Edited version of your private ruling

Authorisation Number: 1012504564247

Ruling

Subject: Employee Share Scheme

Question 1

Will the irretrievable contributions made by the entity to the Trustee of the Employee Share Trust (EST) to fund the subscription for or acquisition on-market of the entitiy's shares by the EST be an allowable deduction under section 8-1 (being about general deductions) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes

Question 2

Will the entity 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?

Advice/Answers

Yes

Question 3

Are irretrievable contributions made by the entity to the Trustee of the EST, to fund the subscription for or acquisition on-market of the entity's shares by the EST to satisfy Employee Share Scheme ("ESS") interests (specifically, the PRs), deductible to the entity at a time determined by section 83A-210 of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

Advice/Answers

Yes

Question 4

If an EST satisfies its obligation under the entity's LTIP (or under future incentive plans) by subscribing for new shares in the entity, will the subscription proceeds be included in the assessable income of the entity under section 6-5 (being about ordinary income) or section 20-20 (being about assessable recoupments) or trigger a capital gains tax ("CGT") event under Division 104 of the ITAA 1997?

Advice/Answers

No

Question 5

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 entity in respect of the irretrievable contributions made by the entity to the Trustee of the EST to fund the subscription for or acquisition on-market of the entity's shares by the EST?

Advice/Answers

No

Question 6

Will the provision of SARs or PRs to Participants be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Advice/Answers

No

Question 7

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

Advice/Answers

No

Question 8

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

Advice/Answers

No

This ruling applies for the following periods:

Income tax

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

FBT

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

Year ended 31 March 2016

Year ended 31 March 2017

The scheme commences on:

1 July 2012

Relevant facts and circumstances

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

· Application for Private Ruling

· The entity's Long Term Investment Plan Rules

· The Trust Deed of the EST

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment act 1997

Section 20-20 of the Income Tax Assessment Act 1997

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

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

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

Section 102-5 of the Income Tax Assessment act 1997

Section 102-25 of the Income Tax Assessment Act 1997

Section 104-35 of the Income Tax Assessment Act 1997

Section 104-155 of the Income Tax Assessment Act 1997

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

Section 995-1 of the Income Tax Assessment Act 1997

Section 177A of the Income Tax Assessment Act 1936

Section 177C of the Income Tax Assessment Act 1936

Section 177D of the Income Tax Assessment Act 1936

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

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

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

Section 67 of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Question 1

Will the irretrievable contributions made by the entity to the Trustee of the EST to fund the subscription for or acquisition on-market of the entity's shares by the EST be an allowable deduction under section 8-1 (being about general deductions) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Section 8-1 of the ITAA 1997 states:

8-1(1)

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a ^*business for the purpose of gaining or producing your assessable income.

8-1(2)

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

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

The entity has established its Long Term Incentive Plan as part of its remuneration policy with the intention of attracting, retaining rewarding suitable employees in its business.

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

The stated purpose of the entity in establishing and funding its LTIP and making contributions to the EST is to provide employees with an opportunity to share in the share in the future growth of the entity and encourage participants to improve the performance of the entity.

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

In Pridecraft Pty Ltd v. FC of T [2004] FCAFC 339; 2005 ATC 4001; FC of T v. Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55ATR 745, the Court held that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature. This is consistent with the opinion expressed in ATO Interpretative Decision ATO ID 2002/1074 that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for non-refundable cash contributions made to the trustee of its employee share scheme.

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

The entity has advised that the company will make contributions to the Trust to provide benefits to eligible employees in the form of shares. It is anticipated such contributions will be made by the entity when the Participants exercise their Rights granted under the LTIP. Under the LTIP, the entity will fund the EST so that the EST can acquire the entity's shares and allocate them to the employees. The EST will hold the shares for up to a number of years after which the shares will be legally transferred to the employees. Furthermore, the entity's shares will be acquired by the EST either on market or via a new issue of shares by the entity.

The entity has also advised that the contributions to the EST will be a recurring outgoing which forms part of the remuneration costs of the Participants. Consequently, it will not be pre-funding the Trust with a lump sum payment but will be making contributions on a regular basis as required.

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

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

Question 2

Will the entity 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?

Detailed reasoning

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

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

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

· Employee plan record keeping;

· Production and dispatch of holding statements to employees;

· Provision of annual income tax return information for employees;

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

· Management of employee termination; and

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

These expenses form part of the ordinary employee remuneration costs.

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

Question 3

Are irretrievable contributions made by the entity to the Trustee of the EST, to fund the subscription for or acquisition on-market of the entity's shares by the EST to satisfy Employee Share Scheme ("ESS") interests (specifically, the PRs), deductible to the entity at a time determined by section 83A-210 of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

Detailed reasoning

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

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

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

83A-210 If:

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

(i) under an arrangement; and

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

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

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

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

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

Performance Rights (PRs)

A performance right granted to an employee will be an ESS interest as it is a right to acquire a beneficial interest in a share in the entity. This ESS interest is granted under an ESS and the share acquired by the Trustee of the EST to satisfy such a right is granted under the ESS to an employee.

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

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

In summary, the entity will be allowed a deduction for contributions made to the Trustee of the EST in the year of income in which they are made, provided and to the extent that they are in respect of the funding of the acquisition of shares to satisfy the obligations in relation to rights to acquire shares granted to participants in that income year or earlier income years.

If any amount of money is used by the Trustee of the EST to purchase excess shares intended to meet a future obligation arising from a future grant of rights, the excess payment occurs before the employees acquire the relevant rights (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the entity in the year of income when the relevant rights are subsequently granted to the employees.

Question 4

If an EST satisfies its obligation under the entity's LTIP (or under future incentive plans) by subscribing for new shares in the entity, will the subscription proceeds be included in the assessable income of the entity under section 6-5 (being about ordinary income) or section 20-20 (being about assessable recoupments) or trigger a capital gains tax ("CGT") event under Division 104 of the ITAA 1997?

Detailed reasoning

Section 6-5 Income according to ordinary concepts

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

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

· the character of the advantage sought by the payment

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

· the means adopted to obtain it.

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

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

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

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

Section 20-20 Assessable recoupments

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

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

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

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

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

Division 104 CGT events

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

· D1 Creating contractual or other rights; or

· H2 Receipt for event relating to a CGT asset.

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

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

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

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

Receiving subscription proceeds from the Trustee of the EST for new shares it has issued to the trustee does not constitute an act, transaction or event occurring in relation to a CGT Asset owned by the entity. Furthermore, paragraph 104-155(5)(c) of the ITAA 1997 provides that CGT event H2 does not happen where a company issues or allots equity interests in the company, which is applicable here.

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

Question 5

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 entity in respect of the irretrievable contributions made by the entity to the Trustee of the EST to fund the subscription for or acquisition on-market of the entity's shares by the EST?

Detailed Reasoning

A consideration of all the factors referred to in paragraph 177D(b) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the entity's employees who participate in the scheme in a form that promotes the company's business objectives, rather than to obtain a tax benefit.

Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the entity in relation to irretrievable contributions made by the entity to the Trust to fund the acquisition of employer shares in accordance with the scheme as outlined above.

Reform of Part IVA

Significant amendments are proposed in Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 introduced into Parliament in February 2013. The amendments focus on the definition of 'tax benefit' considered necessary to deal with the consequences of court cases that have exposed weaknesses in how Part IVA works out whether there is a tax benefit in connection with a scheme and what that tax benefit is. Even though the legislation has not yet been enacted, it is intended to apply from 16 November 2012 when passed.

However, the amendments do not affect taxpayers unless they have obtained a tax advantage from an arrangement entered into with a relevant tax avoidance purpose. In this case, it is acknowledged that the entity will obtain a tax benefit as a result of the scheme it enters into but it is also acknowledged that it is not entering in to the scheme for the sole and dominant purpose of obtaining a tax benefit. Consequently, the amendments if and when enacted will have no application in this case.

Question 6

Will the provision of Rights under the LTIP to Participants be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) 1986?

Detailed reasoning

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

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

In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee.

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

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

(h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83AB or 83AC of that Act applies.

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

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

(a) a share in the company

(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:

83A - 10(2) An employee share scheme is a scheme under which ESS interests in a company are provided to employees, or associates of employees, including past or prospective employees of:

(a) the company, or

(b) subsidiaries of the company

in relation to the employees employment.

The entity has stated that it will grant ESS interests (comprising Rights) to the participants of its LTIP. The ESS interests offered to participants in the LTIP are offered at a discount and are in connection with the participant's employment.

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

It is also accepted that the LTIP is an employee share scheme under which the relevant ESS interests (being the beneficial interests in the shares) are acquired by employees of the entity (or their associates), and the acquisition of those ESS interests is in relation to the employees employment.

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

The provision of shares arising form the exercise of Rights (PRs and SARs)

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

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

Essentially, this means that the entity's shares granted under the LTIP, to satisfy rights exercised, are not ESS interests acquired under an employee share scheme. Consequently, the acquisition of the shares (as a result of exercising the rights) is not excluded from being a fringe benefit by virtue of the definition of fringe benefit in subsection 136(1) of the FBTAA.

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

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

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

The situation is similar to that which existed in FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The Full Federal Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.

When an employee accepts to participate in the LTIP, they obtain a right to acquire a beneficial interest in a share in the entity 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 a right under the LTIP will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee.

Question 7

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

Detailed Reasoning

Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include:

(ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997);

An employee share trust (EST) is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides that an EST for an employee share scheme (having the meaning given by subsection 83A -10(2) of the ITAA 1997) is a trust whose sole activities are:

(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

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

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

A Clause of the Trust Deed provides a Sole activities test.

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

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

· the opening and operating of a bank account to facilitate the receipt and payment of money

· the receipt of dividends in respect of shares held by the EST on behalf of an employee, and their distribution to an employee;

· the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme;

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

· the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares;

· the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries.

· receiving and immediately distributing shares under a demerger

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

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

Under the LTIP, the entity has established the Trust to acquire shares in the entity and to allocate those shares to employees. Furthermore it is proposed that future allocations of shares under the ESP will be administered by the EST. Therefore, paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 are satisfied because:

· The Trust acquires shares in the entity; and

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

The trust is an employee share trust as defined in subsection 995-1 of the ITAA 1997, as the activities of the Trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the Trust from being a fringe benefit.

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

Question 8

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

Detailed Reasoning

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

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

145. Section 67 is the general anti avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and an other employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148 Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included and or could reasonably be expected to be included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

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

In Miscellaneous Taxation Ruling MT 2021 under the heading "Appendix, Question 18" on the application of section 67, the Commissioner states:

…As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement…

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

151. the approach outlined in this practice statement (refer to paragraph 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

Under the entity's LTIP, the benefits provided to the trustee by way of irretrievable cash contributions to the EST and to participants by way of the provision of rights will not be subject to FBT. Consequently, no amount could reasonably be expected to be included in the aggregate fringe benefits amount, attributable to the scheme, if the arrangement had not been entered into. Therefore, the fringe benefits tax is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of the entity in relation to a tax benefit obtained under the Plans.