Edited version of your private ruling

Authorisation Number: 1012502855038

Ruling

Subject: Implementation of Employee Share Trust

Question 1

Will each of the Taxpayer, Company A and Company C obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions that they respectively make (which in the case of the Taxpayer includes contributions made by subsidiary members of the Taxpayer's income tax consolidated group) to the Trustee of the Taxpayer Incentive Plan Trust (EST) to fund the subscription for, or acquisition on-market (or off-market) of, the Taxpayer's shares?

Answer

Yes.

Question 2

Are irretrievable contributions made by the Taxpayer (including contributions made by subsidiary members of the Taxpayer's income tax consolidated group), Company A or Company B to the Trustee of the EST, to fund the subscription for or acquisition on-market (or off-market) of shares in the Taxpayer by the EST to satisfy ESS interests, deductible respectively to the Taxpayer, Company A or Company B 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 3

Are irretrievable contributions made by the Taxpayer (including contributions made by subsidiary members of the Taxpayer's income tax consolidated group), Company A or Company B to the Trustee of the EST, to fund the subscription for or acquisition on-market (or off-market) of shares in the Taxpayer by the EST to satisfy ESS interests, deductible respectively to the Taxpayer, Company A or Company B under section 8-1 of the ITAA 1997 in the income year when the contributions are made, where the contribution is made after the acquisition of the relevant ESS interests?

Answer

Yes.

Question 4

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, any deduction claimed by the Taxpayer, Company A or Company B in respect of the irretrievable contributions they respectively make (which in the case of the Taxpayer includes contributions made by subsidiary members of the Taxpayer's income tax consolidated group) to the Trustee of the EST to fund the subscription for or acquisition on-market (or off-market) of shares in the Taxpayer by the EST?

Answer

No.

The rulings for questions 1 to 4 each apply for the following periods:

1 January 2013 to 31 December 2013

1 January 2014 to 31 December 2014

1 January 2015 to 31 December 2015

1 January 2016 to 31 December 2016

1 January 2017 to 31 December 2017

Question 5

Is the provision of Performance Rights, Options or shares in the Taxpayer under the Executive Incentive Plan (EIP) by the Taxpayer to its employees, employees of any subsidiary member of the Taxpayer's income tax consolidated group, employees of Company A or employees of Company B, a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 6

Will the irretrievable contributions made by the Taxpayer, any subsidiary member of the Taxpayer's income tax consolidated group, Company A or Company B to the Trustee of the EST, to fund the subscription for or acquisition on-market (or off-market) of shares in the Taxpayer, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA?

Answer

No.

The rulings for questions 5 to 6 each apply for the following periods:

1 April 2012 to 31 March 2013

1 April 2013 to 31 March 2014

1 April 2014 to 31 March 2015

1 April 2015 to 31 March 2016

1 April 2016 to 31 March 2017

The scheme commences on:

Establishment of the employee share trust

Relevant facts and circumstances

The Taxpayer

The Taxpayer is an Australian public company limited by shares and is listed on the Australian Securities Exchange.

The Taxpayer is the head company of an Australian income tax consolidated group (Tax Group) that operates a group of companies. It is also the parent entity of an economic group which, in addition to the members of the Tax Group, includes Company A and Company B (Economic Group).

The Taxpayer has established an Executive Incentive Plan (EIP).

The EIP operates in accordance with Division 83A of ITAA 1997.

The EIP allows the Taxpayer to grant Options or Performance Rights (as defined in the Executive Incentive Plan Rules (Plan Rules) over fully paid ordinary shares in the Taxpayer (Shares) to employees of all subsidiaries in the Economic Group.

The Taxpayer has now established a single employee share trust known as the Taxpayer Incentive Plan Trust (EST) to facilitate, pursuant to the EIP, the provision of Shares to employees of entities in the Economic Group. The Trustee is an external trustee acting in an independent capacity on behalf of the beneficiaries of the EST in accordance with the Trust Deed.

The applicant has stated that the EST was established to assist the Taxpayer with capital management for the EIP and to facilitate the acquisition of newly issued or market purchased shares to satisfy Options or Performance Rights granted under the EIP.

Use of the EST is intended to facilitate the Taxpayer's compliance with Corporations Law requirements, in addition to, amongst other things, allowing the Taxpayer:

• to warehouse Shares in the EST, that is, to acquire and hold Shares before they are to be allocated to Participants; and

• to subject Shares to a restriction on dealing (for example, to enforce the Taxpayer share trading policy and the disposal restrictions imposed under the EIP), for a specified period of time after vesting/exercise of Performance Rights and Options respectively, during which time they will be held in the EST.

Operation of the EIP

The EIP is governed by the Plan Rules. The objective of the EIP as stated in the Plan Rules is to encourage employees to share in the ownership of the Taxpayer and to promote the long-term success of the Taxpayer as a goal shared by all employees.

The Board of Directors of the Taxpayer (Board), at their absolute discretion, may from time to time make an offer in writing to an employee of the Economic Group inviting them to take up an award of Options or Performance Rights.

An Option represents a right to be issued one fully paid ordinary share in the Taxpayer upon payment of an Exercise Price (as defined in the Plan Rules).

A Performance Right represents a right to be issued one fully paid ordinary share in the Taxpayer upon the satisfaction of specified Vesting Conditions (as defined in the Plan Rules)

Each Option and Performance Right is granted for nil consideration.

Options and Performance Rights are collectively referred to as Awards

Grant and acceptance of Awards under the EIP

Pursuant to the Plan Rules, Awards may be granted without the need for acceptance, or may be offered with a requirement that they be accepted before grant. If acceptance is required, the Employee becomes a Plan Participant (Participant) by completing the relevant application form provided, and if required, making or directing payment of the total amount payable for the Awards.

Unless otherwise specified in the invitation in relation to the relevant Awards, Awards will lapse on the expiry date as set out in the offer.

Vesting and Exercise of Awards

The Taxpayer has applied the following Vesting Conditions to Awards granted under the EIP. The Vesting Conditions must be satisfied in order for the Awards to vest /be exercised:

• Retention: the participant must remain employed with the Economic Group until the vesting date. This continued employment vesting condition applies to all Awards.

• Earnings Per Share: Awards vest only if the Taxpayer's annual compound EPS growth equals or exceeds a pre-determined EPS target for the relevant performance period.

• Return on Sales: Awards granted to one participant vest to the extent that Return on Sales for the participant's particular business unit equals or exceeds a pre-determined target for the relevant performance period. In addition, the participant is required to remain the 'Managing Director' of the business until the vesting date.

• Awards granted during a particular period of time: a specified interest cover ratio must be satisfied for Awards to vest.

Vesting of Performance Rights

Performance Rights vest on the Vesting Date, provided the Vesting Conditions have been satisfied (or waived).

In addition to not being required to pay any consideration on the grant of Performance Rights a participant is not required to pay any consideration on vesting of the Performance Rights.

Exercise of Options

Options become exercisable to the extent the Vesting Conditions are satisfied. A
Participant has until the seventh anniversary of the grant date to exercise their Options.

Options that are not exercised within this timeframe automatically lapse.

Options may be exercised by providing the Taxpayer with a notice of exercise specifying the number of Options which the Participant wishes to exercise, and a cheque for the Exercise Price.

Allocation of Shares under the EIP

Performance Rights vest and Options become exercisable when all the Vesting Conditions are satisfied. The Board must allocate Shares to Participants when Performance Rights vest and when vested Options are exercised.

The Plan Rules allows the Board to allocate either new issue shares, or cause existing shares to be transferred to Participants.

The Taxpayer intends to use the EST to facilitate the acquisition of Shares on behalf of Participants for all future vested Performance Rights and exercised Options under the EIP.

Restrictions on Shares after vesting/exercise

Any Shares allocated to Participants upon vesting of Performance Rights or when vested Options are exercised are restricted from sale under the Plan. This rule prohibits Participants from trading their Shares until 7 years from the date of the Award, unless:

• the Participant ceases to be an employee;

• the Participant makes an application requesting release of the restrictions and this is approved by the Board. It is envisaged that such approval will only be granted in certain limited circumstances; or

• the Board otherwise agrees to end the restriction period.

EST

Acquiring Shares on-market or off-market to satisfy Awards, and specifically, acquiring Shares before they are to be allocated to employees (i.e. before the Performance Rights vest or Options are exercised) would (without the EST) create administrative difficulties for the Taxpayer as it is legally unable to acquire its own Shares. One of the main reasons therefore, why the Taxpayer has decided to establish the EST for use with the EIP is that it allows the Taxpayer to procure the acquisition of Shares to satisfy Awards before Performance Rights vest and Options are exercised

Contributions to the Trust

Trust Deed allows the Taxpayer (and its subsidiaries) to make contributions to the EST to allow the Trustee to acquire Shares for the EIP. In relation to the timing of contributions to the EST:

• where Shares are to be acquired on-market (or off-market), contributions may be made to the EST at any time to satisfy existing or future grants;

• where Shares are to be newly issued, contributions will typically be made around the time Performance Rights vest, or are expected to vest, and Options are exercised.

Allocating Shares for the EIP

Under the terms of the Trust Deed, the Taxpayer will notify the Trustee of the number of Shares that must be acquired by the Trustee following vesting of Performance Rights or exercise of Options under the EIP. Pursuant to the Trust Deed the Trustee must then acquire (on provision of funding by the Taxpayer) Shares (via subscription or by purchase on-market, or off-market) and then allocate the Shares from the EST to the Participant.

By way of Deed of Variation, the Taxpayer and the Trustee amended the Trust Deed to remove any possibility of cash contributions made to the EST being repaid to any entity in the Economic Group.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

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 Subsection 130-85(4)

Income Tax Assessment Act 1997 Section 995-1

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

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 the Trust Deed, either the Taxpayer (or a subsidiary member of the Tax Group), Company A or Company B must provide the Trustee with all the funds (contributions) required to enable the Trustee to subscribe for, or acquire Shares in accordance with the Trust Deed. The Trustee will, in accordance with instructions received pursuant to the relevant Plan 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 either the Taxpayer (or a subsidiary member of the Tax Group), Company A or Company B will be irretrievable and non-refundable to either the Taxpayer (as head entity of the Tax Group), Company A or Company B, as the case may be (by way of Deed of Variation the Trust Deed was amended to remove the possibility of cash contributions made to the EST being repaid to any entity in the Economic Group). On this basis, the irretrievable contributions made by the Taxpayer (as head entity of the Tax Group), Company A or Company B are a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997.

Relevant nexus

The purpose of establishing and making irretrievable contributions to the Trustee of the EST for the purposes of the EIP is to provide benefits to employees 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 Taxpayer business (i.e. employees of the Economic Group). As stated by the applicant in its private ruling application '… the irretrievable contributions are in respect of the remuneration of the Taxpayer's Australian-based employees employed by the Employing Entities for the Taxpayer's business carried on in Australia for the purpose of producing assessable income.'

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

Capital or Revenue

The contributions by either the Taxpayer (or a subsidiary member of the Tax Group), Company A or Company B will be recurring and will be made from time to time as and when the Shares are to be subscribed for or acquired pursuant to the Trust Deed. Therefore, to this end, the contributions are not capital in nature, but rather outgoings incurred by either the Taxpayer (as head entity of the Tax Group), Company A or Company B in carrying on their respective businesses. 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. (It should be noted that although the Court held that the payments were deductible under subsection 51(1) of the ITAA 1936, it found that subsection 177F(1) of Part IVA of the ITAA 1936 applied to cancel the tax benefit arising from the deduction). 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 an irretrievable contribution is made by either the Taxpayer (including a subsidiary member of the Tax Group), Company A or Company B to the Trustee of the EST to fund the acquisition of Shares in accordance with the Trust Deed, those contributions will be an allowable deduction respectively to either the Taxpayer (as head entity of the Tax Group), Company A or Company B, under section 8-1 of the ITAA 1997.

Question 2

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 the EIP, the 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 the 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).

Awards

Under the EIP, a participant, when acquiring an Award, 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 EIP and therefore, the reasoning in it is relevant to them as explained immediately below.

Awards granted to an employee under the EIP 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 Awards, the provision of the money to the Trustee under the arrangement (the EIP), the acquisition and holding of the Shares by the Trustee and the allocation of the Shares to the participating employees are all interrelated components of the EIP. 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 necessarily allows the scheme to proceed.

Accordingly, the provision of money to the Trustee to acquire Shares is considered to be for the purpose of enabling the participating employees employed by entities of the Economic Group, indirectly as part of the EIP, to acquire ESS interests (that is, Awards).

Timing - acquisition time

Contribution made in an income year prior to the income year that Awards are acquired

The acquisition time for the purposes of paragraph 83A-210(b) of the ITAA 1997 will occur when the Awards are granted to participants. Accordingly, when the Taxpayer (including a subsidiary member of the Tax Group), Company A or Company B makes a cash contribution to the Trustee to acquire Shares in an income year before the income year in which the acquisition time for these ESS interests occurs, the timing of the deduction allowable respectively to either the Taxpayer, Company A or Company B 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 (Awards) are granted (acquired).

Question 3

Contribution made after the income year in which Awards are acquired

Section 83A-210 of the ITAA 1997 will not apply if a cash contribution is made by the Taxpayer (including a subsidiary member of the Tax Group), Company A or Company B in an income year that is later than the income year in which the Awards are granted. In this case, the cash contribution will be deductible respectively to the Taxpayer, Company A or Company B 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

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 his discretion to make a determination 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 must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out, 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 (dominant purpose).

On the basis of an analysis of these requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Taxpayer, Company A or Company B in respect of the irretrievable contributions they respectively make (which in the case of the Taxpayer includes contributions made by subsidiary members of the Tax Group) to the Trustee of the EST to fund the subscription for or acquisition on-market (or off-market) of Shares by the EST.

Question 5

The provision of Awards

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) a share in the company; or

(b) 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:

(a) the company, or

(b) subsidiaries of the company

in relation to the employees employment.

The applicant has stated that ESS interests (being the Awards which are rights to acquire a beneficial interest in the share of a company, the Taxpayer) will be granted to participants of the EIP. The ESS interests offered to participants under the EIP are offered in connection with a participant's employment by the Taxpayer i.e. any entity of the Economic Group.

It is therefore accepted that the EIP 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 6 below).

Accordingly, the acquisition of ESS interests (the Awards) pursuant to the EIP 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 of the Economic Group accepts to participate in the EIP, they obtain a right to acquire a beneficial interest in a Share 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 (refer to ATO ID 2010/219).

Therefore, the benefit that arises to an employee upon the exercise of a vested Option or upon vesting of the Performance Right under the EIP (that is, the provision of a Share) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee.

Question 6

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 the Taxpayer or a subsidiary member of the Tax Group, Company A or Company B to the Trustee of 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.

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 EIP is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is scheme under which rights to acquire shares in the company are provided to employees in relation to the employee's employment.

Under the EIP, the employer has established the EST to acquire shares in the company and to allocate those shares to employees to satisfy the Awards acquired under the EIP. 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 (the Taxpayer); 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 the Trust Deed. Specific clauses limit the powers given to the Trustee under the Trust Deed 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, that is, for '...The Company wishes to establish the Trust to acquire, hold and deliver Shares for the purposes of the Plans.' (The Trust Deed provides that '… the Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of section 130-85(4) of the Income Tax Assessment Act 1997.'). 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 EIP. 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 EIP.

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, the Taxpayer or a subsidiary member of the Tax Group, Company A or Company B will not be required to pay FBT in respect of irretrievable cash contributions made to the Trustee of the EST to fund the acquisition of Shares in accordance with the Trust Deed.