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Ruling

Subject: Employee Share Scheme

Question 1

Will the entity obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the irretrievable cash contributions made by the entity (or any of the subsidiary members of the entity's consolidated group) to the Trustee of the employee share trust (EST) to fund the acquisition of shares in the entity in satisfaction of the entity's obligations under the entity's equity plans?

Advice/Answers

Yes

Question 2

Will the entity obtain income tax deductions pursuant to sections 8-1 or section 25-5 of the ITAA 1997, in respect of costs incurred in relation to the implementation and ongoing administration of the EST?

Advice/Answers

Yes

Question 3

(A) In respect of Performance Rights and Options granted to employees under the entity's Equity Plans:

· After 30 June 2009; or

· Prior to 1 July 2009 where:

· no election was made under the former section 139E of the Income Tax Assessment Act 1936 (ITAA 1936); and

· a cessation event as described in subsection 139B(3) of the ITAA 1936 did not occur before 1 July 2009

Will the contribution made to the EST to fund the subscription for or acquisition on market or off market of the entity's shares by the EST be deductible to the entity at the later of the time of the contribution and when the Performance Right or Option is granted to the relevant employee, pursuant to section 83A-210 of the ITAA 1997?

Advice/Answers

Yes

(B) In respect of Performance rights and Options granted to employees under the entity's Equity Plans prior to 1 July 2009 where

· An election was made under the former 139E of the ITAA 1936 Act; or

· A cessation event as described in subsection 139B(3) of the ITAA 1936 Act occurred before 1 July 2009

Will the contribution made to the EST to fund the subscription for or acquisition on market or off market of the entity's shares by the EST be deductible to the entity at the later of the time of the contribution and when the Performance right or Option is granted to the relevant employee, pursuant to section 139DB of the ITAA 1936?

Advice / Answers

Yes

Question 4

If the EST satisfies the entity's obligations under the relevant entity's Equity Plans by subscribing for new shares in the entity, will the subscription proceeds be included in the assessable income of the entity under section 6-5 or section 20-20 of the ITAA 1997, or give rise to a capital gains tax event ("CGT") event under Division 197 of the ITAA 1997?

Advice/Answers

No

Question 5

If the EST satisfies the entity's obligations under the entity's Equity Plans by subscribing for new shares in the entity, will the share capital account of the entity become tainted under Division 197 of the ITAA 1997?

Advice/Answers

No

Question 6

Will the Commissioner make a determination that Part IVA of the ITAA 1936 applies to any aspect of the arrangement to deny, in part or in full, any deduction claimed by the entity in respect of the cash contributions made by the entity or any of its subsidiary members to the Trustee of the EST to fund the subscription for, or on market / off market acquisition of, the entity's shares by the EST?

Advice/Answers

No

Question 7

Is the provision of Performance Rights or Options under the Equity Plans to employees of the entity a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Advice/Answers

No

Question 8

Will cash contributions made by the entity to the Trustee of the EST to fund the subscription for or acquisition of the entity's shares on market be a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Advice/Answers

No

Question 9

Will the Commissioner seek to apply section 67 of the FBTAA to any of the entity's Equity Plans or EST arrangement?

Advice/Answers

No

This ruling applies for the following period

Year ended 30 June 2010

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

Year ended 30 June 2016

The scheme commenced on

1 July 2009

Relevant facts

The scheme the subject of this Ruling has been ascertained from the following documents:

· Application for Private Ruling

· The entity's Employee Share Option Plan Rules

· The entity's Long Term Incentive Plan Rules

· The Trust Deed of the EST

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Section 20-20 of the Income Tax Assessment Act 1997

Section 83A-10 of the Income Tax Assessment Act 1997

Section 83A-35 of the Income Tax Assessment Act 1997

Section 83A-205 of the Income Tax Assessment Act 1997

Section 102-5 of the Income Tax Assessment Act 1997

Section 102-25 of the Income Tax Assessment Act 1997

Section 104-35 of the Income Tax Assessment Act 1997

Section 104-155 of the Income Tax Assessment Act 1997

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

Section 995-1 of the Income Tax Assessment Act 1997

Section 197-25 of the Income Tax Assessment Act 1997

Section 139DB of the Income Tax Assessment Act 1936

Section 139E of the Income Tax Assessment Act 1936

Section 177A of the Income Tax Assessment Act 1936

Section 177C of the Income Tax Assessment Act 1936

Section 177D of the Income Tax Assessment act 1936

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

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

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Section 67 of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Question 1

Single entity rule

Pursuant to Taxation Ruling TR 2004/11, section 701-1 of the ITAA 1997 (the single entity rule) provides that if an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for 'head company core purposes' and 'entity core purposes' to be part of the head company, rather than separate entities during that period.

The intended operation of the single entity rule is to apply the income tax laws to consolidated group as if it were a single entity (being the head company).

Therefore when the entity or a member of the entity's group makes irretrievable cash contributions to the trustee of the EST, whether a deduction is allowed to the entity will be determined by considering whether the requirements of section 8-1 of the ITAA 1997 have been met.

Section 8-1 of the ITAA 1997 states:

8-1(1)

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.

8-1(2)

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;

The entity has established its employee share plans as part of its remuneration policy with the intention of attracting, retaining rewarding suitable employees in its business.

The cash contributions made by the entity to the Trustee of the Trust to fund the subscription for or acquisition on-market of the entity's shares by the Trust are irretrievable and non-refundable under the Trust Deed.

The stated purpose of the entity in establishing and funding its employee share plan is to encourage Employees to share in the ownership of the Company and to attract, motivate and retain those employees. In addition, the Long Term Incentive Plan was introduced to incentivise, retain and reward key employees.

Therefore, the irretrievable cash contributions it makes to the Trustee under the rules of the plans are directed to enhancing the profitability of its business and producing assessable income.

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; 55ATR 745, the Court held 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 is consistent with the opinion 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 non-refundable cash contributions made to the trustee of its employee share scheme.

Accordingly, the conditions of paragraph 8-1(1)(b) of the ITAA 1997 are satisfied.

The entity has advised that the company will make contributions to the Trust to provide benefits to eligible employees in the form of shares. Such contributions will be made if and when the rights or options vest. Furthermore, on vesting, the entity's shares will then be acquired by the EST either on market or via a new issue of shares by the entity.

Accordingly the entity will not be pre-funding the Trust with a lump sum payment but will be making contributions on a regular basis as required.

The irretrievable cash contributions are an on-going expense of conducting its business to which the Company has committed itself by establishing the share plans and entering into the Trust Deed with the Trustee. Therefore, they are not capital in nature and paragraph 8-1(2)(a) of the ITAA 1997 is satisfied.

Accordingly, the irretrievable cash contributions the entity makes to the Trustee to enable it to acquire shares, whether by on-market purchase or subscription, are allowable deductions.

Question 2

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

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

The entity incurs various costs in relation to the implementation and on-going administration of the Trust. For example, the entity will incur costs associated with the services provided by the Trustee of the Trust, including but not limited to:

· Employee plan record keeping;

· Production and dispatch of holding statements to employees;

· Provision of annual income tax return information for employees;

· Costs incurred in the acquisition of shares on market (e.g. brokerage costs and the allocation of Shares to participants);

· Management of employee termination; and

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

These expenses form part of the ordinary employee remuneration costs.

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

As employer costs for the purpose of administering an employee share scheme are deductible under section 8-1 of the ITAA 1997, there is no need to address the issue of deductibility under section 25-5 of the ITAA 1997.

Question 3

(A)

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

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

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

83A-210 If:

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

(i) under an arrangement; and

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

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

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

Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by the entity under the ESOP or LTIP, in relation to the employee's employment.

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

Under the ESOP or LTIP an option or right granted to an employee will be an ESS interest as it is a right to acquire a beneficial interest in a share in the entity. This ESS interest is granted under an ESS in relation to the employee's employment. The share acquired by the Trustee of the EST to satisfy such an option or right is granted under the ESS to an employee, in relation to the employee's employment.

The granting of the beneficial interests in the options or rights, the provision of the money to the Trustee of the EST under the arrangement, the acquisition and holding of the shares by the Trustee of the EST and the allocation of shares to the participating employees are all interrelated components of the entity's ESOP or LTIP. All the components of the scheme must be carried out so that the scheme can operate as intended.

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

However, if any amount of money is used by the Trustee of the EST to purchase excess shares intended to meet a future obligation arising from a future grant of options, the excess payment occurs before the employees acquire the relevant options 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 the entity in the year of income when the relevant options are subsequently granted to the employees.

(B)

Does former Division 13A of the ITAA 1936 apply to options issued prior to 1 July 2009?

Former Division 13A of the ITAA 1936 was repealed effective 1 July 2009, but still has application in limited circumstances, by virtue of Division 83A of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997), including as outlined in paragraphs 97 to 101 of Class Ruling CR 2011/23:

97. Division 83A of the IT(TP)A 1997 sets out when Division 83A of the ITAA 1997 will apply to a share or right.

98. Subsection 83A-5(2) of the IT(TP)A 1997 provides that Subdivision 83A-C of the ITAA 1997 will apply to an ESS interest where:

· at the pre-Division 83A time, former subsection 139B(3) of the ITAA 1936 applied in relation to the interest;

· the interest was acquired (within the meaning of former Division 13A) before 1 July 2009;

· the cessation time mentioned in former subsection 139B(3) of the ITAA 1936, for the interest did not occur before 1 July 2009.

99. Section 83A-10 of the IT(TP)A 1997 provides that to avoid doubt, former Division 13A continues to apply if:

· at the pre-Division 83A time, former Division 13A applied in relation to a share or right; and

· if there is a beneficial interest in the share or right that is an ESS interest, Division 83A of the ITAA 1997 does not apply in relation to the ESS interest under section 83A-5 of the IT(TP)A 1997.

100. Former subsection 139B(3) of the ITAA 1936 applies in relation to a share or right if it is a qualifying share or right and the taxpayer has not made an election under former section 139E of the ITAA 1936 covering the share or right. Former subsection 139B(3) of the ITAA 1936 practically applies so that the discount given in relation to the interest is included in the assessable income in the year in which the cessation time occurs.

101. Former section 139E of the ITAA 1936 (for the 2008-2009 income year) provided for an election to be made in an employee's income tax return for the acquisition year and provided the Commissioner with a discretion to allow an election to be made at a later time. The election applies for an income year and covers each qualifying share or right acquired in that year.

Based on the above, former subsection 139B of the ITAA 1936 cannot apply where an election has been made by the employee under former section 139E of the ITAA 1936 and so Division 83A of the ITAA 1997 is not applicable. In these circumstances, where a participant makes an election under former section 139E of the ITAA 1936, former Division 13A of the ITAA 1936 continues to apply to options and rights issued prior to 1 July 2009.

Whether non-refundable cash contributions to the EST are deductible at a time determined by former section 139DB of the ITAA 1936?

Former section 139DB of the ITAA 1936 provides:

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

(a) under an arrangement

(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.

ATO Interpretative Decision ATO ID 2005/181 considered whether former section 139DB of the ITAA 1936 determines when a deduction is allowable to the taxpayer under section 8-1 of the ITAA 1936 in respect of the provision of money to the trustee of an employee share trust to purchase shares to satisfy obligations arising from share rights.

ATO ID 2005/181 provides:

Subsection 139C(4) of the ITAA 1936 provides that a taxpayer does not acquire a share under an employee share scheme if the taxpayer acquires the share as the result of exercising a right that the taxpayer acquired under an employee share scheme.

By the operation of subsection 139C(4) of the ITAA 1936 the shares transferred when the vesting conditions have been satisfied are not acquired by the participating employees under an employee share scheme. Therefore, section 139DB of the ITAA 1936 will only apply if there is the relevant connection between the money provided by the taxpayer to the trustee under the arrangement and the acquisition of the rights by the participating employees (the ultimate beneficiaries) under the plan.

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. Therefore, pursuant to section 139DB of the ITAA 1936, a deduction is allowable at the time the rights are acquired by participating employees and only to the extent of that amount of the money provided to acquire shares to satisfy the obligations in relation to the rights acquired.

We have already established, see question 3(A), that:

The granting of the beneficial interests in the options and rights, the provision of the money to the Trustee of the EST under the arrangement, the acquisition and holding of the shares by the Trustee of the EST and the allocation of shares to the participating employees are all interrelated components of the entity's ESOP and LTIP. All the components of the scheme must be carried out so that the scheme can operate as intended.

As one of those components, the provision of money to the Trustee of the EST necessarily allows the scheme to proceed.

Consequently, the provision of money to the Trustee of the EST to acquire the entity's shares is considered to be for the purpose of enabling the participating employees, indirectly as part of the ESOP, to acquire the options and rights.

As provided in ATO ID 2005/181, in the above circumstances former section 139DB of the ITAA 1936 determines the time when a deduction is allowable to the entity in respect to the provision of money to the Trustee of the EST. Therefore a deduction is allowable at the time the options and rights are acquired by participating employees but only to the extent money is provided before the options and rights are acquired. Section 139DB of ITAA 1936 will not apply to a deduction for the purchase of shares to satisfy an obligation arising from options and rights already granted. As in question 3, a deduction for the purchase of shares to satisfy an obligation arising from options and rights already granted is deductible in the year in which the money is paid to the trustee of the EST under section 8-1 of the ITAA 1997.

Question 4

Section 6-5 Income according to ordinary concepts

Under subsection 6-5(1) of the ITAA 1997, a payment or other benefit received by a taxpayer is included in assessable income if it is income according to ordinary concepts. Income according to ordinary concepts is not defined in the income tax legislation. However, principles to determine whether a receipt is income according to ordinary concepts have been developed by case law. In determining whether a receipt is income according to ordinary concepts, it is necessary to apply the relevant principles developed by case law to the facts of the particular case.

Dixon J in Sun Newspapers Limited and Associated Newspapers Limited v. FCT (1938) 61 CLR 337; (1938) 5 ATD 23; 1 AITR 403 (Sun Newspapers) outlined the three matters to be considered in determining whether a payment is on capital or revenue account, as follows:

· the character of the advantage sought by the payment

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

· the means adopted to obtain it.

As stated previously in this ruling, the entity has established its employee share plans as part of its remuneration policy with the intention of attracting and retaining suitable employees in its business. Therefore, the character of the advantage sought is one of reward and retention of the human resources of the business, as a contribution to its long term success, which distinguishes it as capital in nature.

The receipt of the subscription will be accounted for as an addition to the share capital of the entity in its books and records. While this treatment of the subscription proceeds is not decisive in itself, it is indicative of the entity's treatment of the receipt and consistent with accounting principles.

The payment is an outlay to secure shares in the entity as a means to structure the business to secure and enhance its long-term profitability.

Based on these three factors, the subscriptions proceeds are held on capital account.

Section 20-20 Assessable recoupments

Under Subdivision 20-A of the ITAA 1997, certain amounts received by way of insurance, indemnity or other recoupment are assessable income if the amounts are not income under ordinary concepts or otherwise assessable.

Under subsection 20-20(2) of the ITAA 1997, an amount you have received as recoupment of a loss or outgoing is an assessable recoupment if:

(a) you received the amount by way of insurance or indemnity; and

(b) you can deduct an amount for the loss or outgoing for the *current year, or you have deducted or can deduct an amount for the loss or outgoing for an earlier income year under any provision of this Act.

The subscriptions received by the entity from the Trust are for shares and are integral to the arrangement whereby the acquisition and holding of the shares by the Trustee and the allocation of shares to the participating employees are all interrelated components of the employee share plans. The character of the subscriptions paid to the entity for shares is not one of 'insurance, indemnity or other recoupment'.

Division 104 CGT events

Subsection 102-5(1) of the ITAA 1997 provides that your assessable income includes your net capital gain for the income year. Given that a capital gain or capital loss is made only if a CGT event happens, the initial step is to ascertain whether such an event has occurred. As the transaction is the payment of subscription proceeds by the Trust to the entity for shares, the possible CGT events are:

· D1 Creating contractual or other rights; or

· H2 Receipt for event relating to a CGT asset.

Subsection 102-25(3) of the ITAA 1997 provides that CGT event D1 applies in preference to CGT event H2.

Subsection 104-35(1) states that CGT event D1 'happens if you create a contractual right or other legal or equitable right in another entity'. However, the legal or equitable right has been created at the time of the issuance of the options or rights and not upon the payment of the subscription proceeds to the entity.

As no legal or equitable right is created CGT event D1 does not happen, further paragraph 104-35(5)(c) of the ITAA 1997 states that event D1 does not happen where a company issues or allots equity interests in the company.

As CGT event D1 is excluded, CGT event H2 is to be considered. CGT event H2 happens if an act, transaction or event occurs to a CGT asset owned by a taxpayer and the occurrence does not result in an adjustment to the cost base or reduced cost base (subsection 104-155(1) of the ITAA 1997).

Again, consideration of the subscription proceeds received by the entity from the Trust establishes that they are for shares and are integral to the arrangement whereby the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees are all interrelated components of the relevant Plans. As part of the relevant Plans contractual rights of employees are exercised on their behalf to acquire shares in the entity, rather than an act, transaction or event relating to a CGT asset owned by the entity.

Paragraph 104-155(5)(c) of the ITAA 1997 provides that CGT event H2 does not happen where a company issues or allots equity interests in the company, which is applicable here.

Accordingly, a CGT event under Division 104 of the ITAA 1997 does not arise when the Trustee subscribes for shares in the capital of the entity.

Question 5

The share capital tainting rules in Division 197 of the ITAA 1997 are integrity rules designed to prevent a company from disguising a distribution of profits as a tax-preferred capital distribution by transferring profits into its share capital account and subsequently making distributions from that account.

Essentially, the rules in Division 197 of the ITAA 1997 are designed to prevent companies from capitalising profits by transferring amounts to their share capital account and subsequently making distributions in a tax free or tax preferred manner.

Generally, where a share capital account has been tainted, distributions to the shareholder will be treated as dividends, notwithstanding that they have been debited against the share capital account. Accordingly, the tax free or tax preferred distribution as described will be subject to tax.

Under Division 197 of the ITAA 1997, a share capital account becomes tainted when an amount (other than an excluded amount) is transferred to its share capital account from any of its other accounts.

The Explanatory Memorandum (EM) to the Tax Laws Amendment (2006 Measures No. 3) Act states the following in relation to a transfer to the share capital account

4.12 An amount is transferred from one account to another where that amount is moved from one account to another. This, in turn, requires the balance of the first account to be reduced, while the balance of the second account is increased by the same amount.

4.13 An amount is not transferred from one account to another where the particular accounting entries result in the balances of both accounts increasing in size. Accordingly, an accounting entry of the form 'debit asset, credit share capital account' does not represent a transfer in the relevant sense.

It has been advised that the journal entry that will credit the share capital account of the entity on subscription of new shares is associated with an increase in Cash (asset) account, and the accounting entries will therefore result in the balance of both accounts increasing in size.

It is acknowledged that the balance of both accounts in the entity will increase, and that the EM states this does not constitute a transfer to the share capital account. However, the ATO considers that it is the substance of a dealing, rather than the accounting entries used which determines whether there is a transfer to the share capital account.

In this case, the Commissioner accepts that a transfer of an amount to the company's share capital account does not arise. This is because the two journal entries reflect the payment of cash to the employee share trust, and the receipt of consideration from the share trust for the issue of shares. This does not constitute the movement of an amount from the cash asset account of the entity to the share capital account of the entity.

Consequently, if the EST satisfies the entity's obligations under the entity's equity plans by subscribing for new shares, the share capital account of the entity will not become tainted under Division 197 of the ITAA 1997.

Question 6

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 entity's employees 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 entity in relation to irretrievable contributions made by the entity to the Trust to fund the acquisition of employer shares in accordance with the scheme as outlined above.

Question 7

Options issued on or after 1 July 2009

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the 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 1986 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:

(h) 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 as:

83A - 10(1) An ESS interest, in a company, is a beneficial interest in:

· a share in the company

· 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:

83A - 10(2) 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:

· the company, or

· subsidiaries of the company

· in relation to the employees employment.

The entity has stated that it will grant ESS interests (comprising options or rights) to the participants of its Plan. The ESS interests offered to participants in the Plan are offered at a discount (as there is no consideration paid for the options or rights), and in connection with the participants employment. In turn those ESS interests (subject to certain conditions) are convertible to shares.

It is accepted that the plans described in this private ruling comprise an employee share scheme and incorporate the use of an 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 plans will not be subject to fringe benefits tax on the basis that they are part of an employee share scheme and thereby excluded from the definition of 'fringe benefit' pursuant to subsection 136(1) of the FBTAA.

Transitional Provisions for options and rights issued prior to 1 July 2009

Options and rights that satisfy subsection 83A-5(1) or subsection 83A-5(2), of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997), are excluded from being a fringe benefit under paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA as they are an acquisition of an ESS interest under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies.

Subsection 83-A5(1) and subsection 83A-5(2) of the IT(TP)A 1997 is satisfied for rights or options that were acquired before 1 July 2009 where:

· They are qualifying rights or options under the old rules, and

· The employee has not elected to be taxed up front under the old rules (section 139E election was not made), and

A cessation time has not happened to the rights or options before 1 July 2009 under the old rules.

The provision of shares

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

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 the entity's shares granted under the plan, 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) it 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 plan, they obtain a right to acquire a beneficial interest in a share in Talent2 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 incentive plan 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);

An employee share trust (EST) 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 EST 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:

· obtaining shares or rights in a company; and

· 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:

· the company; or

· a subsidiary of the company; and

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

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

Clause 4.2 of the Trust Deed provides the following Sole activities test:

Without limiting the generality of clause 4.1, the Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share scheme" for the purposes of section 130(4) of the ITAA 1997.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85)4)(b) of the ITAA 1997 will also require that the trustee undertake incidental activities that are a function of managing the option and rights plans, and administering the EST.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, ATO ID 2007/179 sets out the Commissioners views on when an employee share trust satisfies the sole activities test. In particular, the Commissioner considers that activities that are a necessary function of managing an employee share scheme and administering a trust will satisfy the sole activities test. Such activities include:

· the opening and operating 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 an 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 purpose 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.

The scheme 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 entity are provided to employees in relation to the employee's employment or beneficial interests in shares in the entity are provided to employees in relation to the employees employment.

Under the ESOP and LTIP, the entity has established the Trust to acquire shares in the entity and to allocate those shares to employees. Therefore, paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 are satisfied because:

· The Trust acquires shares in the entity; and

· The trust 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 ESOP and LTIP.

The trust is an employee share trust as defined in subsection 995-1 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 1997and 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 Trust from being a fringe benefit.

Accordingly, the employer will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the trustee of the Trust to fund the acquisition of the entities shares in accordance with the Trust Deed.

Question 9

Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA of the ITAA 1936, in that the section requires the identification of an arrangement, a tax benefit obtained by the employer that was the sole or dominant purpose for a person entering into the arrangement and is activated by the making of a determination by the Commissioner.

PS LA 2005/24 provides guidance on the application of section 67 of the FBTAA. Paragraphs 145-148 state:

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 an other 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 and or could reasonably be expected to be included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

The Commissioner will only make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement.

In Miscellaneous Taxation Ruling MT 2021 under the heading "Appendix, Question 18" 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…

ATO Practice Statement - Law Administration PS LA 2005/24 provides instructions and practical guidance to tax officers on the application of Part IVA and other General Anti Avoidance rules. Paragraph 151 of PS LA 2005/24 states:

151. the approach outlined in this practice statement (refer to paragraph 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 entity's employee incentive plans, the benefits provided to the trustee by way of irretrievable cash contributions to the EST and to participants by way of the provision of options, rights and shares under the Plans will not be subject to FBT. Consequently, no amount could reasonably be expected to be included in the aggregate fringe benefits amount, attributable to the scheme, if the arrangement had not been entered into. Therefore, the fringe benefits tax 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 the entity in relation to a tax benefit obtained under the Plans.