Edited version of private ruling

Authorisation Number: 1011807150866

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Ruling

Subject: Income Tax: Employee Share Scheme (Company issues)

Question 1

Will the contribution of the funds by the company to the Trust be a fringe benefit by virtue of the exclusion contained in the definition of fringe benefit in paragraph 136(1)(ha) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

Question 2

Will the irretrievable contributions made by the company to the Trust to enable the Trust to acquire shares, by subscribing for those shares or purchasing them on market, be an allowable income tax deduction to the company under section 8-I of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 3

Will the deduction for the company in respect of the 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 Participants under section 83A-210 of the ITAA 1997?

Answer

Yes

Question 4

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply in relation to any part of these employee share scheme arrangements?

Answer

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

1 July 2010

Relevant Facts

X Limited is a public company (the company). The company is listed in ASX as well as in overseas. It has subsidiaries and directors overseas.

The company has established an employee share scheme called Long Term Incentive Plan (LTIP) as part of its long-term strategy of:

· remunerating its employees, contractors and directors (collectively referred to hereafter as Participants") in a way that aligns their personal financial rewards with the risks and returns of the shareholders of the company;

· enabling the Participants to participate in the growth of the company by participating in such an employee share trust;

· improving business performance by providing financial benefits for Participants that are aligned to the rewards experienced by the taxpayer's shareholders; and

· remunerating the Participants in a way that is competitive, market related, cost-effective for the business, flexible, administratively simple and minimises cash outflow where possible.

The Company established the following LTIPs:

· Employee Long Term Incentive Plan; and

· Directors and Consultant Long Tem Incentive Plan

The company has previously granted options to Participants under the LTIP. The company is in the course of reviewing its long term incentive arrangements and as a result, intends to use an employee share trust (EST) to facilitate the LTIP.

The Plan

The LTIP shall be administered by the Board which may, as contemplated herein, delegate such responsibility to the Committee provide that full and final authority with respect to the granting of options rests with the Board.

The company will appoint the Trustee on such terms and conditions as the Board determines for the purpose of acquiring and delivering shares to participants and/or holding shares on behalf of participants where specified at the date of grant.

The company will contribute funds to the EST as and when it grants options (or other awards) to employees and offerees (participants) under the LTIP or any other employee share scheme it operates, so that the EST can acquire the shares needed when the options are subsequently exercised or other awards vest and shares need to be delivered to Participants.

The purpose and sole activities of the EST will be to provide shares to Participants under the company's LTIP, or any other employee share scheme the company operates.

All costs and expenses of administering this plan will be paid by the company, but the company shall not be responsible for the payment of any fees or expenses in respect of the re-sale by a participant of shares acquired by him or her under this plan.

From time to time the company may determine that an employee may participate in the Plan and issue an invitation in writing (in such form as the Board or the Committee decides from time to time) to that Employee for a grant of Options. The invitation will set out:

(a). (a). the number of Options offered;

(b). (b). the Earliest Exercise Date, which may be the Date of Grant;

(c). (c). the Latest Exercise Date, which shall be no later than 7 years after the Date of Grant;

(d). (d). the Exercise Price; and

(e). (e). (e) the acceptance period of 10 days or such other period the Board may consider ( Offer Period ); and

(f). (f). whether Shares may be held by the Trustee for the benefit of the Participant.

The Exercise Price per Share in respect of an Option shall be not less than the average market price per Share (weighted by reference to volume) for Shares sold through the Relevant Stock Market over the five trading days on the Relevant Stock Market immediately preceding the Date of Grant.

The Trustee of the EST will have the discretion to buy the shares on-market, or to subscribe for a new issue of shares by the company. 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 company, 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.

At all times, 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 company for reasons of cost and administrative ease. The company 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 company will take into account a number of factors, and in particular, the relevant capital management implications.

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

In this regard, therefore, the contributions made to the EST are irretrievable contributions in the form of the initial contribution and additional contributions as required to fund the EST. The amount of the contributions made by the company will depend on;

• the number of options (or other awards) granted to Participants;

• the number of shares held at that time by the Trustee; and

• 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 Participant 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 the shares and/or income. This discretion will be exercised under the terms of the Trust Deed and in fulfilment of the Trustee's fiduciary duty to all beneficiaries.

To the extent that the Trust derives interest income from holding the irretrievable cash contributions made by the company, or dividend income from the holding of shares, that is in excess of the costs of the EST, such income:

· may be used to acquire more shares to deliver to Participants;

· may be distributed to Participants who have become beneficially entitled to the income (because, say, their options have been exercised but the shares not yet delivered); or

· may be distributed 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 EST will be ordinary shares in the company.

The LTIP operated by the company (and or any other employee share scheme the company implements), 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

Income Tax Assessment Act 1936 Part IVA,

Income Tax Assessment Act 1997 8-1,

Income Tax Assessment Act 1997 Division 83A,

Income Tax Assessment Act 1997 Section 83A-210 and

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

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

Reasons for decision

Question 1

Summary

The irretrievable contribution of funds by the company 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.

Detailed reasoning

Question 1

Subsection 136(1) of the FBTAA defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, and paragraph (ha) of that definition excludes:

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);

An 'employee share trust' is defined in subsection 995-1(1) of the ITAA 1997 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 employee share trust for an 'employee share scheme' (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 employee share scheme to employees, or to associates of employees, of:

(i) the company; or

(ii) a subsidiary of the company; and

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

Further, section 83A-325 of the ITAA 1997 provides that Division 83A applies to relationships similar to employment, so that persons who are in an employee-like relationship are not excluded from participating in employee share schemes. The persons covered by the section will typically be directors or other officeholders and independent contractors.

The Explanatory Memorandum to the Tax laws Amendment (2009 Budget Measures No 2) Act 2009 states that:

1.373 The employee share scheme rules cover not only employees of a company offering an employee share scheme, but also cover employees in relationships similar to employment.

1.374 This is to ensure that people such as directors or office holders who are not considered employees, but who are in an employee-like relationship are not excluded from participating in employee share schemes.

1.375 The rules also cover taxpayers who are independent contractors.

The right to acquire a beneficial interest in an Employer Share is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997.

An 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.

The LTIP is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which either rights to acquire beneficial interests in shares in the company are provided to participants in relation to the participants' employment or beneficial interests in shares in the company are provided to the participants in relation to the participant's employment.

Under the LTIP, the company has also proposed to establish the EST to acquire shares in the company and to allocate those shares to employees, directors and consultants. Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

· the EST acquires shares in the company; and

· the EST ensures that the ESS interests being beneficial interests in those shares, are provided under an employee share scheme, to the employees in accordance with the Trust Deed and relevant Rules of the LTIP.

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

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental 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 EST 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 employee share scheme;

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

· 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 result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental.

Therefore, the EST 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 are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the EST from being a fringe benefit.

Accordingly, the company will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the EST to fund the acquisition of the company Shares in accordance with the Trust Deed.

Question 2

Summary

Irretrievable contributions made by the company to the trustee of the EST will be an allowable deduction to the company 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.

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

The trustee will, pursuant to the LTIP 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 company to the trustee of the EST will be non-refundable to the company under the proposed Trust Deed. On this basis, the contributions to the EST are made to support the company's LTIP arrangements.

Relevant nexus

The purpose of the company in establishing and making irretrievable contributions to the trustee of the EST is to provide benefits to certain eligible employees, directors and consultants in the form of shares.

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

Accordingly, there is a sufficient nexus between the outgoings the company's contributions to the trustee of the Trust and the derivation of its assessable income as in 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 and Ronpibon Tin NL v FCT (1949) 78 CLR 47.

Capital or Revenue

The company's contributions will be recurring and made from time to time as and when the company'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 company 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.

Accordingly, irretrievable contributions made by the company to the trustee of the EST are an allowable deduction to the Company pursuant to section 8-1 of the ITAA 1997.

Question 3

Summary

The deduction for the company in respect to irretrievable contributions to the EST will be allowed in the year of income when the contribution is made to the EST provided it is in respect of rights to acquire shares that have previously been granted to employees, directors and consultants.

Detailed reasoning

As outlined above, the provision of funds to the trustee of the Trust by the company for the purpose of remunerating its employees, directors and consultants under its LTIP is an outgoing in carrying on the company'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

(i) 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

(a) 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.

An Employee Share Scheme (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.

Subsection 83A-10(2) of the ITAA 1997 provides that an ESS is

An employee share scheme is a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of;

(a) the company; or

(b) subsidiaries of the company.

In relation to the employee's employment.

In this case the LTIP was established to provide, in respect of their employment, Australian resident employees of the company or a holding company of the company Rights and/or Future Rights which are entitlements to shares in the capital of the Company, subject to certain conditions. Therefore, the LTIP is considered as an ESS.

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 interest (directly or indirectly) by a Participant under the LTIP, in relation to the Participant'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 EST 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 company is proposing to grant rights to directors and consultants (offerees) 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 or offerees 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.

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. They 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). (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). (a).
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 company's LTIP rules, including the proposed Trust Deed as well as the payment of the irretrievable contributions by the company 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 company 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 company would have been entitled to a deduction and therefore no tax benefit would arise under the proposed trust arrangement.

The use of the EST arrangement permits the company, subject to the requirements of sections 8-1 and 83A-210 of the ITAA 1997, to claim a deduction for the full amount of the contributions it makes to the EST. It is probable that this amount would exceed that which would be allowable under section 83A-205 of the ITAA 1997 in the counterfactual above. Therefore, to the extent of any increased deductions because of the trust arrangement, The company obtains a tax benefit.

While, for the reasons noted above by the applicant, it is unlikely that it would choose any other incentive plan that did not give rise to an allowable deduction (and therefore there would not be the necessary tax benefit), the analysis below proceeds on the assumption that the Commissioner would in fact be able to identify a relevant tax benefit.

Paragraph 177D(b) of the ITAA 1936

Paragraph 177D(b) of the ITAA 1936 sets out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit:

(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),

(i) The manner of the scheme

In considering whether Part IVA of the ITAA 1936 applies or not, the necessary comparison to be made in relation to the factors listed in paragraph 177D(b) of the ITAA 1936 is between the scheme as proposed and the relevant counterfactual.

In the present circumstances, the contributions made by the company will be used by the Trust for the purposes of supporting the company's LTIP arrangements, and any other employee share plan arrangements it later implements. The company has undertaken a detailed review of its operations, capital management structure and remuneration framework.

The LTIP has been introduced (and any new employee share plans will be implemented) to enhance the company's profit for each year in which the arrangements are operated through:

· assisting in retention and motivation of Participants, including employees of the company;

· providing those Participants with the opportunity to participate in the profit growth of the company; and

· improving business performance and aligning the financial rewards for Participants with those experienced by the company's shareholders.

· a trust is the most practical vehicle to be used to acquire shares at the time options (or other rights) are granted to employees and other Participants 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 Participants;

· a trust also provides the flexibility to acquire and warehouse shares that will be delivered to Participants under its LTIP (or any other employee share and option plans);

· a trust can enable the shares that will be delivered to Participants to be acquired on-market or by subscribing. This is important for the company's capital management program as 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 associated with being a TSX listed Company. The company needs to be able to respond quickly to any changes in the competitor market; and

· delusionary pressures.

· a trust gives a Participant 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 Participants;

· 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; and

· using a trust enables easier administration of the various plans because the holding and accounting of the shares are separated from the company.

Further, it is noted that the arrangement is not deliberately and intentionally established close to the end of the company income year nor with a large up-front payment intended to provide for the trust's operations for several years into the future, as happened in Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210. The company intends to fund the EST on a recurring basis, as required, to satisfy the provision of shares in accordance with the terms of the EOP.

It is accepted that the EST provides benefits to the operation of the scheme that would not be available if the shares were provided directly by the company in the relevant counterfactual.

(ii) The Form and Substance

The substance of the scheme is the provision of remuneration in the form of shares to Participants who participate in the LTIP. It takes the form of payments by the company to the Trustee which acquires the shares and transfers them to Participants.

While existence of the trust may confer a tax benefit, it cannot be concluded that it is the only benefit provided, as outlined above. The applicant has argued that the form of the arrangement with the trust provides the scheme with non-tax benefits and this is accepted.

(iii) The timing of the scheme

As noted above, the scheme has not been established at a time to provide a substantial year-end deduction to the company nor with a contribution sufficiently large to fund the trust for several years, but by recurring contributions. There is nothing regarding this factor that suggests a dominant purpose of seeking to obtain a tax benefit in relation to the scheme.

(iv) The result of the scheme

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

(v) Any change in the financial position of the company

As noted above, the company makes irretrievable contributions to the EST and those contributions constitute a real expense with the result that the company's financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with a trust as part of the scheme, in contrast to the company providing shares to participants directly, there is nothing artificial, contrived or notional about the company's expenditure.

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

The contributions by the company to the trustee will form part of the corpus of the trust and must be dealt with by the trustee in accordance with the terms of the proposed Trust Deed, that is, for the acquisition of shares to ultimately be provided to participants in the LTIP. The company is not a beneficiary of the EST and its contributions cannot be returned to it in any form except where the trustee acquires shares from the company by subscribing for new shares at market value. Therefore, the contributions made by the company amount to a real change to the financial position of the trustee. The financial position of participants in the schemes will also undergo a real change. There is nothing artificial, contrived or notional about these changes.

(vii) Any other consequence

This factor is not relevant to this scheme.

(viii) The nature of any connection between the company and any other persons

The relationship between the company and the participants in the LTIP is one of employer/employee. The Trustee and the company are unrelated.

The contributions made by the company to the Trustee are commensurate with the company's stated aim of providing the participants with remuneration in a form that aligns their personal financial rewards with the risks and returns of the company's shareholders. There is nothing to suggest that the parties to the employee share schemes are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit.

Conclusion - the purpose of the scheme

A consideration of all the factors referred to in paragraph 177D(b) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the company's employees, directors and consultants who participate in the scheme in a form that promotes the company'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 full, any deduction claimed by the company in relation to irretrievable contributions made by the company to the EST to fund the acquisition of Employer shares in accordance with the scheme as outlined above.