Edited version of your private ruling

Authorisation Number: 1012506585440

Ruling

Subject: Employee Share Schemes and Employee Share Trusts

Question 1

Will the irretrievable contributions made by Company A to Company B (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 in accordance with the Company A Trust Deed (the Trust Deed) 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,in respect of costs incurred in relation to 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 in accordance with the Trust Deed 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

If the EST satisfies its obligation under any of the Company A Equity 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 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 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 Company A shares by the EST in accordance with the Trust Deed?

Answer

No.

The rulings for questions 1 to 5 each apply for the following periods:

1 July 2013 to 30 June 2014

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

Question 6

Will the provision of Options, Performance Rights or Company A shares under the Long Term Incentive Plan (LTIP) or Company A shares under the Employee Share Plan (Tax Exempt) (ESP) to which Division 83A of the ITAA 1997 applies, 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 7

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 in accordance with the Trust Deed, be treated as a fringe benefit within the meaning of section 136(1) of the Fringe Benefits Tax Assessment Act 1936 (FBTAA)?

Answer

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 Company C by the amount of the tax benefit gained 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 in accordance with the Trust Deed?

Answer

No.

The rulings for questions 5 to 8 each apply for the following periods:

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

1 April 2017 to 31 March 2018

The scheme commences on:

1 April 2013

Relevant facts and circumstances

Company A is the head entity of an Australian income tax consolidated group, and is listed on the Australian Securities Exchange (ASX). Company A is a full service stockbroking firm offering its investment and financial advisory services to private, institutional and corporate clients.

In 200X Company A implemented two employee share schemes, namely the Long Term Incentive Plan (LTIP) and the Employee Share Acquisition (Tax Exempt) Plan (ESP) (collectively referred to as the Company A Equity Plans).

In July 20YY Company A established the Company A EST to facilitate the provision of shares in Company A to eligible staff under the Company A Equity Plans. The EST is managed by the Trustee and governed by the Company A EST Deed (Trust Deed).

Whilst the Trustee is a subsidiary member of the Company A income tax consolidated group, for the purposes of the scheme to which this ruling relates, it will be acting solely in its capacity as Trustee. Further, the scheme will be an arm's-length arrangement and is intended to facilitate Company A's compliance with Corporations Law requirements.

Company A wishes to promote employee share ownership through the Company A Equity Plans, with ultimately, an anticipated positive impact upon company productivity and profitability.

Operation of the LTIP

The key features of the LTIP are as follows:

· It is at the absolute discretion of the Board of Company A (Board) to extend an invitation for the grant of Options or Performance Rights (as defined in the Long Term Incentive Plan Rules (LTIP Rules) and referred to collectively as Rights) over fully paid ordinary shares in Company A (Company A shares) to an eligible Director, Executive or Advisor of Company A (as defined in the Plan Rules and referred to collectively as an Executive).

· Invitations will be extended on such terms and conditions as the Board decides from time to time, including, amongst other things, whether or not Performance Rights are automatically exercisable on the Vesting Date (defined below).

· Under the present LTIP Rules, an Exercise Price (as defined in the LTIP Rules) is payable to Company A on the exercise of an Option whereas no Exercise Price is payable upon the exercise of a Performance Right.

· Where an Exercise Price is paid under an Option to acquire Company A shares, then Company A will treat this receipt as assessable income.

· Exercise of an Option or Performance Right entitles the Executive to one Company A share. Company A shares allotted under the LTIP will rank pari passu in all respects with ordinary shares outstanding in Company A.

· Rights will vest and become exercisable on or after a date pre-determined by the Board (Vesting Date) provided the Executive remains employed by Company A at the nominated Vesting Date. However, subject to the specific terms and conditions of any one grant as set by the Board, and as defined in the LTIP Rules (Vesting Conditions), the Board may at its discretion and in certain circumstances, decide to accelerate the vesting of all or part of the Rights (Accelerated Vesting Date).

· Following the Vesting Date or Accelerated Vesting Date (as the case may be) the vested Rights may be exercised by the Executive subject to any exercise conditions as defined in the LTIP Rules (Exercise Conditions) attaching to the grant, and in the case of Options, the payment of the Exercise Price.

· Rights will lapse upon the earliest of any of the conditions stated in the LTIP Rules.

· An Executive may not sell, assign, transfer or otherwise deal with or grant a Security Interest (as defined in the Plan Rules) over Rights granted to them without the prior consent of the Board in its absolute discretion.

· Once all Vesting Conditions and Exercise Conditions, as determined by the Board from time to time, have been satisfied, the Executive will be entitled to receive Company A shares.

· Once Rights have been exercised, the Trustee of the EST will acquire the Company A shares on behalf of the Executive (by purchase either on-market or via a new share issue). The Company A shares acquired will relate to both Options and Performance Rights acquired prior to, and after, the establishment of the EST.

· Whilst Company A shares are held on trust in the EST, the Executive will be entitled to exercise the voting rights attaching to those Company A shares, and subject to the LTIP Rules, will be entitled to dividends.

· The Executive may, subject to Board approval, have legal title in the Company A shares held by the Trustee on their behalf in the EST, transferred to them by submitting an appropriate withdrawal notice to Company A in accordance with the LTIP Rules. These Company A shares may remain subject to restrictions on dealings in accordance with the LTIP Rules.

Operation of the ESP

· Pursuant to the Employee Share Plan (Tax Exempt) Rules (ESP Rules) Company A may from time to time offer ordinary shares in Company A (Award Shares) to certain employees of a Group Company (defined in the ESP Rules as being Company A or any of it's subsidiaries).

· Pursuant to the ESP Rules, the Board will determine the employees who are eligible to participate in the ESP and it must do so on a non-discriminatory basis.

· An offer of Award Shares made to an employee must be in writing and on such terms as the Board determines from time to time. An offer can then be accepted by completing and returning a signed acceptance form to Company A.

· In accordance with the ESP Rules, Award Shares granted to an employee will be subscribed for, purchased and / or allocated by the Trustee in accordance with the Board's instructions and held by the Trustee in the EST on trust for the benefit of the employee subject to the terms and conditions of the EST set out in the Trust Deed.

· The ESP Rules provides that whilst Award Shares are held on trust in the EST, the participating employees have specific entitlements. These include rights to dividends, bonus entitlements, participation in any new share issue, dividend reinvestment plans and voting rights.

· Subject to the satisfaction of the restriction on dealing in Award Shares set out under the ESP Rules (which, amongst other things, includes a restriction that the participating employee is not permitted to dispose of etc an Award Share before the end of the period three years after the issue, acquisition or allocation of the Award Share) , a participating employee may submit a withdrawal notice to Company A (in accordance with the ESP Rules) in respect of some or all of the Award Shares held on their behalf. Pursuant to the ESP any withdrawal notice lodged with the Board cannot be reasonably refused.

(An Executive to whom Rights have been granted and an employee to whom Award Shares have been granted are collectively referred to as a Participant (in the singular) or Participants (in the plural) as the context so requires.)

All Participants under the Company A Equity Plans are employees of Company C. Company C is part of the Company A income tax consolidated group.

Operation of the EST

· Pursuant to the Trust Deed, the EST has been established for the sole purpose of subscribing for or acquiring, delivering, allocating and holding Company A shares and Award Shares under the Company A Equity Plans (as well as any future plans established by Company A requiring shares to be held by the Trustee under the terms of the).

· The EST is funded by cash contributions from Company A.

· Pursuant to the Trust Deed the Trustee is not permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the EST. In addition, it is not permitted to carry out activities which result in the Participants in the Company A Equity Plans being provided with additional benefits other than the benefits that arise from the relevant plan rules.

· Pursuant to the Trust Deed the Trustee of the EST is empowered to acquire Company A shares and Award Shares either on-market or via subscription for new shares in Company A.

· Pursuant to the Trust Deed the Board, on behalf of a Participant, will instruct the Trustee, by way of notice in writing, to subscribe for, purchase and/or allocate the requisite number of Company A shares or Award Shares specified in the notice.

· Pursuant to the Trust Deed, Company A must provide the necessary funds to the Trustee for the purpose of enabling it to acquire Company A shares or Award Shares as specified in the notice in accordance with the Trust Deed.

· The Trustee will, in accordance with instructions received pursuant to the LTIP Rules and ESP Rules, acquire, deliver and allocate Company A Shares and Award Shares for the benefit of Participants provided that the Trustee receives, when required and necessary, sufficient payment from a Participant to subscribe for or purchase such shares and/or has sufficient unallocated trust shares available.

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

· While Award Shares or Company A shares are held in trust, the Participant will be entitled to dividend and voting rights. These shares may be subject to a sale restriction under an ASX administered holding lock. By written notice, Participants can apply for legal title to the appropriate Company A shares or Award Shares held in the EST to be transferred to them.

· All funds received by the Trustee from Company A will constitute accretions to the corpus of the trust and no Participant will be entitled to receive such funds. The contributions will not be repaid to Company A unless they are used to subscribe for Company A shares or Award Shares.

· Where an amount paid by Company A to the Trustee in respect of the acquisition of Company A shares or Award Shares for the benefit of a Participant is in excess of the amount required by the Trustee to acquire those shares, Company A may require the Trustee to apply such amount to acquire, deliver or allocate the shares in accordance with the Trust Deed, the relevant plan rules or the relevant terms of participation or deposit the funds into any account opened and operated by the Trustee.

The Trustee of the EST holds all Company A shares (that is, Company A shares and Award Shares) pursuant to each Company A Equity Plan on capital account.

The applicant has advised that in a limited number of cases, Options granted under the LTIP will be issued at an Exercise Price that is at a sufficient premium to the Company A share price at grant such that they will have a nil value for tax purposes based on the regulations made for the purposes of Division 83A of the ITAA 1997. As a result, Division 83A of the ITAA 1997 will not apply to these Options.

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-210

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 177A

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

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 the Trust Deed, Company A must provide the Trustee with all the funds (contributions) required to enable it to subscribe for, or acquire Company A shares or Award Shares in accordance with the Trust Deed. The Trustee will, in accordance with instructions received pursuant to the relevant LTIP Rules and ESP Rules, acquire, deliver and allocate Company A shares and Award Shares respectively, for the benefit of Participants provided that the Trustee receives sufficient payment to subscribe for or purchase such 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 (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 in Company A.

All the documentation provided indicates that the contributions are made to the Trustee of the EST solely to enable the Trustee to acquire Company A shares and Award Shares for eligible employees and Executives of the business (i.e. employees and Executives of Company C). As stated by the applicant in its private ruling application:

'Cash contributions to the EST are incurred for the purposes set out in the Plan Rules which are designed, through the alignment of employee and shareholder interests, to improve Company A's operating performance and to attract and retain valued employees. The cash contributions can only be used to acquire shares on behalf of employees and would therefore be incurred to facilitate achievement of the purposes of the Plan 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 and Award 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. (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 Company A makes irretrievable contributions to the Trustee of the EST to fund the acquisition of Company A shares and Award Shares in accordance with the Trust Deed, those contributions will be an allowable deduction to Company A under section 8-1 of the ITAA 1997.

Single entity rule

The single entity rule in subsection 701-1(1) of the ITAA 1997 does not affect the answer to the question of whether the contributions made by Company A to the Trustee of the EST are deductible under section 8-1 of the ITAA 1997.

On the basis of the facts and circumstances that form part of this Ruling, the operation of the single entity rule cannot affect the fundamental questions that will determine deductibility. Those questions are:

· were the amounts contributed held for the exclusive benefit of entities who are not members of the Company A consolidated group, and

· to what extent are the contributions incurred in gaining or producing Company A's assessable income and are not of a capital, private or domestic nature.

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

Note that Irretrievable contributions should also be an allowable deduction to Company A for the same reasons as described above, when the contributions are made by Company A to the Trustee of the EST to enable it to acquire, deliver and allocate Company A shares in accordance with the Trust Deed to satisfy Options granted under the LTIP to which Division 83A does not apply.

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 has incurred costs associated with applying for this private ruling.

In accordance with the Trust Deed,

The Trustee is not entitled to receive from the Trust any fees, commission or remuneration in respect of its performance of its obligations as trustee of 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 Company A shares and Award 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 Equity 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).

Rights

Under the LTIP, 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 LTIP and therefore, the reasoning in it is relevant to them as explained immediately below.

Rights granted to an employee under the LTIP will be ESS interests as each Performance Right or Option represents a right to acquire a beneficial interest in a share in a company (Company A). These ESS interests will also be granted under an employee share scheme as they are granted in relation to the employee's employment. A Company 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 Rights, the provision of the money to the Trustee under the arrangement (the LTIP), the acquisition and holding of Company A shares by the Trustee and the allocation of those Company A shares to the participating Executives are all interrelated components of the LTIP. 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 Executives, indirectly as part of the LTIP, to acquire Rights (that is, ESS interests).

Award Shares

Award Shares granted to an employee under the ESP will be ESS interests as each of these awards represents a beneficial interest in a share in a company (Company A).

Under the ESP, Award Shares granted to employees will be held on behalf of the employee in the EST until they are withdrawn from the EST following the removal of any disposal restrictions on the shares pursuant to clause 8 of the ESP Rules. Under these circumstances the provisions of section 83A-210 of the ITAA 1997 apply directly to the acquisition of Award Shares as these shares are acquired directly under an employee share scheme - that is, they are not acquired as a result of the exercise of rights to acquire shares which were first acquired under an employee share scheme.

Timing - acquisition time

Contribution made in an income year prior to the income year that Rights or Award Shares are acquired

The acquisition time for the purposes of paragraph 83A-210(b) of the ITAA 1997 will occur when the Rights and Award Shares 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 (Rights and Award Shares) are granted (acquired).

Contribution made after the income year in which Rights or Award Shares 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 Rights or Award Shares 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.

The Commissioner notes that Section 83A-210 of the ITAA 1997 should also apply as described immediately above to determine the timing of the deduction for contributions made to the EST in respect of Options issued under the LTIP that are not subject to Division 83A of the ITAA 1997.

Question 4

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 EST 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 EST where the EST has 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 EST. There is no insurance contract in this case, so the amount is not received by way of insurance.

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

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

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

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

So far as a deduction under section 8-1 of the ITAA 1997 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 Equity 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 Equity 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 5

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 Company A in respect of the irretrievable contributions it makes to the Trustee of the EST to fund the subscription for or acquisition on-market of Shares and Award Shares by the EST.

Question 6

The provision of Options, Rights and Award Shares

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.

Company A has stated that it will grant ESS interests (being the Rights which are rights to acquire a beneficial interest in the share of a company, Company A and Award Shares, which represent a beneficial interest in the share of a company, again, Company A) to Participants of the LTIP and ESP. The ESS interests offered to Participants under these Company A Equity Plans are offered in connection with a Participant's employment by Company C.

It is therefore accepted that the LTIP and ESP 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 7 below).

Accordingly, the acquisition of ESS interests pursuant to the LTIP and ESP 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. Note however, that this exclusion will not apply to Options that are issued under the LTIP that are not subject to Division 83A of the ITAA 1997 as such Options will not meet the requirements of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

The provision of Company A shares on exercising Rights

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 LTIP, 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 a Right under the LTIP (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 7

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 EST meets the requirements of being an employee share trust..

In respect of Rights, 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. In respect of Award Shares, the beneficial interests in the shares acquired upon their grant, are also ESS interests.

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 LTIP and ESP 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 Company A shares and Award Shares respectively in the company are provided to employees in relation to the employee's employment.

Under the LTIP and ESP, the employer has established the EST to acquire shares in the company (Company A) and to allocate those shares to employees to satisfy the Rights and Award Shares acquired under the employee share schemes, that is, the LTIP and ESP respectively. Note that in respect of Rights, the beneficial interest in the share acquired on exercise of the Option or Performance Right is itself provided under an employee share scheme because it is provided under the same scheme under which the Rights 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 Company A shares and Award Shares, are provided under an ESS (LTIP and ESP), as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those Company A shares and Award Shares to the employees in accordance with the governing documents of the respective 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. Particular clauses in the Trust Deed limits the powers given to the Trustee under the Trust Deed in 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 for the '..sole purpose of obtaining shares for the benefit of Participants..'. These Trust Deed provisions collectively make it clear that the Trustee can only use the contributions received exclusively for the acquisition of Company A shares and Awards Shares for eligible employees and Executives in accordance with the Company A Equity 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 Company A shares and Award Shares for the sole benefit of Participants in accordance with the LTIP and ESP respectively.

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 an employee share trust from being a fringe benefit, 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 in accordance with the Trust Deed, will not be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA.

Question 8

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 LTIP and ESP, if an EST was not used, no fringe benefits tax would be 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 LTIP and ESP arrangements (with an EST), the benefits provided by way of irretrievable contributions to the EST and the provision of Rights (and the Company A shares received on their vesting) and Award Shares to eligible employees are excluded from the definition of a fringe benefit for the reasons given in the responses to questions 6 and 7 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 LTIP and ESP. Also, as there would be no fringe benefits tax payable under the LTIP and ESP without the use of an EST (and nor likely would fringe benefits tax 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 C 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 shares (that is Company A shares and Award Shares).