002/961 provides that costs incurred in implementing and administering an employee share scheme will be deductible under section 8-1 of the ITAA 1997 as they are part of the ordinary employee remuneration costs.

As outlined in the facts, the Company incurs various expenses in respect of the implementation and on-going administration of the Trust. These expenses form part of the ordinary employee remuneration costs.

Consistent with the analysis in question one, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. Accordingly the costs are deductible under section 8-1 of the ITAA 1997 in the year they are incurred.

Furthermore, any costs incurred by the Company for the provision of tax advice will be deductible under section 25-5 of the ITAA 1997.

Question 3

Summary

The irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition on-market of the Company shares by the Trust, are deductible to the Company at a time determined by section 83A-210 of the ITAA 1997.

Detailed reasoning

As discussed in question 1, the provision of money to the trustee of an employee share trust by the employer for the purpose of remunerating its employees under an employee share scheme is an outgoing in carrying on the employer's business and is deductible under section 8-1 of the ITAA 1997.

The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.

With effect from 1 July 2009, section 83A-210 of the ITAA 1997 determines the timing of a deduction for contributions, as follows:

If:


(a) at a particular time, you provide another entity with money or other property:


(i) under an arrangement; and


(ii) for the purposes of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and


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

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

Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by the Company under the Equity Plans, 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.

Under the Company Equity Plans an option granted to an employee will be an ESS interest as it is a right to acquire a beneficial interest in a share in the company (the Company). This ESS interest is granted under an employee share scheme in relation to the employee's employment. The share acquired by the Trustee to satisfy such an option is granted under the employee share scheme to an employee, in relation to the employee's employment.

The granting of the beneficial interests in the options, the provision of the 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 Company employee share plans. All the components of the schemes must be carried out so that the schemes can operate as intended.

As one of those components, the provision of money to the Trustee necessarily allows the schemes to proceed. Consequently, the provision of money to the Trustee to acquire the Company shares is considered to be for the purpose of enabling the participating employees, indirectly as part of the employee share plans, to acquire the options. If that money is provided before the options are acquired then section 83A-210 of the ITAA 1997 will apply. However, section 83A-210 of the ITAA 1997 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from options already granted, and that deduction is accordingly allowable to the Company in the year in which the money was paid to the Trustee, under section 8-1 of the ITAA 1997.

However, if any amount of money is used by the Trustee to purchase excess shares intended to meet a future obligation arising from a future grant of options, the excess payment occurs before the employees acquire the relevant options (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the Company in the year of income when the relevant options are subsequently granted to the employees.

Question 4

Summary

Where the Trust satisfies the relevant Equity Plan obligations by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax event under Division 104 of the ITAA 1997.

Detailed reasoning

Section 6-5 Income according to ordinary concepts (ordinary income)

If you are an Australian resident, your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the ITAA 1997).

Income according to ordinary concepts is not defined in the ITAA 1997. However, there is a substantial body of case law which discusses factors which indicate whether an amount has the character of income according to ordinary concepts.

Dixon J in Sun Newspapers Limited and Associated Newspapers Limited v. FCT (Sun Newspapers) outlined the three matters to be considered in determining whether a payment is on capital or revenue account, as follows:

· the character of the advantage sought by the payment

· the way it is to be used or enjoyed; and

· the means adopted to obtain it.

The character of the advantage sought by the payment

As stated previously in this ruling, the stated purpose of the Company in establishing and funding its employee share plans is to motivate achievement and promote longevity of employment by rewarding senior management and key executives for achieving performance criteria set by the Board. A general aim of the Company' employee share schemes is to enhance the profitability of the group's business. Therefore the character of the advantage sought is one of reward and retention of the human resources of the business, as a contribution to its long term success, which distinguishes it as capital in nature.

The way it is to be used or enjoyed

As stated in the applicant's "Opinion with reasons":

The receipt of the subscription price will be accounted for as an addition to the share capital of the Company in its books and records.

While this treatment of the subscription price is not decisive in itself, it is indicative of the Company' treatment of the receipt and consistent with accounting principles.

The means adopted to obtain it

The payment is a premium or outlay to secure a share(s) in the company as a means to structure the business to secure and enhance its long-term profitability, which when considered with the two preceding matters - the character of the advantage sought and the way it is to be used - makes a persuasive case for the subscriptions for the shares to be distinguished as being on capital account.

Section 20-20 Assessable recoupments

Division 20 of the ITAA 1997 deals with amounts included to reverse the effect of past deductions and section 20-20 of the ITAA 1997 with assessable recoupments, which are described (at section 20-10 of the ITAA 1997) as 'an amount you receive by way of insurance, indemnity or other recoupment'.

The subscriptions received by the Company from the EST are for shares and are integral to the arrangement whereby 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 Company employee share plans. The character of the subscriptions paid to the Company for shares is not one of 'insurance, indemnity or other recoupment'.

Also, the table at section 20-30 of the ITAA 1997 which shows the deductions for which recoupments are assessable does not include provision for subscriptions for funding an EST to acquire shares for employees.

Division 104 CGT events

Given that a capital gain or capital loss is made only if a CGT event happens, the initial step is to ascertain whether such an event has occurred. Also, given that the transaction is the payment of subscriptions by the EST to the Company for shares, the possible events are:

· D1 Creating contractual or other rights; or

· H2 Receipt for event relating to a CGT asset.

Event D1 applies in preference to event H2.

Subsection 104-35(1) states that CGT event D1 'happens if you create a contractual right or other legal or equitable right in another entity'. However the legal or equitable right has actually been created at the time of the issuance of the options, not upon the payment of the subscription proceeds to the Company. Therefore no legal or equitable right is created and hence event D1 does not happen.

Also, paragraph (c) of subsection 104-35(5) states event D1 does not happen where a company issues or allots equity interests in the company, which is the case with the Company transactions under consideration.

As event DI is excluded, H2 is to be considered. Event H2 happens if an act, transaction or event occurs to a CGT asset owned by a taxpayer and the occurrence does not result in an adjustment to the cost base or reduced cost base (section 104-155(1)).

Again, consideration of the subscriptions received by the Company from the EST establishes that they are for shares and are integral to the arrangement whereby 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 Company employee share plans. As part of the Company employee share plans contractual rights of employees are exercised on their behalf to acquire shares in the Company, rather than an act, transaction or event relating to a CGT asset owned by the Company.

Also, paragraph (c) of subsection 104-155(5) states event H2 does not happen where a company issues or allots equity interests in the company, which is applicable to the payment of subscription proceeds to the Company.

In summary, if the EST satisfies the relevant the Company Equity Plan obligations by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under sections 6-5 or 20-20 of the ITAA 1997, or trigger a CGT event under Division 104 of the ITAA 1997.

Question 5

Summary

The Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition on-market of the company's shares by the Trust.

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) of the ITAA 1936.

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:

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

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

(iii) 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 Equity Plans could be considered to constitute a scheme to which Part IVA might apply.

An element that must be considered for Part IVA of the ITAA 1936 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 Equity Plans are undertaken for commercial reasons and is explicable by reference to ordinary business dealings. The Equity Plans are established to attract, reward and retain high quality staff to the Company

The Trust was established to subscribe for, acquire, allocate, hold and deliver shares under the Company Equity Plans for the benefit of the Company employees.

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:

· Capital management flexibility as it provide a streamlined approach to using contributions received from the Company and employees to either acquire shares in the Company on market (in a more convenient manner than if not trust was used) or alternatively to subscribe for new shares in the Company. This provides flexibility as circumstances change in how share are sourced for provision to employees.

· Administrative efficiency as it provides a single arm's length vehicle to facilitate the provision of shares to employees under the Company Equity Plans. This is increasingly important as the Company continues to expand its operations employee numbers in future years.

· Assisting the Company to meet Corporations Act requirements in relation to dealing in its own shares and insider trading. The Corporations Act generally prohibits a company from acquiring its own shares. The use of the Trust provides a mechanism to allow for acquisition of the Company shares through the Trust and the Trust is not prohibited from doing so as a result of the Company having no beneficial interest in any shares held by the Trust or the Trust itself.

· Ability for the Company to give effect to disposal restrictions after vesting. This ability arises as the Trustee is the legal owner of the shares and the employees, as beneficial owners have no ability to deal in them.

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 Equity Plans 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 Equity Plans were 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 Equity Plans 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 Equity Plans 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 Equity Plans 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 Shares by the Trustee or the costs incurred by the Company group in relation to the implementation and on-going administration of the Equity Plans and the Trust.

Question 6

Summary

The provision of performance rights, options or shares by the Company to the Company employees under the Company Option Plan or the proposed the Company Rights Plan are not fringe benefits within the meaning of subsection 136(1) of the FBTAA 1986.

Detailed reasoning

A fringe benefit is defined under subsection 136(1) of the FBTAA as a benefit provided by an employer to an employee or associate of an employee in respect of the employment of the employee, unless the benefit is specifically excluded from the definition of a fringe benefit.

Paragraph (h) of section 136(1) of the FBTAA specifically excludes from the definition of a fringe benefit:

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

An ESS interest in a company is 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 (subsection 83A-10(1) of the ITAA 1997). An employee share scheme is a scheme under which ESS interests in the company are provided to employees (or associates of employees) of the company or subsidiaries of the company, in relation to the employee's employment. (Subsection 83A-10(2) of the ITAA 1997)

The Company employees will receive rights and options to acquire beneficial interests in shares in respect of their employment, upon acceptance of participation in the plan in accordance with the Company Equity Plans.

The Commissioner accepts that the Equity Plans described in the facts is an employee share scheme under which relevant ESS interests (being rights to acquire beneficial interests in shares) are acquired by employees of the Company (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to the employment of those employees. Therefore, the provision of those rights will not be subject to FBT because they are specifically excluded from the definition of fringe benefit.

The shares acquired by the Trustee under the EPSP to satisfy the rights are also provided to employees under that same employee share scheme.

However shares granted to employees under the EPSP to satisfy the rights acquired on acceptance of participation in the EPSP plan are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 apply (see subsection 83A-20(2) of the ITAA 1997 and paragraph 83A-105(1)(a) of the ITAA 1997). Therefore the providing of these shares will not be specifically excluded from the definition of fringe benefits under paragraph (h) of the definition in subsection 136(1) of the FBTAA.

As stated above, a fringe benefit will only arise under subsection 136(1) of the FBTAA where the benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee.

Under the Equity Plans, the benefit (beneficial interest in performance shares) that arises upon the end of the vesting period is considered to be provided as a result of the employee exercising rights (previously obtained upon acceptance to participate in the EPSP).

The situation mentioned above is considered to be analogous to that stated in ATO ID 2003/316 which refers to the case of FC of T v. McArdle 89 ATC 4051;(1988) 19ATR 1901. In that case, an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.

In the present circumstances, when an employee accepts to participate in the Equity Plans, he or she obtains a right to acquire a beneficial interest in a share in the Company and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received, that is, beneficial interest in performance shares, would be in respect of the exercise of the right, and not in respect of employment.

Therefore, the benefit that arises to an employee after the vesting period under the EPSP, being the beneficial interest in a performance share, does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of' the employment relationship.

Question 7

Summary

The irretrievable cash contributions made by the Company to the Trustee of the Trust, to fund the subscription for or acquisition on-market of the Company shares will not be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA 1986.

Detailed reasoning

Subsection 136(1) of the FBTAA 1986 defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, but does not include:

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

The term 'employee share trust' referred to in subsection 130-90(1) of the ITAA 1997 is defined in subsection 995-1 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides that an EST for an ESS (having the meaning given by subsection 83A-10(2) of the ITAA 1997 is a trust whose sole activities are:

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

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


(i) the company; or


(ii) a subsidiary of the company; and

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

The term 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment.

In this case the Equity Plans are schemes that include the Trust obtaining shares, being fully paid ordinary shares in the capital of the Company and providing them to the Participants being Australian residents for taxation purposes in respect of their employment.

Therefore the Equity Plans are an ESS and the Options and Rights are ESS interests.

The beneficial interest in the shares is itself provided under the ESS because they are provided under the same scheme.

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

· the EST acquires shares in the company,

· the EST ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, provided under an ESS, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the governing documents of the scheme.

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

The Trust will satisfy the sole activities test where the activities of the trustee of the Trust are limited to managing an employee share plan and the general administration of the trust.

The Commissioner considers merely incidental activities of managing an ESS and administering a trust include:

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

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

· the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the ESS;

· dealing with shares forfeited under an ESS including the sale of forfeited shares and using the proceeds of sale for the purposes of the ESS;

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

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

· receiving and immediately distributing shares under a demerger.

Activities that the Commissioner considers will not satisfy the sole activities test include:

· any activities that are not a necessary function of managing an ESS or administering a trust; and

· any activities which result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares).

The provisions of the Trust Deed effectively read down the general powers given to the Trustee so as to ensure that the Trustee can only use the contributions received exclusively for the acquisition of shares for persons who fall within the meaning of 'Participant' in accordance with the Plan. To this end, all other duties/general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the shares to be acquired for the Participants.

Additionally, the Trust Deed provides that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4) of the ITAA 1997.

Therefore, the Trust is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the Trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

As the Trust is an employee share trust, paragraph 136(1)(ha) of the FBTAA 1986 will apply to specifically exclude the irretrievable cash contributions made by the Company to the Trustee of the Trust as being treated as a fringe benefit within the meaning of section 136(1) of the FBTAA 1986.

Question 8

Summary

The Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 to increase the fringe benefits taxable amount to the Company, by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee of the Trust, to fund the subscription for or acquisition on-market of Company shares.

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:

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.