Edited version of private advice

Authorisation Number: 1012625222551

Ruling

Subject: Employee Share Scheme

Question 1

Can the taxpayer deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made by the taxpayer to the trustee of the employee share trust (EST) to fund the subscription for, or acquisition on-market of, taxpayer's shares?

Yes

Question 2

Will the taxpayer obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the EST?

Yes, for administration costs charged to the taxpayer by the trustee to administer the trust.

No, for the establishment costs such as those for the software setup and for legal advice to commence the ESS.

Question 3

Are the irretrievable cash contributions made by the taxpayer to the trustee of the EST deductible to the taxpayer under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests?

Yes

Question 4

Are the irretrievable cash contributions made by the taxpayer to the trustee of the EST deductible to the taxpayer under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the acquisition of the relevant ESS interests?

Yes

Question 5

Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, a deduction claimed by the taxpayer for the irretrievable cash contributions made by the taxpayer, to fund the subscription for, or acquisition on-market of, the taxpayer's shares by the trustee of the EST?

No

Question 6

Will the irretrievable cash contributions made by the taxpayer to the trustee of the EST to fund the subscription for, or acquisition on-market of, the taxpayer's shares constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Assessment Act 1986 (FBTAA)?

No

Question 7

Will the provision of ESS interests at a discount by the taxpayer or the trustee to employees of the taxpayer constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

No

Question 8

Will the Commissioner seek to apply section 67 of the FBTAA to the EST arrangement where ESS interests are provided to employees at a discount?

No

This ruling applies for the following periods:

For the income tax years.

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

And for the fringe benefits tax years

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:

1 September 2013

Relevant facts and circumstances

Documents provided with the application.

• The Plan

• Remuneration Report; and

• Draft Trust Deed for the EST (the Trust Deed)

• Letter to employees explaining the operation of the new EST.

• The taxpayer's capital management policy.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Fringe Benefits Tax Assessment Act 1986 Section 66

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(f)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(h)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(ha)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(s)

Income Tax Assessment Act 1997 Section 8-1

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

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Subsection 83A-20(2)

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 995-1

Anti-avoidance rules

The anti-avoidance rules are addressed at questions 5 and 8.

Reasons for decision

Issue 1

Question 1

Can the taxpayer deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made by the taxpayer to the trustee of the employee share trust (EST) to fund the subscription for, or acquisition on-market of, the taxpayer's shares?

An employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an EST that is either

•incurred in gaining or producing assessable income ('first limb') or

•necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income ('second limb'),

to the extent the contribution is not private or domestic in nature, is not of capital or of a capital nature and does not relate to the earning of exempt income or non-assessable non-exempt income.

To qualify for a deduction under section 8-1 of the ITAA 1997 a contribution to the trustee of an EST must be incurred. There is no statutory definition of the term 'incurred'. As a broad guide, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance.

A contribution made to the trustee of an EST is incurred only when the ownership of that contribution passes from an employer to the trustee of the EST and there is no circumstance in which the employer can retrieve any of the contribution - - Pridecraft Pty Ltd v. FC of T [2004] FCAFC 339; 2005 ATC 4001; (Pridecraft); FC of T v Spotlight Stores Pty Ltd [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 209; (Spotlight).

The taxpayer intends to provide contributions to the trustee of an EST, to fund the taxpayer's legal obligations to provide shares to its employees who participate in its employee share scheme and exercise the rights granted to them under the Plan. Funds may be contributed at any time the taxpayer considers appropriate. Generally this is after vesting when the contribution is used to acquire shares to satisfy that grant.

On termination of the trust the taxpayer has no recourse to any of the contributions it has made to the trust. Therefore we conclude that when the taxpayer makes a contribution to the trustee of the EST, ownership of the contribution passes to the trustee. The contributions made to the EST by the taxpayer will be incurred at the time the contributions are made.

Further, to be deductible under section 8-1 of the ITAA 1997, a contribution must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

In order to satisfy the second limb of section 8-1 of the ITAA 1997 there must be a relevant connection between the outgoing and the business. An expense will have the relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' (Ronpibon Tin NL and Tongkah Compound NL v. FC of T (1949) 78 CLR 47 8 ATD 431 (Ronpibon); Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation 80 ATC 4542; 11 ATR 276 (Magna Alloys)).

Where an employer:

• carries on a business for the purpose of gaining or producing assessable income and engages employees in the ordinary course of carrying on that business

• makes a contribution to the trustee of an EST

• at the time the contribution is made, the primary purpose of the contribution is for it to be applied, within a relatively short period of time, to the direct provision of remuneration of employees (who are employed in that business),

then, such a contribution would ordinarily satisfy the nexus of being necessarily incurred in carrying on that business.

The taxpayer carries on a business that produces assessable income. It makes contributions to the EST to fulfil its legal obligation to provide shares to participant employees upon exercise of the performance rights. The required connection to the assessable income or the carrying on of the business is evident in the vesting conditions (hurdles) that participant employees to the Plan must achieve before they can exercise the rights. These hurdles are currently linked to increased post-tax, budgeted profit for the taxpayer and its subsidiaries. After a review of executive remuneration was conducted, a share based payment plan was adopted to align the interests of executive management with that of shareholders through the use of a direct link between the creation of shareholder wealth and share based payment remuneration. The contributions are required to fund the employee reward scheme and are necessarily incurred by the taxpayer in carrying on its business for the purpose of gaining or producing assessable income.

In Pridecraft and Spotlight, 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 Income Tax Income Tax - deductibility - irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme, 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.

The outgoings incurred by the taxpayer in carrying on its business are either not capital in nature or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. The expense will occur on revenue account in the course of business and is therefore not of a private or domestic nature. It will be incurred in the gaining of assessable income. There are no specific provisions of the ITAA 1997 or the ITAA 1936 which prevent the irretrievable contributions from being a deduction. Therefore section 8-1(2) of the ITAA 1997 will not prevent the irretrievable cash contributions paid by the taxpayer and its subsidiaries to the EST from being a deduction.

The taxpayer will obtain a deduction under section 8-1 of the ITAA 1997 for irretrievable cash contributions made to the trustee of the employee share trust fund to fund the subscription for, or acquisition on-market of the taxpayer's shares.

Question 2

Will the taxpayer obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the EST?

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 Income Tax: employer costs for the purpose of administering its employee share scheme are deductible, provides examples of costs incurred to administer an employee share scheme:

The taxpayer incurs costs of operating the scheme. These costs include brokerage fees, audit fees, bank charges and other ongoing administrative expenses necessarily incurred in running the scheme.

And states:

The operating costs associated with the administration and implementation of the employee share plan are part of the ordinary employee remuneration costs of the taxpayer. Accordingly they are deductible under section 8-1 of the ITAA 1997 in the year that they are incurred.

The taxpayer advised that its implementation and ongoing administration costs include the computer system set up to allow employees to access their own records with the trustee, legal review of the trust deed and administration by the trustee of the trust's requirements. The taxpayer was unable to provide a fee schedule, as agreed with the new trustee, because the information is commercial in confidence.

Administration by the trustee of the trust's requirements is an ongoing cost to the taxpayer which the Commissioner in ATO ID 2002/961 considers to be part of the ordinary employee remuneration costs that are a deduction under section 8-1 of the ITAA 1997. The administration 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.

The computer system setup and legal review of the trust deed are costs which are one-off expenses incurred by the employer to establish the employee share scheme. These expenses are not operating costs and recurring. These are capital costs that are excluded from being a deduction by virtue of paragraph 8-1(2)(a) which prevents a deduction for a loss or outgoing of capital or of a capital nature.

Question 3

Are the irretrievable cash contributions made by the taxpayer to the trustee of the EST deductible under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests?

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.

Section 83A-210 of the ITAA 1997 provides that if:

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

(i) under an arrangement; and

(ii) for the purpose 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 purpose 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.

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. An employee share scheme is a scheme under which the ESS interests in a company (or subsidiaries of the company) are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2) of ITAA 1997).

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 employee under an employee share scheme in relation to the employee's employment.

As established in question 1, the taxpayer and its subsidiaries make irretrievable contributions to the EST and under the terms of the Trust Deed, the trustee is required to acquire, hold, and allocate shares to employees participating in employee share plans operated by the taxpayer.

The Plan rules allow the taxpayer to offer employees, rights to acquire fully paid shares subject to the terms of the invitation and the Plan rules. The rights meet the definition of ESS interests (subsection 83A-10(1) of ITAA 1997) as they are beneficial interests in rights to acquire beneficial interests in shares in the taxpayer. The Plan meets the definition of an employee share scheme (subsection 83A-10(2) of ITAA 1997) in that it is a scheme under which the rights to shares in the taxpayer are provided to its employees or their associates in relation to the employee's employment.

The arrangement is constituted of the rules for the employee share plans, the creation of the EST under the trust deed and the provision of money to the trustee of the EST to acquire and hold shares to satisfy the allocation of shares to participants under the employee share scheme. The granting of ESS interests, the provision of the money to the trustee under the arrangement, 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 scheme. All the components of the scheme must be carried out so that the scheme can operate as intended.

The provision of money by the taxpayer or its subsidiaries, to the trustee is considered to be for the purpose of enabling the participating employees, directly or indirectly, as part of the employee share scheme, to acquire the ESS interests. Where the irretrievable contributions are made by the taxpayer and its subsidiaries to the trustee of the EST before the income year in which the ESS interests are granted to the employee, section 83A-210 will apply.

Under section 83A-210 of ITAA 1997, if an amount of irretrievable contributions are made to the trustee under the arrangement to purchase shares in excess of the obligations for the ESS interests already granted, the amount will be deductible in the income year in which the relevant ESS interests are granted to the participating employees, that is the income year in which the employee acquires the ESS interests.

Question 4

Are the irretrievable cash contributions made by the taxpayer to the trustee of the EST deductible to the taxpayer under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the acquisition of the relevant ESS interests?

A deduction for the purchase of shares or to fund subscription for shares to satisfy the existing obligations arising from the grant of ESS interests is allowable to the taxpayer in the year in which the money was paid to the trustee, under section 8-1 of the ITAA 1997. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust which considers the timing of deductions allowable to an employer in respect of money provided to the trustee of an employee share trust.

As discussed in the previous answer to question 3, section 83A-210 of ITAA 1997 applies if, under an arrangement, an amount of irretrievable contributions are made to the trustee to acquire shares to satisfy future obligations under the employee share plan, which is before the grant of the ESS interests that are rights to shares, to participating employees.

Section 83A-210 of the ITAA 1997 will not apply where the taxpayer or its subsidiaries make irretrievable contributions to the EST to fund the acquisition of the taxpayer's shares by the trust to satisfy ESS interests, where the contribution is made after the acquisition of the relevant ESS interests.

In this situation, the irretrievable contribution by the taxpayer to the trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which irretrievable contributions are made.

Question 5

Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, a deduction claimed by the taxpayer or its subsidiaries for the irretrievable cash contributions made by the taxpayer, to fund the subscription for, or acquisition on-market of, the taxpayer's shares by the trustee of the EST?

Law Administration Practice Statement PS LA 2005/24 (PSLA 2005/24) Application of General Anti-Avoidance Rules provides instructions and practical guidance to tax officers on the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1) of the ITAA 1936. The following requirements must be met before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936:

• a 'tax benefit', as identified in section 177C, was or would, but for subsection 177F(1), have been obtained;

• the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and

• having regard to section 177D, the scheme is one to which Part IVA applies.

The Scheme

Subsection 177A(1) of the ITAA 1936 defines a 'scheme' as:

(a). any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b). any scheme, plan, proposal, action, course of action or course of conduct;

It is considered that this definition is sufficiently wide to cover the proposed arrangement under the Plan which utilises a payment made by the taxpayer or its subsidiaries to the trustee of the EST (in accordance with the Trust Deed), to fund the acquisition of its shares on behalf of participating employees by the trustee.

Tax Benefit

'Tax benefit' is defined in subsection 177C(1) of the ITAA 1936 as including:

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out;

In order to determine the tax benefit that would be derived by the taxpayer or its subsidiaries from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the companies might reasonably have been expected to enter into to achieve the taxpayer's aims in relation to employee remuneration.

The taxpayer has provided the following counterfactuals:

1. the taxpayer could fund the purchase of shares on-market in the name of the participant at the time conditional rights vest and in the case of performance rights and options at exercise. Under this alternative, a tax deduction would be available to the taxpayer for the purchase cost of the shares.

2. the taxpayer could remunerate employees via payments of salary, bonuses or superannuation contributions (ie cash equivalent amounts based on the value of shares) rather than through the grant of awards and delivery of shares. Under this alternative, payments of the additional cash amounts would be deductible to the taxpayer.

3. the taxpayer could issue new shares directly to participants when conditional rights vest and performance rights or options are exercised. Under this alternative, the taxpayer would be entitled to a tax deduction for costs incurred in issuing and transferring the shares, but it is unlikely to receive a deduction for the cost/value of the shares issued.

Consideration of the tax advantages of the counterfactuals/alternative forms of remuneration and the proposed scheme suggests there is no tax benefit for the first two counterfactuals because the deductible amounts under both of them would be the same or similar from the taxpayer's tax perspective under the current ESS arrangement. Counterfactual 1 would result in a deduction for the purchase cost of the shares. Counterfactual 2 would equally result in a similar tax benefit as payments of the additional cash amounts would also be deductible to the taxpayer.

However, the third counterfactual acknowledges that if the taxpayer were to issue new shares to fulfil the rights, it would not be entitled to any deduction for the shares, only the costs incurred when issuing and transferring any shares, unless section 83A-205 of the ITAA 1997 was satisfied. This provision requires that:

• the taxpayer must have provided an ESS interest to an individual under an employee share scheme

• the taxpayer must have done this as the individual's employer (or as the holding company of the employer)

• with the exception of paragraph 83A-35(2)(b) of the ITAA 1997(the employee income test), section 83A-35 must have applied to reduce the amount included in that individual's assessable income under subsection 83A-25(1).

If the shares did meet these conditions, the company would be entitled to a deduction equal to the amount of the reduction allowable to the individual under section 83A-35 of the ITAA 1997 (a maximum deduction of $1,000). However, the scheme restricts the offer of ESS rights to non-executive employees. Therefore the scheme is not non-discriminatory, a prescribed condition pursuant to subsection 83A-35(6) and the taxpayer would fail to obtain a deduction by virtue of section 83A-205.

By contrast the use of the trust arrangement permits the taxpayer, subject to the requirements of sections 8-1 and 83A-210 of the ITAA 1997, to claim a deduction for the full amount of the contributions it makes to the trust. Therefore, to the extent of any increased deductions because of the trust arrangement, the taxpayer obtains a tax benefit.

While, for the reasons noted above by the applicant, it is unlikely that it would choose any other incentive plan that did not give rise to an allowable deduction (and therefore there would not be the necessary tax benefit), the analysis below proceeds on the assumption that the Commissioner would in fact be able to identify a relevant tax benefit.

Section 177D of the ITAA 1936 provides that Part IVA only applies if, after having regard to certain factors specified in paragraph 177D(2) of the ITAA 1936, it would be concluded that a person who entered into the scheme did so for the sole or dominant purpose of enabling the taxpayer to obtain the tax benefit.

Paragraph 177D(2) of the ITAA 1936

Paragraph 177D(2) of the ITAA 1936 sets out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit:

(i) the manner in which the scheme was entered into or carried out;

(ii) the form and substance of the scheme;

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi).

(i) The manner of the scheme

In considering whether Part IVA applies or not, the necessary comparison to be made in relation to the factors listed in paragraph 177D(2) of the ITAA 1936 is between the scheme as proposed and the relevant counterfactual.

The inclusion of the EST in the scheme does give rise to a tax benefit, but the taxpayer has provided the following commercial reasons for the operation of the trust:

1. ESTs are common commercial vehicles which have been used by taxpayers for many years.

2. To provide remuneration benefits to employees. Their usage is wide spread amongst private and public companies in Australia and overseas, and they provide significant commercial benefits to taxpayers in regards to administration of equity based remuneration strategies (e.g. the trustee function can be outsourced to the share registry provider which can reduce administration costs and the need to obtain an Australian Financial Services Licence). The company believes this form of remuneration is more effective than the cash and non-cash bonuses or superannuation benefits previously provided.

3. To provide an arm's length vehicle for acquiring and holding shares in the taxpayer either by way of acquiring shares from another shareholder or by way of a new issue of shares, and can assist the taxpayer in meeting Corporations Act 2001 ("Corporations Act") requirements in relation to dealing in its own shares.

4. To assist with managing any insider trading issues as the trustee, as an independent party, is acquiring shares in accordance with a settled trust deed.

5. To provide an efficient structure for giving effect to disposal restrictions, forfeiture conditions and other conditions on shares. As a trustee is the legal owner, employees as beneficial owners have no ability to deal in the shares unless complying with those restrictions or conditions.

6. To enable shares in the taxpayer held by the EST to be recycled without increasing the percentage of ownership of other shareholders. When shares are forfeited (i.e. on termination of employment or on expiry of a plan), the shares can be re-used for future offers to employees and

7. To provide the taxpayer with capital management flexibility by allowing the taxpayer to decide whether the trustee should purchase shares from another shareholder or subscribe for shares to hold on behalf of employees. This flexibility may allow the taxpayer to manage its earnings per share, for example.

It is accepted that the trust provides benefits to the operation of the scheme that would not be available if the shares were provided directly by the taxpayer as per the third counterfactual.

(ii) The Form and Substance of the scheme

The substance of the scheme is the provision of remuneration in the form of shares to employees who participate in the ESS. It takes the form of payments by the taxpayer or its subsidiaries to the trustee which acquires the shares and transfers them to employees.

While existence of the trust may confer a tax benefit, it cannot be concluded that it is the only benefit provided, as outlined above. The applicant has argued that the form of the arrangement with the trust provides the scheme with non-tax benefits and this is accepted.

(iii) The timing of the scheme

The irretrievable cash contributions made by the taxpayer Group to the trustee enable the trustee to acquire shares in the taxpayer in satisfaction of employee rights and to use market conditions advantageously to meet potential employee share requirements in advance. The application of section 83A-210 to cash contributions made before the employee receives the right, prevents any timing advantage for the deductibility of those contributions.

(iv) The result of the scheme

The result of the scheme is to provide the taxpayer and its subsidiaries with allowable deductions for the contributions they make to the EST. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of the taxpayer to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances.

(v) Any change in the financial position of the taxpayer

As noted above, the taxpayer makes irretrievable cash contributions to the trust and those contributions constitute a real expense with the result that the taxpayer's financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with a trust as part of the scheme, in contrast to the taxpayer providing shares to employees directly, there is nothing artificial, contrived or notional about the taxpayer group's expenditure.

(vi) Any change in the financial position of other entities or persons

The contributions by the taxpayer to the trustee will form part of the corpus of the trust and must be dealt with by the trustee in accordance with the terms of the Trust Deed, that is, for the acquisition of shares to ultimately be provided to participants in the ESS. The taxpayer is not a beneficiary of the trust and its contributions cannot be returned to it in any form except where the trustee acquires shares from by subscribing for new shares at market value. Therefore, the contributions made by the taxpayer amount to a real change to the financial position of the trustee. The financial position of employee participants and their associates in the scheme will also undergo a real change. This will be the case whether the shares are acquired through the EST or provided direct by the taxpayer. There is nothing artificial, contrived or notional about these changes.

(vii) Any other consequence

There are no other consequences for the taxpayer, the subsidiaries, their employees and or their associates that would be relevant as evidence of a dominant purpose of obtaining a tax benefit.

(viii) The nature of any connection between the taxpayer and any other persons

The relationship between the taxpayer and the participants in the Plan is one of employer/employee. The trustee and the taxpayer are unrelated.

The contributions made by the taxpayer to the trustee are commensurate with the taxpayer's stated aim of providing the participants with remuneration in a form that aligns their personal financial rewards with the risks and returns of the taxpayer's shareholders. There is nothing to suggest that the parties to the employee share scheme are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit.

Conclusion - the purpose of the scheme

A consideration of all the factors referred to in paragraph 177D(2) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the employees of the taxpayer and its subsidiaries who participate in the scheme in a form that promotes the taxpayer'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 taxpayer in relation to irretrievable contributions made by the taxpayer and its subsidiaries to the trust to fund the acquisition of employer shares in accordance with the scheme as outlined above.

Question 6

Will the irretrievable cash contributions made by the taxpayer to the trustee of the EST to fund the subscription for or acquisition on-market of the taxpayer's shares constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Assessment Act 1986 (FBTAA)?

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 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

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

A payment of money by the taxpayer 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 taxpayer.

The Trust Deed includes a clause that satisfies the sole activities test in that the Trust will be managed and administered so that it satisfies the definition of "employee share scheme" for the purposes of section 130-85(4) of the ITAA 1997.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will also require that the trustee carry out 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.

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 taxpayer are provided to employees in relation to the employee's employment.

Under the Plan, the taxpayer has established the trust to acquire shares in the taxpayer and to allocate those shares to employees. Furthermore it is proposed that future allocations of shares under the Plan 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 taxpayer; 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 the rules of the Plan.

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 taxpayer's shares in accordance with the Trust Deed.

Question 7

Will the provision of ESS interests at a discount by the taxpayer or the trustee to employees of the taxpayer constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

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:

(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 83A-B or 83A-C of that Act applies.

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

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:

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 provision of a right to acquire a beneficial interest in a share in the company.

The taxpayer has stated that it will grant ESS interests of rights to shares in the taxpayer to the participants of its Plan. The ESS interests offered to participants in the Plan are offered at a discount and are in connection with the participant's employment.

It is accepted that the Plan described in this private ruling comprises an employee share scheme and incorporates 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 Plan is an employee share scheme under which the relevant ESS interests (being the beneficial interests in the shares) are acquired by employees of the taxpayer (or their associates), and the acquisition of those ESS interests is in relation to those employees employment.

Accordingly, the acquisition of ESS interests pursuant to the Plan 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 from the exercise of options

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

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 taxpayer shares granted under the Plan to satisfy rights that are 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.

ATO ID 2010/219 provides the commissioner's view of the application of the FBTAA to shares provided to employees upon exercise of rights granted under an employee share scheme.

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

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

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

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

When an employee accepts to participate in the Plan, they obtain a right to acquire a beneficial interest in a share in the taxpayer and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received would be in respect of the exercise of the right, and not in respect of employment.

Therefore, the benefit that arises to an employee upon the exercise of an option or right under the incentive plan will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee.

Question 8

Will the Commissioner seek to apply section 67 of the FBTAA to the EST arrangement where ESS interests are provided to employees at a discount?

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 ie 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.

ATO Practice Statement - Law Administration PS LA 2005/24 Application of General Anti-Avoidance Rules also 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(2) 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 Fringe benefits tax: response to questions by major rural organisation under the heading ' Administration of the Fringe Benefits Tax Assessment Act, Question 18' discusses the application of section 67. Here 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…

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 taxpayer's employee incentive plan, the benefits provided to the trustee by way of irretrievable cash contributions to the EST and to participants by way of the provision of options and shares under the Plans will not be subject to FBT. Consequently, no amount could reasonably be expected to be included in the aggregate fringe benefits amount, attributable to the scheme, if the arrangement had not been entered into. Therefore, the fringe benefits tax is not any less than it would have been but for the arrangement. There is no counterfactual to consider under section 67 of the FBTAA.

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 taxpayer in relation to a tax benefit obtained under the Plans.