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Ruling

Subject: Employee Share Scheme

Question 1

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

Answer

Yes.

Question 2

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

Answer

Yes.

Question 3

Are irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares by the EST, deductible to Company A at the time determined by section 83A-210 of the ITAA 1997 in respect of employee share scheme (ESS) interests that are subject to Division 83A of the ITAA 1997 when those contributions are made before the ESS interests have been acquired?

Answer

Yes.

Question 4

Are irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares by the EST, deductible to Company A at the time determined by section 139DB of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of ESS interests that are subject to Division 13A of the ITAA 1936?

Answer

Yes.

Question 5

If the EST satisfies its obligations under the Employee Share Option Plan (ESOP) and Performance Rights Plan (PRP) by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997?

Answer

No.

Question 6

Will the Commissioner seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee of the EST to fund the subscription for or acquisition on-market of the company's shares by the EST?

Answer

No.

Question 7

Will the provision of Options under the ESOP or Rights under the PRP by Company A be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 8

Will the non-refundable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

Question 9

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A by the amount of the tax benefit obtained from the non-refundable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares?

Answer

No.

This ruling applies for the following periods:

Income Tax

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Fringe benefits tax

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

Year ended 31 March 2016

Relevant facts and circumstances

As part of its reward and retention strategy Company A operates an Employee Share Option Plan (ESOP) and a Performance Rights Plan (PRP). The ESOP and PRP are collectively referred to below as the Incentive Plans.

Company A has established a single EST to facilitate the provision of fully paid ordinary shares in

Company A to employees and executives under the existing Incentive Plans and any future executive and employee equity plans. The EST is managed by a corporate trustee company, and governed by the deed of trust between Company A and the Trustee (Trust Deed).

The applicant has noted the following commercial benefits of using an EST:

· providing Company A with capital management flexibility by enabling it to direct the Trustee of the EST to either buy shares on-market or to subscribe for an issue of new shares in Company A;

· providing a single vehicle to whom the administration of the Incentive Plans and any plans which Company A introduces in the future can be conveniently outsourced and more efficiently managed; and

· providing an arm's-length vehicle for acquiring and holding shares in Company A. This will assist Company A meet its Corporations Law obligations and help it to facilitate the management of potential insider trading issues and any other risks associated with a company dealing in its own shares.

The ESOP

In accordance with the Rules of the ESOP (ESOP Rules) the Board, at its discretion, will offer Share Options (Options) to an Eligible Person after considering various factors including the seniority and position of that person within Company A, the length of their service, their record of employment and their potential contribution to the growth of the company.

Administration of the ESOP is vested in the Board.

The Eligible Person may accept the offer by providing to the Board with a notice of acceptance in writing or nominating a nominee in whose favour they wish to renounce the offer. The Board may, in it its absolute discretion and without reason, resolve not to allow such renunciation.

Upon acceptance of an offer, Certificates for Share Options will be dispatched by Company A to the Eligible Person within 10 business days after their Issue Date and the certificate will state the number of Options issued and their Issue Date and Exercise Price (if applicable). Until determined otherwise by the Board, Options are granted for nil consideration.

The Options will vest twelve months from the allotment date (being the Issue Date as defined in the ESOP Rules) and may be exercised at any time up until the Expiry Date, which is five years from the date of their allotment. Options may also be exercised in the circumstances set out in clauses 11.2 and 11.4 of the ESOP Rules.

Each Option is convertible into one fully paid ordinary share in Company A.

Options may only be exercised by way of notice in writing (Exercise Notice) provided to the Board at the registered office of Company A. Such notice must specify the number of Options being exercised and must be accompanied by the total Exercise Price (if applicable) for all Options being exercised and the Certificate for those Options (for cancellation by the company).

The method of calculation of the Exercise Price (if applicable) of each Option will be determined by the Board with regard to the market value of the shares when it resolves to offer the Option and will be based upon a premium of approximately 10% to the closing price of the shares as traded on the ASX.

Options will automatically lapse if they are not validly exercised on or before their Expiry Date or if the participant ceases to be an Eligible Person for any reason other than retirement, permanent disability, redundancy or death.

Within 10 business days after the Exercise Notice has become effective in accordance with clause 11.5 of the ESOP Rules, Company A must instruct the Trustee to subscribe for, acquire and/or allocate the number of shares specified in the Exercise Notice. The Trustee will hold those shares in accordance with the terms of the Trust Deed. All shares allotted and transferred will be of the same class and rank equally with all existing ordinary shares in Company A.

The Board may determine that a Restriction Period will apply to shares issued, transferred or allocated to a participant following exercise, up to a maximum of seven years from the allotment date. The Board may, in its sole discretion, waive a Restriction Period. A participant cannot dispose of or otherwise deal with any shares while the shares are restricted.

A participant on whose behalf the Trustee holds shares may submit a Withdrawal Notice to Company A in respect of some or all of the shares which are not restricted shares and which the Trustee of the EST holds on behalf of the participant. At this point, Company A must then direct the Trustee to transfer legal title of the shares or to dispose of the shares in accordance with the terms of the approved Withdrawal Notice.

Operation of the PRP

At the discretion of the Board and in accordance with the PRP Rules, Company A may offer Performance Rights (Rights) and Phantom Performance Rights to an Eligible Employee by providing them with an Invitation to Participate in the PRP (PRP Invitation). However, as the Phantom Performance Rights will not be administered by the EST, they are not covered by this Ruling.

Unless otherwise determined by the Board, Rights are granted pursuant to the PRP Invitation for nil consideration.

The terms and conditions of Rights offered to each Eligible Employee will be set out in the PRP Invitation and include, if applicable, the number of Rights, Fee payable, Exercise Price, Exercise Period, Vesting Conditions, Performance Conditions, the Restriction Period and rights or restrictions attaching to the Rights administered through the EST.

A Right granted pursuant to the PRP entitles the participant to one fully paid ordinary share in Company A.

Unless otherwise determined by the Board, no exercise price is payable by a participant on exercise of a Right.

The final number of Rights that may be exercised will depend on the extent to which the Performance Exercise Conditions and Time Based Conditions specified in the PRP Invitation are satisfied.

Where the Exercise Price of the Right is nil, the Right will be exercisable when a participant receives an Exercise Notice from Company A notifying the participant of the extent to which the Exercise Conditions have been satisfied and the number of Rights which may be exercised.

Where an Exercise Price is payable, the Right must be exercised within the Exercise Period and by delivering to the registered office of Company A a signed Notice of Exercise and payment of the exercise price.

Upon their exercise Rights will automatically lapse and Company A must instruct the Trustee to either subscribe for new shares or acquire shares on market and/or allocate shares held in the EST equal to the number of shares for which the participant was entitled through the exercise of the Rights.

All shares allocated and transferred to a participant pursuant to the exercise of Rights granted under the PRP will be of the same class and rank equally with all other shares then on issue in Company A.

The Board may determine whether there will be a Restricted Period and what restrictions on the disposal of, granting and Security Interest in or over, or otherwise dealing with shares will apply during the Restricted Period. The Board may waive the Restricted Period having regard to the circumstances at the time of making the invitation. A participant cannot dispose of or otherwise deal with any shares while the shares are restricted.

Company A may irrevocably authorise the Trustee to apply a Holding Lock to the shares of a participant and undertake not to request removal of the Holding Lock applied to the shares while the shares are held subject to the PRP.

A participant may submit a Withdrawal Notice to Company A in respect of some or all of the shares the Trustee holds on behalf of a participant, which are not restricted shares. At this point, Company A must direct the Trustee to transfer legal title to the shares to the participant in accordance with the terms of the approved Withdrawal Notice.

Operation of the EST

The ESOP and PRP will be subject to the same EST ie the Trust Deed and its terms. Accordingly, the following provisions will apply to both these plans:

The EST will be established for the sole purpose of subscribing for, acquiring, holding and allocating shares in Company A under the Incentive Plans (as well as any future plans established by Company A requiring shares to be held by the Trustee under the terms of the EST).

Pursuant to clauses 6.1 and 6.2 of the Trust Deed the appropriately convened Board of Company A will, on behalf of a participant, instruct the Trustee, by way of notice in writing, to purchase, subscribe for or allocate the requisite number of shares in Company A specified in the notice.

Pursuant to subclause 6.4(a) of the Trust Deed Company A must provide the necessary funds to the Trustee for the purpose of enabling it to acquire shares as specified in the notice in accordance with the Trust Deed.

Shares issued to or acquired by the Trustee will be allocated to the relevant employees and held on trust on their behalf (Clause 12.2 of the Trust Deed)

Shares may be dealt with at any time after any restrictive period lapses by either:

Shares allocated to each employee being transferred into the name of the employee upon a Withdrawal Notice being lodged with and approved by the Board (Clause 11 of the Trust Deed) or

The Trustee selling shares on behalf of the employee, where permitted to do so by the employee, resulting in a cashless exercise for them. That is, the employee receives proceeds on sale of the shares by the EST less the Exercise Price (if applicable) and any brokerage costs (Clause 12.1 of the Trust Deed)

Subclause 3.1(b) of the Trust Deed provides that subject to the relevant plan rules and terms of participation, each participant is the beneficial owner of the Trust shares held by the Trustee on their behalf and absolutely entitled to all other benefits and privileges attached to, or resulting from holding those Trust shares.

The Trustee will, in accordance with instructions received pursuant to the relevant plan rules in place at the time, acquire or subscribe for, allocate and transfer shares for the benefit of participants provided that the Trustee receives, when required and necessary, sufficient payment to subscribe for or purchase shares and/or has sufficient unallocated Trust shares available (see clauses 3.3 and 8.1 of the Trust Deed).

The subscription price for each of the shares must be the market value of the shares as ascertained by Company A on the date on which the shares are issued to the Trustee (see clause 6.3 of the Trust Deed).

The Trustee (or any other party which the Trustee considers appropriate) will establish and maintain a separate Trust Share Account or record in respect of each participant in accordance with subclause 7.1 of the Trust Deed.

While shares are held in trust, the participant will be entitled to dividend and voting rights (see clauses 9.1 and 10 of the Trust Deed). The shares may be subject to a sale restriction under an ASX administered holding lock. By written notice, participants can apply for legal title to the shares held in the EST to be transferred to them (see clauses 11 and 13.2 of the Trust Deed).

All funds received by the Trustee from Company A will constitute accretions to the corpus of the trust and no participant will be entitled to receive such funds. The contributions will not be repaid to Company A unless they are used to subscribe for shares in Company A (see subclause 6.4(b) of the Trust Deed).

Where an amount paid by Company A to the Trustee in respect of the acquisition of shares for the benefit of a participant is in excess of the amount required by the Trustee to acquire those shares, Company A may require the Trustee to apply such amount to subscribe for or acquire, allocate or transfer shares in accordance with the Trust Deed, the relevant plan rules or the relevant terms of participation or deposit the funds into any account opened and operated by the Trustee (see subclause 6.4(d) of the Trust Deed).

The Trustee will not be permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the EST. It will not be permitted to carry out activities which result in the participant being provided with additional benefits other than the benefits that arise from the relevant plan rules (see subclauses 4.4(b) and 4.4(c) of the Trust Deed).

The applicant has advised that some Options issued under the ESOP will be subject to Division 83A of the ITAA 1997, some Options may be subject to Division 83A of the ITAA 1997 by operation of the transitional legislation and some Options may be subject to former Division 13A of the ITAA 1936. All Rights granted pursuant to the PRP are subject to Division 83A of the ITAA 1997 only.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 20-20

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Section 83A-35

Income Tax Assessment Act 1997 Section 83A-205

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 104-155

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

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Section 139DB

Income Tax Assessment Act 1936 Section 139E

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

Income Tax (Transitional Provisions) Act 1997 Section 83A-5

Income Tax (Transitional Provisions) Act 1997 Section 83A-10

Fringe Benefits Tax Assessment Act 1986 Section 67

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Question 1

Subsection 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) is a general deduction provision. It states that:

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 states:

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

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

(b) it is a loss or outgoing of a private or domestic nature; or

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

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

Losses or outgoings

Pursuant to clause 6.4(a) of the Trust Deed, Company A or a Related Body Corporate must provide the EST with funds (contributions) for the purpose of acquiring shares in Company A in accordance with clause 6.2 of the Trust Deed.

The Trustee will, in accordance with directions received by Company A, purchase, subscribe for or allocate shares for the benefit of participants provided that the Trustee receives sufficient payment to subscribe for or purchase shares and/or has sufficient shares available.

These contributions made to the EST by Company A will be irretrievable and non-refundable to Company A (clause 6.4(b) of the Trust Deed provides that funds provided to the EST pursuant to clause 4.2 of the Trust Deed will not be repaid to Company A and that no participant is entitled to receive such funds). On this basis, it is concluded that the irretrievable contributions made by Company A are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997.

Relevant nexus

The purpose of Company A in establishing and making irretrievable contributions to the EST is to provide benefits to certain eligible employees in the form of shares in Company A, provided certain conditions as detailed in the ESOP Rules and PRP Rules, are satisfied.

As stated by the applicant at page 25 of its application, the purpose of Company A making contributions to the EST is to provide participants with an opportunity to share in the future growth in value of Company A. This aligns employee and shareholders interest and in doing so, should encourage participants to improve the longer-term performance (and assessable income) of Company A.

Accordingly, there is a sufficient nexus between the outgoings (Company A's contributions to the EST) and the derivation of its assessable income (Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay's) Ltd v FCT (1935) 54 CLR 295;(1935) 3 ATD 288, W Nevill & Co Ltd v FC of T (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin NL v FCT (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147).

Capital or Revenue?

The contributions by Company A will be recurring and made from time to time as and when Company A shares are to be subscribed for or acquired by the Trustee pursuant to the Trust Deed.

Therefore, to this end, it is concluded that the contributions are not capital in nature, but rather outgoings incurred by Company A 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; 58 ATR 210 and FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745 that payments by an employer company to an EST established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature.

This Commissioner considers that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made by the company to the Trustee of its employee share scheme.

Finally, nothing in the facts suggests 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 Income Tax Assessment Act 1936 (ITAA 1936).

Question 2

As discussed in question 1 above, section 8-1 of the ITAA 1997 provides that 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.

Company A will incur costs associated with the services provided by the Trustee of the EST and has incurred various implementation costs. These costs are part of the ordinary recurring cost to Company A of remunerating its employees and are therefore deductible under section 8-1 of the ITAA 1997.

However, it is noted that, unlike the irretrievable contributions made to the EST to acquire shares, these payments do not form part of the corpus of the EST, but are assessable income of the Trustee.

Question 3

Section 83A-210 of the ITAA 1997 states:

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.

An employee share scheme is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2) of the ITAA 1997). An ESS interest is a beneficial interest in a share in a company or a right to acquire a beneficial interest in a share in a company (subsection 83A-10(1) of the ITAA 1997). The ESOP and PRP are employee share schemes as an Option and Right respectively, granted under each of these employee share schemes is an ESS interest, being a right to acquire a beneficial interest in the share of a company (that is, rights to acquire Company A shares) and are granted in respect of a participant's employment with Company A.

The adoption of the ESOP Rules and PRP Rules and the creation of the EST constitute the arrangement in these circumstances for the purposes of paragraph 83A-210(a)(i) of the ITAA 1997 and the provision of money to the Trustee necessarily allows the scheme to proceed.

Company A will provide money to the Trustee of the EST to enable the Trustee to acquire Company A shares for the purposes of satisfying the grant of Options or Rights under the ESOP Rules and PRP Rules. As noted above, both the Rights and the Options are ESS interests which participants will acquire upon being granted them by Company A. The acquisition time for the purposes of section 83A-210 of the ITAA 1997 occurs when the Rights or the Options to the Company A shares are granted to participants.

Accordingly, in accordance with section 83A-210 of the ITAA 1997, the cash contributions that Company A makes to the Trustee will be deductible in the income year in which the acquisition time falls for the Rights or Options.

Therefore, when Company A makes a cash contribution to the Trustee in an income year before the income year in which the acquisition time for the Rights or Options occurs, section 83A-210 of the ITAA 1997 provides that it will be allowed a deduction in the income year in which the ESS interests (Rights or Options) are granted (acquired).

However, section 83A-210 of the ITAA 1997 will not apply if Company A makes a cash contribution in an income year that is later than the income year in which the Rights or Options are granted. In this case, the cash contribution will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is incurred i.e. in the later income year.

Finally, it should be noted that 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 or Rights, the excess payment will occur before the employees acquire the relevant Options or Rights (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 Company A in the year of income when the relevant Options or Rights are subsequently granted to (acquired by) participants.

Question 4

Former section 139DB of the ITAA 1936

Former section 139DB of the ITAA 1936 states:

If, at a particular time, a person (the provider) provides another person with money or other property:

(a) under an arrangement; and

(b) for the purpose of enabling another person (the ultimate beneficiary) to acquire, directly or indirectly, a share or right, under an employee share scheme;

Then, for the purpose of determining when any deduction is allowable to the provider in respect of provision of the money or other property, the provider is taken to have provided it not before the time when the ultimate beneficiary acquires the share or right.

The Commissioner considers that the granting of the rights, the providing of the money to the trustee, the acquisition and holding of the shares by the trustee and the allocating of shares to the participating employees are all interrelated components of the plan. All the components of the plan must be carried out so that the plan can operate as intended. As one of those components, the providing of money to the trustee necessarily allows the plan to proceed. Consequently, the providing of money to the trustee is considered to be for the purpose of enabling the participating employees, indirectly as part of the plan, to acquire the rights available under the plan. Accordingly, section 139DB of the ITAA 1936 determines the time when a deduction is allowable to the taxpayer under section 8-1 of the ITAA 1997 in respect of the provision of money to the trustee of the employee share trust.

However, Options which were issued before 1 July 2009 and to which former Division 13A of the ITAA 1936 still applies were acquired before the establishment and creation of the EST. As a consequence, the irretrievable contributions eventually made to the Trust to enable the EST to acquire shares to satisfy pre -1 July 2009 Options, will be paid after the participant has acquired their Options. Therefore former section 139DB of the ITAA 1936 will not act to defer the timing of the deduction for irretrievable contributions made by Company A to the EST. Rather, the cash contributions will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is incurred, that is, in the year the irretrievable contribution is made.

Question 5

Ordinary Income

Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. The classic definition in Australian law was given by Jordan CJ in Scott v DCT (NSW) (1935) 35 SR (NSW) 215. It states that:

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts.

The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that:

The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; … that is income derived from property. Nothing else answers the description.

In GP International Pipecoaters Pty Ltd v FCT (1990) 170 CLR 124 the High Court held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. They further state:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In accordance with an employee share scheme, the Trustee subscribes to the company for an issue of shares, it pays the full subscription price for the shares and the company receives a contribution of share capital from the Trustee.

The character of the contribution of share capital received by Company A from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, Company A is issuing the Trustee new shares in itself. The character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of the share capital, and accordingly, is of a capital nature.

Accordingly, when Company A receives the subscription proceeds from the Trustee of the EST where the EST subscribes for new shares in Company A to satisfy its obligations to the Option or Rights holders, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account, and not ordinary income under section 6-5 of the ITAA 1997.

Section 20-20 of the ITAA 1997

Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year.

Company A will receive an amount for the subscription of shares by the EST. There is no insurance contract in this case, so the amount is not received by way of insurance.

Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation.

Subsection 20-20(3) of the ITAA 1997 makes assessable a recoupment of a loss or outgoing that is deductible, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30 of the ITAA 1997.

Recoupment is defined to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of a loss or outgoing.

The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing.

So far as a deduction under section 8-1 of the ITAA 1997 is allowed for bad debts or rates or taxes, section 20-30 of the ITAA 1997 will apply such that if there was a recoupment of that deduction, that amount would be assessable. However, it can be argued that in subscribing for new shares in Company A, the EST is acquiring new shares in Company A. This cannot be said to be a recoupment under subsection 20-25(1) of the ITAA 1997.

The receipt by Company A is made in return for issuing shares to the EST, not as a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes to which section 20-30 of the ITAA 1997 will apply.

Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20 of the ITAA 1997.

Capital Gains Tax

Section 102-20 of the ITAA 1997 states that you make a capital gain or loss, if and only if a CGT event happens. No CGT events occur when the EST satisfies its obligations under the Incentive Plans by subscribing for new shares in Company A.

The relevant CGT events that may be applicable when the subscription proceeds are received by Company A are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset).

However, paragraph 104-35(5)(c) of the ITAA 1997 states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, Company A is issuing shares, being equity interests as defined in section 974-75 of the ITAA 1997, to the Trustee, therefore CGT event D1 does not happen.

In relation to CGT event H2, paragraph 104-155(5)(c) of the ITAA 1997 also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Therefore, CGT event H2 does not occur.

Since no CGT event occurs, there is no amount that will be assessable as a capital gain to Company A.

Therefore, when the EST satisfies its obligations under the ESOP and PRP by subscribing for new shares in Company A, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20-20 ITAA 1997, nor trigger a CGT event under Division 104 of the ITAA 1997.

Question 6

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 in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are:

there must be a scheme within the meaning of section 177A of the ITAA 1936

a tax benefit arises that was obtained or would be obtained in connection with the scheme but for Part IVA of the ITAA 1936 and

having regard to the matters in paragraph 177D(b) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies.

The Scheme

A scheme is defined in subsection 177A(1) of the ITAA 1936 which states:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct

It is considered that this definition is sufficiently wide to cover the proposed employee arrangement under the Plan, which consists of the creation of the EST, including the Trust Deed, and the payment of the irretrievable cash contributions to the Trustee.

Tax Benefit

'Tax benefit' is defined in subsection 177C(1) 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 Company A from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the company might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration.

The applicant, at page 43 of its application considers the following alternate actions:

If the scheme were not entered into (i.e. the EST was not used) and Company A simply chose to issue new shares, Company A may not receive a tax deduction for this amount. However, Company A would still be entitled to a deduction if it simply bought shares for employees on market via a broker (subject to company law requirements) or alternatively remunerated the employees via an entirely different method such as cash bonuses.

If Company A issued new shares directly to employees they may not receive a deduction for the amount incurred in issuing the shares. Therefore by using an EST, a tax benefit is created through the deduction they will receive under section 8-1 of the ITAA 1997 for the irretrievable cash contributions they make to the Trustee.

The applicant concurs with this in their application at page 43 where they provide that the relevant tax benefit in the present case is where Company A receives an income tax deduction arising from the payment of an amount to the Trustee.

Dominant purpose

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:

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

· the form and substance of the scheme

· the time at which the scheme was entered into and the length of the period during which the scheme was carried out

· the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme

· 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

· 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

· 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

· 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).

Subsection 177A(5) of the ITAA 1936 requires the purpose to be the dominant purpose. Therefore in considering whether Part IVA applies or not, the necessary comparison to be made in relation to the factors listed in paragraph 177D(b) is between the scheme as proposed and the relevant counterfactual.

(i) The Manner of the Scheme

The inclusion of the EST in the scheme does give rise to a tax benefit, but the company contends that the presence of the EST provides other commercial benefits. In particular, it states at page 45 of its application that benefits include, amongst other things:

Capital management flexibility as it provides a streamlined approach to using contributions received from Company A and Participants to either acquire shares in Company A on market (in a more convenient manner than if no trust was used) which is non-dilutive to existing shareholders or alternatively to subscribe for new shares which is dilutive but provides for capital management flexibility. This provides flexibility as circumstances change, business needs move and market conditions change in how shares are sourced for provision to Participants.

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

The application also provides that the establishment of the EST will assist Company A to meet Corporations Act requirements in relation to dealing in its own shares and insider trading.

Further, it is noted that the arrangement is not deliberately and intentionally established close to the end of the company's income year nor with a large up-front payment intended to provide for the EST'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. Rather, as the applicant states at page 46 of its private ruling application, '…Company A will fund the EST on an ongoing basis (at least annual basis) as the need arises'.

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 as 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 eligible employees who participate in the Incentive Plans (as well as any employees who participate in future employee share equity plans). It takes the form of payments by Company A to the Trustee who acquires the shares and transfers them to participants.

While existence of the EST confers a tax benefit, it cannot be concluded that it is the only benefit provided as outlined above. Company A has argued that the form of the arrangement with the EST provides the scheme with multiple 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 EST for several years, but by recurring contributions. There is nothing in this factor to suggest 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 Company A 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, Company A 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 an EST as part of the scheme than would be the case if the company provided shares to participants directly, there is nothing artificial, contrived or notional about Company A's expenditure.

(vi) Any Change in the Financial Position of other Entities or Persons

The contributions by Company A to the EST will form part of the corpus of the EST and must be dealt with by the Trustee in accordance with the terms of the Trust Deed i.e. for the acquisition of shares to provide to participants in employee share schemes. 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 issues 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

Not relevant to this scheme.

(viii) The Nature of any Connection between the Company and any Other Persons

The relationship between Company A and the participants in the scheme is one of employer/employee. The Trustee is independent of the company and is under a fiduciary obligation to act in the interests of the employees who participate in employee share schemes and in particular, in this case, the Incentive Plans. The contributions made by the company to the Trustee are commensurate with the company's stated aim of encouraging employees to share in the ownership and the long-term success of the company. 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.

Question 7

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided.

No amount will be subject to FBT unless a 'fringe benefit' is provided.

In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee.

However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

Paragraph (h) of the definition of 'fringe benefit' states that a fringe benefit does not include:

…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 83AB or 83AC of that Act applies.

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

…a beneficial interest in:

· a share in the company; or

· a right to acquire a beneficial interest in a share in the company.

Subsection 83A - 10(2) of the ITAA 1997 defines an employee share scheme as:

…a scheme under which ESS interests in a company are provided to employees, or associates of employees, including past or prospective employees of:

· the company, or

· subsidiaries of the company

· in relation to the employees employment.

Company A has stated that it will grant ESS interests (Options and Rights) to participants of the ESOP and PRP. The ESS interests offered to participants under these plans are offered at a discount (as there is no consideration paid for the Options or Rights) in connection with a participant's employment. In turn, these ESS interests (subject to certain conditions) are convertible to shares.

It is accepted that the Incentive Plans described in this private ruling comprise an employee share scheme and incorporate the use of the EST that is an employee share trust within the meaning of subsection 130-85(4) of the ITAA 1997.

Accordingly, the acquisition of ESS interests pursuant to the Incentive Plans will not be subject to fringe benefits tax on the basis that they are part of an employee share scheme and are thereby excluded from the definition of 'fringe benefit' pursuant to subsection 136(1) of the FBTAA.

The provision of shares

Division 83A of the ITAA 1997

Subsection 83A - 20(2) of the ITAA 1997 states:

83A-20(2) However, this subdivision does not apply if the ESS interest is a beneficial interest in a share that you acquire as a result of exercising a right, if you acquired a beneficial interest in the right under an employee share scheme.

Essentially, this means that Company A shares granted under the Incentive Plans, to satisfy Rights or Options exercised, are not ESS interests acquired under an employee share scheme. Consequently, the acquisition of the shares (as a result of exercising the Options and Rights) is not excluded from being a fringe benefit by virtue of the definition of fringe benefit in subsection 136(1) of the FBTAA.

However, for a benefit to be a fringe benefit, it must be provided in respect of the employment of the employee.

The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. The court at ATC 4158 said:

Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, casual connection or relationship between the benefit and the employment.

The situation is similar to that which existed in FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The full Federal 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.

When an employee accepts to participate in the ESOP or PRP, they obtain a right to acquire a beneficial interest in a share in Company A and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received would be in respect of the exercise of the right, and not in respect of employment.

Therefore, the benefit that arises to an employee upon the exercise of an Option or Right under the ESOP or PRP will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee.

Question 8

Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit 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);

Employee share trust

Subsection 130-85(4) of the ITAA 1997 states:

An employee share trust, for an employee share scheme, 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).

A payment of money by Company A to the EST will therefore not be subject to FBT provided that the sole activities of the EST are obtaining shares or rights to acquire shares in Company A.

The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests 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 ESOP and PRP are employee share schemes within the meaning of subsection 83A-10(2) of the ITAA 1997 because they are both schemes under which rights to acquire shares in the company are provided to employees in relation to the employee's employment (see further discussion of the term 'employee share scheme' below).

Under the ESOP and PRP, the employer has established the EST to acquire shares in the company and to allocate those shares to employees to satisfy the Rights and Options acquired under the employee share schemes. The beneficial interest in the share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights to acquire the shares are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997.

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, are 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 a Trustee to undertake incidental activities that are a function of managing the employee share scheme and administering the trust.

The Commissioner considers that 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 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 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

· 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.

For the purposes of the EST, the powers of the Trustee are set out in Clause 4.1 of the Trust Deed. Clause 4.2 limits the powers given to the Trustee under the Trust Deed in clause 4.1 so as to ensure that the powers of the Trustee under the Trust Deed are exercised in accordance with the purpose of the Trust Deed as evidenced in Recital B, that is, for the "..sole purpose of obtaining Shares for the benefit of Participants". These provisions, collectively, make it clear that the Trustee can only use the contributions received exclusively for the acquisition of shares for eligible employees in accordance with the Incentive Plans. 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 for the sole benefit of participants in accordance with the ESOP and PRP.

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

Accordingly, as 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, Company A 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 Company A shares in accordance with the Trust Deed.

Former Division 13A of the ITAA 1936

Some of the cash contributions made by Company A to the EST will be used by the Trustee to acquire shares to satisfy Options that are still subject to former Division 13A of the ITAA 1936. As a consequence, former provisions in the FBTAA relevant to former Division 13A of the ITAA 1936 will still apply to determine the FBT consequences of cash contributions made by Company A to the EST to acquire shares to satisfy Options issued under the ESOP that are still subject to former Division 13A of the ITAA 1936.

Former paragraph (hb)

For the purposes of former Division 13A of the ITAA 1936, benefits constituted by the acquisition by a trust of money or other property in relation to an employee share trust, are specifically excluded from being fringe benefits by the operation of the former paragraph (hb) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA. The exclusion will apply where:

....the sole activities of the trust are obtaining shares, or rights to acquire shares, in a company, or a holding company (within the meaning of the Corporations Act 2001) of the first-mentioned company, and providing those shares or rights:

(i) to employees, or associates of the employees, of the first-mentioned company;….

In the present case the Trustee of the EST will be receiving irretrievable contributions from Company A for the purpose of providing shares to eligible employees. The contributions will be used exclusively to acquire shares in Company A for employees of Company A.

The Commissioner considers that a trust will be acting solely for the benefit of the EST where the activities of the trustee of the trust are limited to managing an employee share plan and the general administration of the trust.

As concluded above, the powers in the Trust Deed are to be read down so as to ensure that the Trustee exercises its powers at all times for the sole purpose of providing a benefit in the form of Company A shares to participants under the ESOP and PRP.

Therefore, as the sole activities of the Trustee are related to acquiring shares in Company A for employees the exclusion in former paragraph (hb) of subsection 136(1) of the FBTAA will apply and the contributions will be excluded from the definition of fringe benefit in subsection 136(1) of the FBTAA.

Accordingly Company A will not be required to pay FBT under the provisions of the former Division 13A of the ITAA 1936 in respect of the irretrievable contributions it makes to the Trustee of the EST.

Question 9

Law Administration Practice Statement 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. 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 fringe benefits tax 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 Practice Statement 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.

Under the existing ESOP and PRP no fringe benefits tax is payable and nor is it likely that benefits provided to employees under other alternative remuneration plans would result in fringe benefits tax being payable.

In addition, under the ESOP and PRP arrangements, the benefits provided by way of irretrievable contributions to the EST and the provision of rights and shares to eligible employees are excluded from the definition of a fringe benefit for the reasons given in the responses to questions 7 and 8 above. Therefore, as these benefits have been excluded from the definition of a fringe benefit, no fringe benefit arises and no fringe benefits tax will be payable by using an employee share trust with the existing ESOP and PRP. As there is also no fringe benefits tax payable under the existing ESOP and PRP nor likely to be payable under other alternative remuneration plans, the fringe benefits tax 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 Company A in relation to a tax benefit obtained under the proposed arrangement.