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Ruling

Subject: Employee Incentive Plans

Question 1

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

Answer

Yes.

Question 2

Will Company A obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, for contributions made to the EST for payment of the EST's implementation and on-going administration costs?

Answer

Yes

Question 3

Are irretrievable 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 to satisfy ESS interests, deductible to Company A at a time determined by section 83A-210 of the ITAA 1997, in respect of those ESS interests which are subject to Division 83A of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes.

Question 4

Are irretrievable 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 to satisfy ESS interests, deductible to Company A at a time determined by former section 139DB of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of those ESS interests which are subject to Division 13A of the ITAA 1936?

Answer

Yes.

Question 5

If an EST satisfies its obligation under any of the Company A Incentive Plans 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 Income Tax ITAA 1936 applies to deny, in part or full, any deduction claimed by Company A in respect of the irretrievable 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 Employee Share Option Plan (ESOP) or Performance Rights under the Performance Rights Plan (PRP) by Company A be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No.

Question 8

Will the irretrievable 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 section 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 tax benefit obtained from the 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?

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 Benefit 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

Company A is a provider of integrated engineering solutions in the mining, resources, energy and power sectors and was established in 1996 as a result of the merger of two listed companies.

Company A uses in-house expertise to deliver a range of turnkey projects from design and manufacture to construction, installation, maintenance and off-site repair. It operates through four business streams via related entities and has an extensive network of operations in key locations throughout Australia, New Zealand and Asia.

Company A's executive remuneration strategy is designed to attract, retain and motivate appropriately qualified and experienced executives whilst balancing the expectations of shareholders. As part of its remuneration strategy, Company A operates an Employee Share Option Plan (ESOP) and a Performance Rights Plan (PRP) - together referred to as the Company A Incentive Plans. The applicant considers that the key to its remuneration strategy is the ability to align executive remuneration to shareholders interests.

Company A has now established a single employee share trust, known as the Company A Employee Share Trust (EST) to facilitate the provision of shares in Company A to executives and employees under the Company A Incentive Plans. Company B is the trustee of the EST. It is an external trustee acting in an independent capacity on behalf of the beneficiaries of the EST in accordance with the Trust Deed for the Company A Employee Share Trust between Company A Ltd and Company B.

The applicant has stated that this scheme utilising the EST and to which this ruling relates is in effect an arm's-length arrangement. Use of the EST is intended to facilitate Company A's compliance with Corporations Law requirements, in addition to:

· providing greater flexibility in the management of Company A's capital structure; and

· providing a single vehicle which the administration of the Company A Incentive Plans (and any future employee equity plans) can be centralised in and outsourced to, thus freeing up the internal resources of Company A.

Operation of the ESOP

The ESOP is governed by the Employee Share Option Plan Rules (ESOP Rules).

The objectives of the ESOP are to:

· establish a method by which Eligible Persons (as defined in the ESOP Rules) can participate in the future growth and profitability of Company A;

· provide an incentive to, and reward for, Eligible Persons for their contributions to Company A; and

· to attract and retain a high standard or managerial and technical personnel for the benefit of Company A.

The Board of Directors of Company A (Board), at their absolute discretion, may from time to time make an offer in writing to an Eligible Person inviting them to take up an award of options (Options or Option in the singular). The offer document must specify, amongst other things, the number of Options, the terms and conditions of the issue of the Options and include an application form and a copy of the ESOP Rules.

Options may be offered to full and part-time officers and employees of Company A but may not be offered to Directors (unless shareholder approval is given by the shareholders of Company A in a general meeting) or Non-executive Directors.

Exercise of an Option entitles the participant to one fully paid ordinary share in Company A.

Each Option is granted for nil consideration however, an Exercise Price (calculated in accordance with the ESOP Rules) is payable to Company A on the exercise of the Option.

An Option will expire on its Expiry Date and can only be exercised by lodging with Company A an Option Exercise Notice together with the payment of the Exercise Price.

Options will lapse upon the earliest of any of the conditions stated in clause 10 of the ESOP Rules.

Options may only be exercised on or after the first anniversary of the date of issue of the Options or such other date as determined by the Directors (in their absolute discretion as set out in the offer).

Once Options are exercised, Company A must instruct the Trustee (subject to it receiving sufficient funds from Company A) within 15 Business days from receiving the Exercise Notice from the participant, to subscribe for or acquire on-market and then allocate to the participant, the relevant number of shares. The Trustee will hold those shares on behalf of the participant in accordance with the terms of the Trust Deed.

Shares allotted under the ESOP will rank pari passu in all respects with ordinary shares outstanding in Company A.

The Board may determine that a Restriction Period will apply to the shares allocated to a participant following exercise, up to a maximum of seven years from the Issue Date of the Options. The Board may, in its sole discretion, waive a Restriction period however a participant cannot dispose of or otherwise deal with any shares while they are restricted shares.

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

Operation of the PRP

The PRP is governed by the Long Term Incentive Plan Rules (LTIP Rules).

The purpose of the PRP is to drive long-term performance for shareholders and retain executives. It is targeted at Company A executives whose responsibilities provide them with the opportunity to significantly influence long-term shareholder value.

The Board may from time to time, in its absolute discretion, make an award of performance rights (Performance Rights or Performance Right in the singular) to an Eligible Executive (as defined in the LTIP Rules). A Non-executive Director is not eligible to participate in the PRP.

The responsibility for the establishment and operation of the PRP rests with the Board (who may delegate the management and administration of the PRP as they see fit).

Performance Rights are granted for nil consideration (unless determined otherwise by the Board from time to time).

Each Performance Right represents a right to acquire one fully paid ordinary share in Company A.

The PRP operates on the basis of an annual cycle correlated to the company's financial year (unless determined otherwise by the Board). An Eligible Executive who is offered the opportunity to participate in a cycle will receive a written offer in a form approved by the Board. The offer specifies, amongst other things, the date of the offer, the Grant Date, the number of Performance Rights offered, the Performance Criteria and Vesting Date of each Performance Right.

Vesting of Performance Rights is subject to the satisfaction of Performance Conditions, namely Performance Tranche 1 and Performance Tranche 2 hurdles (together referred to as Performance Hurdles) determined, in the main, three financial years out from the Grant Date of the Performance Rights. The Performance Hurdles have been developed to create a link to shareholder value.

The Performance Tranche 1 Hurdle comprises a pre-defined EPS (calculated on a compound rate of 15%) and Company A's TSR performing better than the TSR performance over the same period for companies in the S&P/ASX 300 Index.

The Performance Tranche 2 Hurdle requires an Eligible Executive participating in the PRP to remain continuously employed by a Group for the requisite period of time.

Upon automatic vesting of a Performance Right (on achievement of the Performance Hurdles) Company A must instruct the Trustee to either subscribe for or acquire on-market and then allocate to a participant the number of Company A shares in respect of which they are entitled and Company A (or the Trustee upon recept of instruction from Company A) must notify the participant that the Trustee holds the shares on the participant's behalf.

The Board may determine whether there will be a Restriction Period (up to a maximum of seven years) and what restrictions on dealing with shares will apply during the Restriction Period, for some or all of the shares allocated to a participant. The Board may waive the restriction period having regard to the circumstances at the time. A participant cannot dispose of or otherwise deal with any shares while the shares are restricted.

A participant can withdraw their vested Performance Rights by submitting a Withdrawal Notice to Company A in respect of some or all of the shares the Trustee holds on their behalf which are not restricted shares. At this point, if the Board approves the withdrawal notice Company A must direct the Trustee to transfer legal title in the shares to the participant in accordance with the terms of the approved Withdrawal Notice.

Employee Share Trust

The EST has been established for the sole purpose of obtaining securities for the benefit of employees, including accepting the grant of and subscribing for, acquiring, holding, allocating and delivering employee shares under the Company A Incentive Plans.

The EST will be funded by contributions from Company A. In accordance with the intended operation of the Company A Incentive Plans, contributions are likely to occur subsequent to a participant's valid request to exercise their Options or upon the automatic vesting of Performance Rights when the Board determines that the Performance Hurdles have been met.

These funds will be used by the Trustee of the EST to acquire the shares in Company A either on-market or via subscription for new shares in Company A.

Shares acquired by the Trustee will be immediately allocated to the relevant employees and held on trust on their behalf.

Shares allocated to each employee will generally be transferred into the name of the employee (that is, legal title will pass) upon a valid Withdrawal Notice being lodged and approved by the Board.

Company A will pay the Trustee's costs of operation to the extent that they relate to the operation of the EST which will facilitate the Company A Incentive Plans.

The Trustee will not price hedge when purchasing shares or buy shares in advance of the issue of Options or Performance Rights.

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 Performance Rights granted pursuant to the PRP are subject to Division 83A of the ITAA 1997 only (as the PRP was not established until November 2010).

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 ITAA 1997 is a general deduction provision. Broadly, the provision provides an entitlement to a deduction from assessable income for 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. However, subsection 8-1(2) of the ITAA 1997 prevents such a deduction to the extent that it is a loss or outgoing of capital, or of a capital nature, is a loss or outgoing of a private or a domestic nature, is incurred in gaining or producing exempt income, or is prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

Losses or outgoings

Pursuant to sub-clause 8 of the Trust Deed, Company A must provide the Trustee with all the funds (contributions) required to enable it to subscribe for, or acquire shares in Company A in accordance with clause 2.10 of the Trust Deed. The Trustee will, in accordance with instructions received pursuant to the relevant ESOP Rules and PRP Rules, acquire, deliver and allocate shares for the benefit of participants provided that the Trustee receives sufficient payment to subscribe for or purchase shares and / or has sufficient unallocated trust shares available. These contributions made to the Trustee by Company A will be irretrievable and non-refundable to Company A (sub-paragraph 8(b) of the Trust Deed provides that funds provided to the Trustee will not be repaid to Company A and no participant shall be entitled to receive the 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 Trustee of the EST is to provide benefits to certain eligible employees and executives in the form of shares.

All the documentation provided indicates that the contributions are made to the Trustee of the EST solely to enable the Trustee to acquire shares for eligible employees of the business. As stated by the applicant at page 25 of its private ruling application, 'The purpose of Company A making contributions to the EST is to provide Participants with an opportunity to share in the future growth and profitability of Company A …this expenditure is incurred to facilitate achievement of the purpose of the Incentive Plans which is ultimately designed to increase the operating performance of Company A and therefore, its assessable income'.

Accordingly, there is a sufficient nexus between the outgoings (Company A's contributions to the Trustee of 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

Company A's contributions will be recurring and be made from time to time as and when Company A shares are to be subscribed for or acquired 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 the company in carrying on its business. In support of this conclusion, the Court held in Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745 that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature. This confirms the view expressed in ATO ID 2002/1074 that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made to the trustee of its employee share scheme.

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 ITAA 1936.

Therefore, when Company A makes irretrievable contributions to the Trustee of the EST to fund the acquisition of Company A shares in accordance with clauses 8 and 2.10 of the Trust Deed, those contributions will be an allowable deduction to Company A under section 8-1 of the ITAA 1997.

Question 2

Company A will incur various costs in relation to the implementation and on-going administration of the EST. For example, Company A will incur costs associated with the services provided by the Trustee of the EST. These costs are likely to include:

· employee plan record keeping;

· production and dispatch of holding statements to employees;

· provision of annual income tax return information;

· costs incurred in the acquisition of shares on market (e.g. brokerage costs and allocation 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 EST.

In addition to the services to be provided by the Trustee of the EST, Company A will also incur various implementation costs, including the services provided by the company's accounting and legal advisors.

In accordance with Clause 14.1 of the Trust Deed,

The Trustee may not levy from the Fund any fees or charges for operating or administering the Trust.

The Company may pay to the Trustee from the Company's resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as the Company and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement.

Such costs are likely to include brokering costs incurred by the Trustee of the EST (for example, where the Trustee is directed by Company A to acquire shares on-market), as well as other Trustee expenses such as the annual audit of the financial statements of the EST.

The costs incurred by Company A in relation to the implementation and on-going administration of the EST are deductible under section 8-1 of the ITAA 1997 as either:

· costs incurred in gaining or producing the assessable income of Company A; or alternatively

· costs necessarily incurred in carrying on Company A's business for the purpose of gaining or producing the assessable income of Company A.

The view that the costs incurred by Company A are deductible under section 8-1 of the ITAA 1997 is consistent with ATO ID 2002/961 in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer.

Consistent with the analysis in Question 1 (above), the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses, and are deductible under section 8-1 of the ITAA 1997.

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.

Arrangement

The adoption of each of the Company A Incentive Plans, their respective plan rules and the associated EST, constitutes an 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 each scheme to proceed.

Acquiring an ESS interest '…directly or indirectly...'

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).

Options and Performance Rights

Under the Company A Incentive Plans, a participant will acquire a right under an employee share scheme because the conditions of section 83A-10 of the ITAA 1997 are satisfied.

The deductibility of money provided to employee share trusts is considered in ATO ID 2010/103. The facts described in ATO ID 2010/103 are comparable to the present ESOP and PRP and therefore, the reasoning in it is relevant to them as explained immediately below.

Options and Performance Rights granted to an employee under the ESOP and PRP respectively will be ESS interests as each of these rights represents a right to acquire a beneficial interest in a share in a company. These ESS interests will also be granted under an employee share scheme as they are granted in relation to the employee's employment. A share acquired by the Trustee to satisfy a right to acquire a share, granted under the employee share scheme to an employee in relation to the employee's employment, is itself provided under the same scheme.

The granting of the beneficial interests in the Performance Rights and Options, the provision of the money to the Trustee under the arrangement (each of the ESOP and PRP), the acquisition and holding of shares by the Trustee and the allocation of shares to the participating employees are all interrelated components of the ESOP and PRP. All the components of these schemes must be carried out so that the schemes can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the schemes to proceed.

Accordingly, the provision of money to the Trustee to acquire Company A shares is considered to be for the purpose of enabling the participating employees, indirectly as part of both the ESOP and PRP, to acquire rights (that is, ESS interests).

Timing - acquisition time

Contribution made in an income year prior to the income year that Performance Rights or Options are acquired

The acquisition time for the purposes of paragraph 83A-210(b) of the ITAA 1997 will occur when the Options and Performance Rights are granted to participants. Accordingly, when Company A makes a cash contribution to the Trustee in an income year before the income year in which the acquisition time for these ESS interests occurs, the timing of the deduction allowable under section 8-1 of the ITAA 1997 will be determined by section 83A-210 of the ITAA 1997 as being the later income year in which these ESS interests (Performance Rights and Options) are granted (acquired).

It should be noted that if any amount of money is provided to the Trustee to purchase excess shares intended to meet a future obligation arising from a future grant of rights under the ESOP and the PRP, the excess payment will occur before the employees acquire the relevant Options or Performance 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 later year of income when these ESS interests are subsequently granted to (acquired by) participants.

Contribution made after the income year in which Performance Rights or Share Options are acquired

Section 83A-210 of the ITAA 1997 will not apply if Company A makes cash contributions in an income year that is later than the income year in which the Performance Rights and 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 properly incurred i.e. in the later income year.

Question 4

Former section 139DB of the ITAA 1936 - ESOP only

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 deductibility of money provided to an employee share trust is considered in ATO Interpretative Decision ATO ID 2005/181 (now withdrawn). The facts described in that ATO ID are comparable to the present ESOP and therefore, the reasoning in it is still relevant to them.

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 Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215. Chief Justice Jordan considered 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 Federal Commissioner of Taxation (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. They further stated at page 138 that:

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 of the ESTs 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 with 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 share capital, and accordingly, is also of a capital nature.

Accordingly, when Company A receives subscription proceeds from the Trustee of the ESTs where the ESTs have subscribed for new shares in Company A to satisfy obligations to participants, 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 Trustee of the ESTs. 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 allowed for bad debts or rates or taxes is concerned, 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 and this cannot be said to be a recoupment under subsection 20-25(1) of the ITAA 1997.

In any event, the receipt by Company A made in return for issuing shares to the EST would not be 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 could 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 Company A 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 Company A Incentive Plans 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 Company A Incentive Plans, 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 full 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 the 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 Company A 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 Company A 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

The provision of Options and Rights

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 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 83A-B or 83A-C 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 (being the Options and Rights which are rights to acquire a beneficial interest in the share of a company, Company A) to participants of the ESOP and PRP. The ESS interests offered to participants under these Company A Incentive Plans are offered in connection with a participant's employment by Company A.

It is therefore accepted that the ESOP and PRP each comprises an employee share scheme (that incorporates the use of the EST that is an employee share trust within the meaning of subsection 130-85(4) of the ITAA 1997 - see question 8 below).

Accordingly, the acquisition of ESS interests pursuant to the ESOP and PRP will not be subject to fringe benefits tax on the basis that they are acquired under an employee share scheme (to which Subdivision 83A-B or 83A-C of the ITAA 1997 will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

The provision of shares

As stated above, 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.

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 in respect of the ESOP or when the performance conditions are met under the PRP (that is, the provision of a share in Company A) 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.

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 Performance 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 a company (Company A); and

· 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.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental, as set out in ATO ID 2010/108, 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 11.3 of the Trust Deed. Clause 11.4 (and in particular, clause 11.4(b)(iii)) limits the powers given to the Trustee under the Trust Deed in clause 11.3 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 securities for the benefit of Employees..'. 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 Company A 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 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 1986 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

As discussed at question 4 above, 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 1986 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 1986. 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.

ATO ID 2007/179 (relevant only for the purposes of the former Division 13A of the ITAA 1936) states that a trust will satisfy the sole activities test where the activities of the trustee of the trust are limited to managing an employee share plan and the general administration of the trust.

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). The exercise of the Trust powers by the Trustee in this way satisfies the intent of ATO ID 2007/179

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 1986 will apply and the contributions will be excluded from the definition of fringe benefit in subsection 136(1) of the FBTAA 1986.

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 1986 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 1986 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 (without an EST) 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 (with an EST), 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 EST 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 1986 applies to include an amount in the aggregate fringe benefits amount of Company A in relation to a tax benefit obtained from the 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.