Edited version of your written advice

Authorisation Number: 1012668224944

Ruling

Subject: Employee share scheme

Question 1

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the irretrievable cash contributions made by it to the Trustee of the Employee Share Trust (EST) to fund the subscription for or acquisition on-market and/or off-market of the Company's shares by the EST pursuant to the Equity Plans?

Answer

Yes.

Question 2

Will the Company obtain income tax deductions, pursuant to sections 8-1, 25-5 or 40-880 of the ITAA 1997 in respect of costs incurred in relation to the implementation and ongoing administration of the EST?

Answer

Yes.

Question 3

Are irretrievable cash contributions made by the Company to the Trustee of the EST to fund the subscription for or acquisition on-market and/or off-market of the Company's shares by the EST pursuant to the Equity Plans, deductible to the Company at the time determined by section 83A-210 of the ITAA 1997?

Answer

Yes.

Question 4

If the Trustee of the EST satisfies the relevant Equity Plan obligations by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company 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 make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to any aspect of the arrangement(s) described In Section 2 of the application to deny, in part or in full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company or any of its subsidiary, members to the Trustee of the EST to fund the subscription for or acquisition of the Company shares from existing shareholders by the EST?

Answer

No.

Question 6

Is the provision of shares pursuant to the Equity Plans by the Company to the Participants 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 cash contributions made by the Company to the Trustee of the EST to fund the subscription for or acquisition on-market and/or off-market of the Company's shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer

No.

Question 8

Will the Commissioner seek to apply section 67 of the FBTAA 1986 to the Company's payment of irretrievable contributions to the Trustee?

Answer

No.

This ruling applies for the following periods:

Income tax year ending 30 June 2014 to year ending 30 June 2018

Fringe benefit tax year ending 31 March 2014 to year ending 31 March 2018

The scheme commences on:

1 July 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Company is the head entity of an Australian tax consolidated group, and is listed on the Australian Stock Exchange (ASX).

The Company has implemented two equity based compensation plans (Equity Plans) as part of its remuneration policy for its employees. These are:

• Performance Rights Plan (PRP); and

• Employee Share Option Plan (ESOP).

Performance Rights currently on issue are governed by the PRP Rules and do not have vesting conditions exceeding three years. The ESOP is governed by the Employee Share and Option Scheme Terms and Conditions (together referred to as plan documents).

The Company has established the Company Equity Plan Trust (EST) to facilitate the provision of shares in the Company under each of the above mentioned Equity Plans to certain Australian employees of the Company (Participants).

The trustee of the EST is Pacific Custodians Pty Ltd (Trustee) which is not part of the Company tax consolidated group.

The Company intends to amend existing plan documents to introduce new equity based compensation plans and further, to accommodate the use of the EST.

The applicant advised that the summary provided in the application accurately reflects the substance of the proposed changes.

It is proposed that current Equity Plan Participants and new Participants will be eligible to participate in the Equity Plans administered by the EST. For current Equity Plan Participants, the existing deeds will be amended to transition into the new scheme, and for new Participants, new share deeds incorporating the new scheme will be entered into.

Performance Rights Plan (PRP)

The key features of the PRP are as follows:

• At the Board's absolute discretion, it may from time to time issue invitations to Eligible Persons to participate in the Plan.

• The Invitation to participate will specify information, including any applicable Performance Hurdles (for example, growth targets and the minimum employment service) and the Performance Period over which the Performance Hurdles will be measured.

• The Performance Rights ("PRs) will be granted for no consideration payable by the Participant.

• The PRs do not confer the Eligible Person the right to participate in a new issue of Shares by the Company, including by way of bonus issue, rights issue or otherwise.

• Participants have no entitlement to be granted any PRs unless and until such PRs are granted.

• The Performance Hurdles (PRP clause 6) for the PRs issued to date have been broken into two separate vesting conditions as follows:

Category One

Divided into three equal tranches of PRs for the first three years of employment vesting when business unit or group profit targets are met.

Category Two

Divided into three equal tranches of PRs for the first three years of employment, vesting when the ten day volume weighted average share price (VWAP') exceeds set levels.

• The Performance Hurdles will be measured during the respective Performance Period. Where PRs have not vested, the Board may make a determination that the PRs will lapse.

• Each PR is eligible to be converted into one ordinary share in the Company on satisfaction of the relevant criteria.

• PRs can only be exercised through submission of a Notice of Exercise provided the PR has vested and has not lapsed.

• Shares issued as a consequence of the exercise of PRs, will from the date of allotment, rank pari pasu in all respects with other issued shares, except as otherwise set out in the Plan, and will be entitled in full to dividends from the date of issue.

• Administration of the PRP is vested in the Board.

Employee Share Option Plan (ESOP)

The ESOP broadly operates as follows:

• The Board may at any time decide that the Scheme should be operated in respect of any Financial Year and it its discretion, the total number of Securities to be offered to each eligible Employee and the Issue Price at which the Securities are offered.

• The Board may in its absolute discretion determine that an employee who otherwise would be eligible to acquire Securities is not eligible.

• The Offer of Shares is provided in writing and will specify, amongst other things, the number of Shares offered, the Issue Price and the Performance Hurdles applying to the Offer.

• The Offer of Options is provided in writing and will specify, amongst other things, the number of Options, Option Period, Exercise Price and any Performance Hurdles applying to the Offer.

• The total number of Securities which may be offered under the Scheme will not at any time exceed 5% of the Company's total issued Shares.

• When exercisable, each Option is convertible into one ordinary share

• To exercise an Option, a Participant must sign and return an exercise notice in a form prepared by the Company. Options which have not been exercised by the expiry of the Option Period will lapse.

• Option holders do not have any right to participate in new issues of Securities in the Company made to shareholders generally.

• The Option holder does not participate in any dividends unless the Options are exercised and the resultant Shares of the Company are issued.

• If there is a bonus issue to the holders of Shares in the Company, the number of Shares over which the Option is exercised may be increased.

• The Board at its absolute discretion may Offer and issue Restricted Shares and Restricted Options upon the terms and conditions it sees fit.

• Administration of the ESOP is vested in the Board.

The applicant has advised no Restricted Shares were issued nor are any intended to be issued under the Equity Plans.

Employee Share Trust

The Company has established the Company Equity Plan Trust (EST) for the purposes of managing the current and future incentive plans in accordance with the Equity Plan Trust Deed (the Trust Deed). The Trustee is an independent entity appointed by the Board as the Trustee of the EST.

The EST has been established for the sole purpose of obtaining shares for the benefit of Participants in the Equity Plans, including subscribing for, or acquiring, allocating, holding and delivering shares in the Company under the PRP, ESOP and any other employee equity plans for the benefit of Participants.

The documentation for the Equity Plans will be amended to allow the Board to use an EST to facilitate the implementation of the PRP and ESOP.

The Trust will be managed and administered so that it satisfies the definition of an 'employee share trust' in section 130-85(4) of the ITAA 1997.

The EST will be funded by contributions from the Company for the purchase of shares under the Equity Plans.

Upon receipt of notice from the Board, the Trustee will purchase the requisite number of shares, in accordance with the Equity Plans, either from existing shareholders, via subscription from the Company, or through allocation of shares that are trust assets not being held on behalf of any other Participant. A combination of these acts can also be undertaken to effect the purchase.

The structure of the EST and the rules of each Equity Plan, are such that shares allocated to each employee will generally be transferred into the name of the relevant Participant. The Participants are absolutely entitled to the Shares as against the Trustee of the EST from the time the Shares are allocated to them.

By written notice, the Participants can apply for legal title to the shares held in the EST to be transferred to them or to a third party.

The Trustee will, after lifting of any relevant restrictions, be permitted to sell shares on behalf of a Participant where the relevant Equity Plan rules permit (subject to any restrictions on transfer that are imposed upon participants in the Equity Plans).

The Trustee may not exercise any voting rights, participate in rights issues or hold any bonus shares in relation to unallocated trust shares. The Trustee may, however, apply any capital receipts, dividends or other distributions received in relation to the unallocated shares to purchase further shares to be held on trust.

The Trustee is not permitted to carry out activities which result in the Participants in the Equity Plans being provided with additional benefits other than the benefits that arise from the relevant Equity Plan rules.

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.

Commercial Benefits of EST

The use of an EST has a range of commercial benefits. In particular, the EST will:

• Provide an arm's length vehicle for acquiring and holding shares in the Company, either by way of subscription or acquisition from existing shareholders.

• Assist the Company in relation to dealing in its own shares while meeting its legal requirements under the Corporation Act 2001 which generally prohibits a Company from acquiring Its own shares. The use of the EST provides a mechanism to allow for the acquisition of the Company's shares through the EST and the EST is not prohibited from doing so as a result of the Company having no beneficial Interest in any shares held by the EST.

• Assist the Company in managing any insider trading issues as the Trustee, a party acting independently and with a fiduciary duty to its beneficiaries, is acquiring shares in accordance with a set policy.

• Provide the Company with capital management flexibility. That is, shares allocated to Participants can be either acquired from other shareholders or through subscription. This is important for the Company's shareholders as, in deciding the appropriate acquisition method, the most effective manner to utilise cash for shareholder benefit, and any concerns that existing shareholders have in relation to dilution of their existing shareholdings, can be considered.

• Provide greater flexibility to accommodate its long term incentive arrangements whilst the Company continues to expand in terms of operations and employee numbers in future years.

• Provide the Company with better visibility on management's share transactions in respect of shares acquired under any of the Equity Plans. The mechanism implemented through the facilitation of the Equity Plans through the EST assists the Company to better assess which of its employees are fully committed to aligning their interests with those of shareholders.

• Provide an efficient structure for giving effect to disposal restrictions/vesting conditions. As the Trustee is the legal owner of the shares, the Participants as beneficial owners have no ability to deal in the shares, until the shares are released from the Trust.

• Provide a single vehicle for the administration of Equity Plans and any new plans, resulting in reduced administrative costs.

• Allow for easy recycling of shares, without increasing the percentage of ownership of other shareholders. When, for example, PRs have been issued to a particular Participant, shares have been acquired by the Trustee in advance but have not yet been allocated to be held on behalf of that Participant, and the PRs do not subsequently vest, the Company can allocate those shares to other future Participants under the Equity Plans.

• Provide the Company with an efficient mechanism for the administration and operation of any new employee equity plans which it introduces in the future.

Costs incurred by the Company to administer the EST

The Company will incur various costs in relation to the administration of the EST, including but not limited to:

• taxation and legal advice in respect of the Australian tax and legal implications which may arise for both the Company and the Participants of the relevant Equity Plans in respect of the EST structure;

• legal drafting fees in respect of the various legal documents required in respect of the EST and the Equity Plans.;

• legal advice in respect to the drafting of changes required to existing Equity Plans in order to accommodate the EST structure.;

• professional fees associated with the establishment of the EST including such costs associated with the creation and registration of the EST with various authorities;

• taxation fees associated with the drafting and lodgment of the Application with the ATO.

The Company will also incur costs associated with the services provided by the Trustee of the EST in respect of the on-going administration and management of the EST, including but not limited to:

• equity plan record keeping;

• production and dispatch of holding statements to employees;

• provision of annual income tax return information;

• acquisition of shares and allocation to Participants;

• management of employee termination;

• costs associated with the acquisition of shares (e.g. brokerage and other fees in allocation of shares to Participants).

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 section 67(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177A

Income Tax Assessment Act 1936 subsection 177C

Income Tax Assessment Act 1936 paragraph 177D

Income Tax Assessment Act 1936 subsection 177F

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 25-5

Income Tax Assessment Act 1997 - section 40-880

Income Tax Assessment Act 1997 - section 83A-10

Income Tax Assessment Act 1997 - section 83A-105

Income Tax Assessment Act 1997 - section 83A-210

Income Tax Assessment Act 1997 - section 102-5

Income Tax Assessment Act 1997 - section 102-20

Income Tax Assessment Act 1997 - section 102-25

Income Tax Assessment Act 1997 - section 104-5

Income Tax Assessment Act 1997 - section 104-35

Income Tax Assessment Act 1997 - section 104-155

Income Tax Assessment Act 1997 - section 995-1

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

Corporations Act 2001

Reasons for decision

Question 1

Summary

The Company will obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of the irretrievable cash contributions made by it to the Trustee of the EST to fund the subscription for or acquisition on-market and/or off-market of the Company's shares by the EST pursuant to the Equity Plans

Detailed reasoning

Section 8-1 of the ITAA 1997 states:

8-1(1)

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

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

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

8-1(2)

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

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

The contribution must be incurred

To qualify for a deduction under section 8-1 of the ITAA 1997 a contribution to the trustee of an EST must be incurred.

While 'incurred' generally refers to a situation where a taxpayer owes a present money debt that they cannot escape (see Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions).

Draft Taxation Ruing TR 2014/D1 Income tax: employee remuneration trust arrangements provides the Commissioner's current view on a broad scope of taxation consequences for employers, trustees and employees who participate in an employee remuneration trust arrangement (ERT).

Paragraph 9 of TR 2014/D1 states that the essential elements of an ERT to which the draft ruling applies when considering the consequences for the employer and trustee are:

a) an employer carries on business for the purpose of gaining or producing assessable income;

b) employees are employed by the employer in the ordinary course of carrying on that business;

c) a trust is established by or at the instruction of the employer;

d) the trust is a resident trust for the purposes of Division 6;

e) the employer makes one or more contributions to the trustee of the trust;

f) the trustee applies the contributions to make loans to employees and/or to acquire shares or other assets; employees of the employer are capable of benefiting under the trust (for example, in the form of loans, distributions of cash and/or a transfer of assets); and

g) the value of any benefits provided to employees is determined by the employer or the trustee, having regard to the performance of the employees; the growth in value of, or generation of income from, investments held by the trustee; and/or objective indices, for example, movements in the value of shares in the employer or a related entity.

The way in which the EST has been established and operates is in line with the elements of an ERT to which TR 2014/D1 applies.

Paragraph 169 of the explanation to TR 2014/D1 provides that `a contribution made to the trustee of an ERT is incurred only when the ownership of that contribution passes from an employer to the trustee of the trust and there is no circumstance in which the employer can retrieve any of the contribution (Pridecraft Pty Ltd y Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; Spotlight Stores Pty Ltd v Commissioner of Taxation [2004] FCA 650 2004 ATC 4674; 55 ATR 745)).

The contributions made by the Company to the Trustee of the EST to fund the subscription for or acquisition of the Company shares by the EST are irretrievable and non-refundable under the Trust Deed, which states at clause 4.4 that:

Funding

a) The Company must provide the Trustee, or cause the provision to the Trustee of, any funds required by the Trustee in order to comply with its obligations under clause 4.2 (after application by the Trustee of any capital as provided by clause 4.1 (b) (ii)).

b) The Trustee must not repay to any Group the Company any amount received as contributions for the acquisition of Trust Shares.

c) The Trustee must apply any funds received under clause 4.4(o) in satisfying its obligation under clause 4.2.

And further, at Clause 2.5:

Contributions by the Company

All funds received from the Company for the acquisition of Shares for the purposes of the Equity Plans:

a) constitute accretions to the corpus of the Trust;

b) will not be repaid to the Company; and

c) will not result in any Participant being entitled to receive any such funds contributed by the Company.

Thus, the contributions made by the Company to the Trustee of the EST to allow the Trustee to comply with its obligations to Participants by the provision of shares are irretrievable and non-refundable under the Trust Deed, which does not provide for any circumstances in which the Company can retrieve the contribution other than via subscription for shares under Clause 4.2 of the Trust Deed.

Thus the contributions would be incurred for the purposes of section 8-1 at the time these are made to the EST.

Incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for that purpose

For a contribution by the Company to be deductible under section 8-1 of the ITAA 1997, the 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.

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 at 55-58; [1949] HCA 15 at [9]-[15] (Ronpibon); Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation [1980] FCA 150; 80 ATC 4542 at 4559-4561; (1980) 11 ATR 276 at 294-297 (Magna Alloys)).

Paragraph 14 of TR 2014/D1 provides that where an employer:

• assessable income and engages employees in the ordinary course of carrying on that business;

• makes a contribution to the trustee of an employee remuneration trust; and

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

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

Paragraph 178 of TR 2014/D1 provides that the Commissioner will generally accept a relatively short period of time for the trustee of an ERT to diminish a contribution for the direct provision of remuneration to employees to be up to five years from the date the contribution was made by an employer to the trustee of an ERT. However, where the contribution has been made to facilitate an employee having an interest in the ERT corresponding to a particular number of shares (or rights to acquire shares) in the employer or in its subsidiaries to which Subdivision 83A-C of the ITAA 1997 applies, the statutory scheme is such that a relatively short period of time for these arrangements will generally be accepted as being up to seven years from the date the contribution is made.

In the Company Equity Plans, the PRs and Options are covered by the employee share schemes rules with a maximum deferral period of seven years. In any case the performance hurdles relevant to the Equity Plans are not intended to exceed 3 years. Thus, the relatively short period of time criteria should be met in respect of the contributions made by the Company.

Thus where:

• the Company carries on a business in Australia, and engages employees in that business;

• the Company makes irretrievable contributions to the EST in relation to rights that have been offered to employees under the Equity plans;

• at the time the Company makes contributions to the EST, the primary purpose of the contribution is for it to be applied, within a short period of time, to the provision of remuneration of employees of the Company (in the form of equity based incentives);

then, the irretrievable contributions made by the Company to the Trustee under the rules of the Equity Plans will satisfy the nexus of being necessarily incurred in carrying on the Company business under paragraph 8-1(1)(b) of the ITAA 1997.

A contribution that is capital or of a capital nature

Where a contribution satisfies either limb of subsection 8-1(1) of the ITAA 1997, it may still be capital or of a capital nature. Pursuant to subsection 8-1(2) of the ITAA 1997, the contribution will not be deductible to an employer under section 8-1 to the extent to which it is capital or of a capital nature.

There is no statutory definition as to what constitutes a payment on capital account as opposed to one on revenue account. Therefore, it is necessary to consider the principles identified and developed by case law in determining whether an amount is capital or revenue in nature.

The decision in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337 (Sun Newspapers) is a leading authority on the distinction between revenue and capital expenditure, where his Honour said at 363:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

More recently in GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 21 ATR 1; 90 ATC 4413 the High Court pointed out that the character of expenditure is ordinarily determined by reference to the nature of the asset acquired and that the character of the advantage sought by the making of the expenditure is a critical factor in determining the character of what is paid.

As noted above, the contributions made by the Company to the EST are ultimately and in substance applied for the benefit of remunerating employees in connection with the business operations of the Company. The primary advantage sought by the Company in making contributions to the EST under the Equity Plans is the resultant incentivizing of employees to perform effectively and contribute to the business of the Company.

Other advantages obtained by the Company could, however, include that which flows to the Company from enlarging its own equity structure when the Trustee of the EST acquires the equity interests in the form of shares in the Company (by subscription, rather than on market). The advantage obtained by the Company is, in effect, a movement of value out of profit or capitalised profit to share capital and therefore a maintenance or enhancement of the capital value of the Company. As this advantage is structural and enduring, it would be of a capital nature.

It follows that no advantage of a capital nature is likely to arise in respect of shares acquired on-market to meet the Trustee's obligations.

The combined operation of subsections 8-1(1) and 8-1(2) of the ITAA 1997 may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a differing nature.

However, where a contribution is made for the purposes of securing advantages of both capital and revenue nature, no apportionment is required where the advantages of a capital nature are only expected to be very small or trifling by comparison.

In this regard, the draft taxation ruling TR 2014/D1 at paragraph 200 states:

Where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period (as discussed in paragraph 178 of this draft Ruling) of the contribution being made, it is considered that any amount of the contribution attributable to securing a capital structure advantage will only be very small or trifling where the employer:

• intends that any direct interest in the employer acquired by the trustee of the ERT (for example shares) will be transferred to employees within that relatively short period, and

• does not anticipate that such shares will be on-sold to third parties at that time or shortly thereafter.

For these purposes, the Commissioner considers that a relatively short period of time is up to 5 years, increased to 7 years where the benefit in question relates to an employee share scheme (paragraph 178 of TR 2014/Dl).

In the present circumstances, the shares acquired by the Trustee from the contributions from the Company will be transferred to the Participants when the vesting conditions are satisfied and the shares held by the Trustee are not intended to exceed 3 years. Thus, the relatively short period of time criteria should be met in respect of the contributions made by the Company.

The non-refundable contributions made by the Company to the Trustee of the EST for the purposes of procuring shares to satisfy the Company's commitments arising under the Equity Plans are primarily outgoings incurred by the Company in the ordinary course of carrying on its business. Any capital advantage attained will be small or trifling compared to the advantage expected to be secured by rewarding prior performance of Participants and motivating the Participants to contribute through their employment performance to the income producing activities of the Company. Therefore, such contributions are not considered capital in nature, or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction.

Accordingly, the irretrievable cash contributions the Company makes to the Trustee of the EST to enable it to acquire shares, are allowable tax deductions for the Company under section 8-1 of the ITAA 1997.

Question 2

Summary

The Company will obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the ongoing administration and management of the EST.

The Company will obtain an income tax deduction pursuant to section 40-880 of the ITAA 1997 for costs incurred in establishment of the EST.

The Company will obtain an income tax deduction pursuant to section 25-5 of the ITAA 1997 for costs incurred in relation to managing the tax affairs including the cost associated with the preparation and submission of the private ruling application.

Detailed reasoning

Cost of ongoing administration of EST - section 8-1 of the ITAA 1997

As discussed at Question one, the Company 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 purposes of gaining or producing assessable income.

The view that costs incurred by the Company for administering the EST are deductible under section 8-1 of the ITAA 1997 is consistent with ATO ID 2002/961 which provides that costs incurred in implementing and administering an employee share scheme will be deductible under section 8-1 as they are part of the ordinary employee remuneration cost. The facts in ATO ID 2002/961 reveal that the deductible costs include brokerage fees, audit fees, bank charges and other ongoing administrative expenses necessarily incurred in running the scheme.

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

• employee plan record keeping;

• production and dispatch of holding statements to employees;

• provision of annual income tax return information for employees;

• management of employee termination, and

• costs incurred in the acquisition of shares and the allocation of shares to participants.

These expenses form part of ordinary employee remuneration costs. The costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. Accordingly the costs are deductible under section 8-1 of the ITAA 1997 in the year they are incurred.

Cost of establishment of EST - section 40-880 of the ITAA 1997

The Company will also incur various costs in relation to the establishment and implementation of the EST, including but not limited to:

• taxation and legal advice obtained in respect of the Australian tax and legal implications which may arise for both the Company and the Participants of the relevant the Company Equity Plans in respect of the EST structure;

• legal drafting fees in respect of the various legal documentation required in respect of the EST and the Equity Plans;

• legal advice obtained in respect of the drafting of changes required to existing Equity Plans in order to accommodate the EST structure;

• professional fees associated with the establishment of the EST including such costs associated with the creating and registration of the EST with various authorities;

It is accepted that these costs are incurred in carrying on a business for the purpose of gaining or producing assessable income and therefore meet the requirements of subsection 8-1(1) of the ITAA 1997. To be deductible under section 8-1 however, it needs to be established that the outgoing is not one of capital, or of a capital nature.

The decision in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337 (Sun Newspapers) is a leading authority on the distinction between revenue and capital expenditure, where his Honour said at 363:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

More recently in GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 21 ATR 1; 90 ATC 4413 the High Court pointed out that the character of expenditure is ordinarily determined by reference to the nature of the asset acquired and that the character of the advantage sought by the making of the expenditure is a critical factor in determining the character of what is paid.

The character of the advantage sought by the Company in establishing the EST can be gleaned from the private ruling application where it was stated:

The establishment of the EST provides the Company greater flexibility to accommodate its long term incentive arrangements whilst the business continues to expand in terms of operation and employee numbers in future years. It also allows for a streamlined approach to the administration of the Equity Plans.

Also cited in the private ruling application were the following commercial benefits of using the EST:

• Provides an arm's-length vehicle for acquiring and holding shares in the Company, either by way of subscription or acquisition from existing shareholders;

• Assists the Company to satisfy corporations law requirements relating to a the Company dealing in their own shares, by providing an arm's-length vehicle through which shares in the Company can be acquired and held in the Company on behalf of the relevant employee;

• Provides the Company with capital management flexibility.

• Allows for greater flexibility for the Company to accommodate its long term incentive arrangements whilst it continues to expand in terms of operations and employee numbers in future years;

• provides a single vehicle for the administration of Equity Plans and any new plans, resulting in reduced administrative costs.

It can be seen that the intended effect of establishing the EST, from a practical business point of view, was to establish a structure whereby, in the long term, the Company can accommodate its incentive arrangements, while assisting with capital management. While the Company already had established Equity Plans in place, the EST provides additional benefits long term, which will assist in managing its share capital. The advantage sought is structural and enduring.

In this matter, the costs incurred by the Company under the heading of 'establish and implement' are effectively once and for all payments referrable to implementing the EST. The costs cannot be said to be regular outlays directed at obtaining regular returns.

To the extent such costs are not deductible under either section 8-1 of the ITAA 1997 as noted above, such costs should be deductible under subsection 40-880(2) of the ITAA 1997.

Section 40-880(2) of the ITAA 1997 allows for an equal deduction over five years for capital expenditure incurred in relation to a taxpayer's business.

The ATO accept that such implementation costs are incurred in carrying on a business for the purpose of gaining or producing assessable income. It follows, therefore, that these costs should be considered as being incurred in relation to the Company's business which is carried on for a taxable purpose.

There are, however, a range of exclusions to the operation of section 40-880 of the ITAA 1997 which can be found in subsections 40-880(3)-40-880(9). None of these exclusions operate to deny a deduction to the Company for costs incurred in establishing and implementing the EST which are not already deductible under sections 8-1 of the ITAA 1997.

Thus, the Company will be able to claim an equal tax deduction over 5 years for any costs incurred in establishing and implementing the EST which are not deductible under sections 8-1 of the ITAA 1997.

Cost of managing tax affairs - section 25-5 of the ITAA 1997

The Company will incur various costs relating to tax advice associated with the implementation of the EST, including:

• taxation fees associated with the drafting and lodgement of the private ruling application with the ATO.

Section 25-5(1) of the ITAA 1997 provides a specific deduction for expenditure incurred to the extent that it is for managing tax affairs. Subsection 25-5(4) of the ITAA 1997 denies deductions for tax affairs where this expenditure is of a capital nature, however, also provides that such expenditure is not capital merely because the tax affairs concerned relate to matters of a capital nature.

In this regard, the example to subsection 25-5(4) of the ITAA 1997 states:

Under this section, you can deduct expenditure you incur in applying for a private ruling on whether you can depreciate an item of property.

As a result, the tax costs incurred by the Company in relation to the implementation of the EST, including the preparation and submission of the private ruling application, are deductible under section 25-5 of the ITAA 1997 on the basis such costs are not capital in nature through the operation of section 25-5(4) of the ITAA 1997.

Accordingly, the costs of obtaining tax advice relating to the implementation of the EST which are not deductible under section 8-1 of the ITAA 1997 will be deductible under section 25-5 of the ITAA 1997.

Question 3

Summary

Irretrievable cash contributions made by the Company will be deductible to the Company under section 83A -210 of the ITAA 1997 when the relevant Equity Plans have been granted and a contribution has been made to the EST to acquire shares to satisfy any potential obligation arising under the Equity Plans.

Detailed reasoning

As discussed in Question one, the provision of money to the Trustee of the EST by the Company for the purpose of remunerating its employees under the Equity Plans is an outgoing incurred n carrying on the Company's business and is deduction under section 8-1.

The deduction under section 8-1 would generally be allowable in the income year in which the Company 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 determines the timing of a deduction for contributions, as follows:

83A-210 If:

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

(i) under an arrangement; and

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

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

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

The term 'arrangement' is defined by subsection 995-1(1) of the ITAA 1997 as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

Under the Equity Plans, the Company will contribute money to the Trustee of the EST. The implementation of the Equity Plans undertaken by the Company satisfies the definition of an arrangement. This satisfies paragraph 83A-210(a)(i) of the ITAA 1997.

ATO Interpretative Decision ATO ID 2010/103 considers the timing of deductions for money provided to the trustee of an employee share trust. The ATO ID determines that section 83A-210 of the ITAA 1997 applies to determine the timing of the deduction, but only in respect of the amount of money provided to the trust to purchase shares in excess of the number required to meet obligations arising in the year of income from the grant of options, under an employee share scheme.

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

The Equity Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest (i.e. a beneficial interest in a right or option to acquire a beneficial interest in a share of the Company), is provided to Participants in relation to their employment in the Company in accordance with the Equity Plans Rules.

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.

Under the Equity Plan, a PR or an Option granted to a participant is an ESS interest as it is a right to acquire a beneficial interest in a share in the Company.

The granting of the ESS interests, the provision of money to the Trustee of the EST under the arrangement, the acquisition and holding of shares by the Trustee of the EST and the allocation of those shares to Participants 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.

As one of those components, the provision of money to the Trustee of the EST necessarily allows the scheme to proceed.

Consequently, the provision of money by the Company to the Trustee of the EST to acquire the Company shares is considered to be for the purposes of enabling the Participants, indirectly as part of the employee share scheme, to acquire ESS interests in the form of PRs or Options.

Therefore, after the Company makes an irretrievable cash contribution to the Trustee of the EST, a deduction for the purchase of shares to satisfy the obligations arising from the grant of ESS interests is allowable under section 8-1 of the ITAA 1997 to the Company in the year in which the money was paid to the Trustee.

However, if an amount of money is used by the Trustee to purchase excess shares intended to meet obligations arising from a future grant of ESS interests, the excess payment therefore occurs before the Participants acquire the relevant ESS interests under the Plan. Section 83A-210 of the ITAA 1997 will apply and the excess payment will only be deductible to the Company in the year of income when ESS interests are subsequently granted to the Participants.

This accords with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103. However, section 83A-210 of the ITAA1997 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from PRs that have already been granted.

In summary, the contribution of money by the Company to the EST would be deductible at the following times:

• where a contribution to the EST is made in an income year prior to the income year in which the PRs are granted, the contribution is deductible in the year that the PRs are granted to Participants; and

• where a contribution to the EST is made in the income year in which the PRs are granted or an income year following the year in which the PRs are granted, the contribution is deductible in the year in which the contributions are made.

Question 4

Summary

If the EST satisfies its obligations under the relevant the Company Equity Plan by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax event under Division 104 of the ITAA 1997.

Detailed reasoning

Section 6-5 Income according to ordinary concepts

Section 6-5 of the ITAA 1997, provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. To the extent that a taxpayer is an Australian resident for tax purposes, the assessable income of the taxpayer includes ordinary income derived directly or indirectly from all sources.

The expression 'income according to ordinary concepts" is not defined for the purposes of the income tax legislation, however principles to determine whether a receipt is income according to ordinary concepts have been developed by case law. In determining whether a receipt is income according to ordinary concepts, it is necessary to apply the relevant principles developed by case law to the facts of the particular case.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 21 ATR 1; 90 ATC 4413, the High Court considered the following factors were important in determining the nature of a receipt:

"To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of the receipt will be revealed most clearly by their periodically, regularity or recurrence; sometimes, by the character of o 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 recipients purpose ¡n engaging in the transaction, venture or business."

Periodicity, recurrence and regularity are regarded the most visible indicators of ordinary income. As a more general rule, amounts received as a result of carrying on a business should also represent ordinary income. Importantly, however, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

As discussed above in relation to Question 1, Dixon J in Sun Newspapers outlined the three matters to be considered in determining whether a payment is on capital or revenue account, as follows:

• the character of the advantage sought by the payment

• the way it is to be used or enjoyed, and

• the means adopted to obtain it.

ATO Interpretative Decision ATO ID 2010/155 considers the assessability as ordinary income for an employer of the option exercise price paid direct to the employer by the employee. Whilst not considered in the decision as part of the ATO ID, the reasons for decision provide some insight into the assessability of the subscription price as ordinary income of the exercise price received by the employer the Company. The reasons for decision provide that when the trustee of the EST subscribes to the Company for an issue of shares and pays the full subscription price for the shares using contributions provided by the employer in accordance with an employee share scheme, the Company is taken to have received a contribution of share capital from the trustee. The subscription price received by the Company is a capital receipt of the Company, not ordinary income.

As stated previously in this ruling, the Company has established the Company Equity Plans as part of its remuneration policy with the intention of recognising and rewarding employees for performance and attracting and retaining high performing employees.

The act of subscribing for the Company shares by the Trustee of the EST is governed by the Trust Deed and any directions the Trustee receives from the Company (either acquire shares on-market or subscribe for shares). Notwithstanding that the Trustee's subscription for shares relates to the satisfaction of the Company's obligations under the relevant Equity Plan rules, the subscription for shares is part of the Company's capital management strategy.

The character of the share subscription proceeds received by the Company 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, the Company 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.

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

Based on the above, the subscription proceeds are capital receipts and accordingly not assessable as ordinary income pursuant to section 6-5 of the ITAA 1997.

Section 20-20 Assessable recoupments

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

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

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

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

"Indemnity", is defined in the Shorter Oxford English Dictionary as "compensation for loss, or a sum paid by way of compensation" which includes a receipt in the nature of compensation by way of statutory right as well as a receipt under a contract of indemnity.

In the present case, the Company receives an amount for the subscription of shares by the EST which by its very nature does not represent an insurance or indemnity receipt. There is no insurance contract involved.

The subscriptions received by the Company from the EST are for shares and are integral to the arrangement whereby the acquisition and holding of the shares by the Trustee and the allocation of shares to the Participants are all interrelated components of the Company Equity Plans. The character of the subscriptions paid to the Company for shares is not one of 'insurance, indemnity or other recoupment'.

It follows that the subscriptions received do not constitute an assessable recoupment under section 20-20(2) of the ITAA 1997.

The subscription price paid by the EST does not fall within the definition of "indemnity". This is because the receipt does not arise because of a statutory right or contract of indemnity and the receipt is not in the nature of compensation. The receipt is simply an incident of the transaction flows for the funding of the EST and fulfilment of the obligations under the relevant Equity Plan rules.

Subsection 20-20(3) of the ITAA 1997 makes an amount received as a recoupment of a loss or outgoing, otherwise than by way of insurance or indemnity, an assessable recoupment if such a loss or outgoing that is deductible in the current or a prior income year, where the deduction was claimed under a provision listed in section 20-30 of the ITAA 1997.

The ordinary meaning of recoupment is extended by subsection 20-25(1) of the ITAA 1997 to include:

(a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and

(b) a grant in respect of a loss or outgoing.

However, none of the provisions listed in section 20-30 of the ITAA 1997 are relevant to the current circumstances. Therefore the subscription proceeds will not be an assessable recoupment under subsection 20-20(3) of the ITAA 1997.

For the above reasons, the subscription proceeds received by the Company do not constitute assessable recoupments under subsection 20-20(2) or under subsection 20-20(3) of the ITAA 1997.

Capital Gains Tax

Subsection 102-5(1) of the ITAA 1997 provides that your assessable income includes your net capital gain for the income year.

Section 102-20 of the ITAA 1997 provides that 'you can make a capital gain or capital loss if and only if a CGT event happens...

Given that a capital gain or capital loss is made only if a CGT event happens, the initial step is to ascertain whether such an event has occurred. Section 104-5 of the ITAA 1997 lists the types of CGT events.

In the present case, the transaction is the payment of subscription proceeds by the Trustee of the EST to the Company for the issue of shares, which is a capital receipt, the possible CGT events are:

• D1 Creating contractual or other rights; or

• H2 Receipt for event relating to a CGT asset.

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

Subsection 104-35(1) states that CGT event D1 'happens if you create a contractual right or other legal or equitable right in another entity'. CGT event D1 would therefore apply to the Company in circumstances where the receipt of the subscription proceeds was for the creation by the Company of a contractual, legal or other equitable right in another entity. However, the legal or equitable right has been created at the time of the issuance of the options or rights and not upon the payment of the subscription proceeds to the Company. The payment of the subscription proceeds is therefore, merely an exercise of the contractual right created on the granting of rights pursuant to the Equity Plans.

Furthermore, paragraph 104-35(5)(c) of the ITAA 1997 states that event D1 does not happen where a the Company issues or allots equity interests in the Company which is the case when the Trustee subscribes for the Company shares.

As CGT event D1 is excluded, it is necessary to consider the possible application of CGT event H2 (as per paragraph 102-25(3)(b) of the ITAA 1997).

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

Again, consideration of the subscription proceeds received by the Company from the Trustee of the EST establishes that they are for shares and are integral to the arrangement whereby the acquisition and holding of the shares by the trustee and the allocation of shares to the Participants are all interrelated components of the relevant Equity Plans. As part of the relevant plans, contractual rights of the employees are exercised on their behalf by the Trustee to acquire shares in the Company, rather than an act, transaction or event relating to a CGT asset owned by the Company.

Further, paragraph 104-155(5)(c) provides that CGT Event H2 does not happen where a the Company issues or allots equity interests in the Company, which is applicable here. It follows, for these reasons, CGT Event H2 does not occur.

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

Question 5

Summary

A consideration of all the factors referred to in subsection 177D(2) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the Company's employees who participate in the scheme in a form that promotes the Company's business objectives, rather than to obtain a tax benefit.

Accordingly, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition of the Company's shares by the EST.

Detailed reasoning

Law Administration Practice Statement PS LA 2005/24 provides instructions and practical guidance to Tax officers on the application of Part IVA of the ITAA 1936 and other General Anti-Avoidance Rules.

Part IVA of the ITAA 1936 is a general anti-avoidance provision. 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. The 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 of the ITAA under subsection 177F(1) of the ITAA 1936:

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

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

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

The scheme

Subsection 177A(1) of the ITAA 1936 provides that 'scheme' means:

(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 Company Equity Plans, which consists of the creation of the EST, the payment of the irretrievable contributions by the Company to the Trustee, the acquisition of shares in the Company and the allocation of those shares to Participants.

Tax Benefit

'Tax benefit' is defined in subsection 177C(1) of the ITAA 1936. As far as is relevant here, a tax benefit is:

(c) 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 the present case, a potential tax benefit is created when the Company receives an income tax deduction under section 8-1 arising from the irretrievable cash contributions it makes to the Trustee.

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

The applicant, at page 30 of the application, has provided the following alternate actions (counterfactuals):

If the scheme were not entered into (i.e. contributions were not paid to the EST to purchase shares on market or subscribe for new shares) but rather the Company purchased shares directly on market on behalf of the relevant employees then the Company should still receive a deduction for the purchase price of the shares.

The Company could have either chosen to simply buy shares from existing shareholders or alternatively remunerate employees via an entirely different method (e.g. cash bonuses) both of which would have entitled the Company to a deduction.

A comparison between these counterfactuals/alternative forms of remuneration and the proposed scheme would likely reveal no tax benefit because the deductible amounts under both of them would be the same or similar to a tax deduction for irretrievable contributions made to the EST.

Sole or Dominant Purpose

In deciding whether Part IVA of the ITAA 1936 applies to a scheme, it is necessary to consider whether, having regard to each of the factors set out in paragraph 177D(b) of the ITAA 1936, it would be concluded that the person, or one of the persons who entered into the scheme or any part of it, did so for the purpose of enabling a relevant taxpayer to obtain a tax benefit in connection with the scheme.

However notwithstanding that an examination of the counterfactuals would likely reveal no tax benefit, regard will be had to each of these factors in the event that a tax benefit was identifiable.

Subsection 177D(2) of the ITAA 1936

Subsection 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:

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

(b) the form and substance of the scheme;

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

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

(e) 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;

(f) 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;

(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

(a) 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 subsection 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 on page 11 of the application, the Company has provided a number of commercial reasons for operation of the Company Equity Plans through the EST including the following:

Assisting the Company to meet Corporations Act requirements in relation to dealing in its own shares;

• Capital management flexibility;

• Administrative efficiency;

• Managing insider trading issues;

• Flexibility to accommodate long term incentive arrangements.

Further, unlike the case of Pridecraft Pty Ltd v FC of T [2004] FCAFC 339, where an arrangement was established with a large up-front payment to a trust intended to provide for operations for the future, the Company will fund the Trust on a recurring basis as the need arises.

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 Company in the relevant counterfactuals.

(b) The form and substance of the scheme

This factor directs attention to whether there is a discrepancy between the form of the scheme and its substance, meaning its commercial and economic substance. A discrepancy between the business and practical effect of a scheme on one hand and its legal form on the other, may well indicate the scheme has been implemented in a particular form as the means to obtain a tax benefit if the substance of the scheme may be achieved or available by some other more straightforward or commercial transaction or dealing (paragraph 95 of PS LA 2005/24).

The substance of the scheme is the provision of remuneration in the form of shares to participants who participate in the Equity Plans. It takes the form of irretrievable contributions by the Company to the Trustee of the EST which will acquire shares for Participants.

While existence of the EST confers a tax benefit, it cannot be concluded that it is the only benefit provided as outlined above. The applicant has argued there is nothing in this factor to suggest that the scheme has been carried out for the dominant purpose of obtaining a tax benefit and this is accepted.

It is accepted that there is no apparent discrepancy between the effect of the scheme under the Plan, and its form.

(c) The timing

The scheme has not been established to provide a substantial year-end deduction to the Company nor with a contribution sufficiently large to fund the EST for several years. The contributions will be made progressively over future years in accordance with the terms of the Equity Plans. Furthermore, the length of the scheme is not intended to be for a short period. The scheme is intended to remain in place indefinitely provided the commercial benefits outweigh the respective costs of administration.

There is nothing regarding this factor that suggests that the EST was established for the sole or dominant purpose of obtaining a tax benefit.

(d) The result

The result of the scheme is that the Company will be entitled to a deduction for the contributions it makes to the EST. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of the Company to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances.

There is nothing in this factor to suggest that the scheme has been carried out for the dominant purpose of obtaining a tax benefit.

(e) Any change in the financial position of the Company

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

There is nothing in this factor to suggest that the scheme has been earned out for the dominant purpose of obtaining a tax benefit.

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

The contributions by the Company 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/subscription of shares to ultimately be provided to Participants in the Company Equity Plans.

The Company is not a beneficiary of the EST and its contributions cannot be returned to it in any form except where the Trustee acquires shares from the Company by subscribing for new shares at market value.

Therefore, the contributions made by the Company amount to a real change to the financial position of the Trustee. The financial position of employee participants in the scheme will also undergo a real change. It is accepted that there is nothing artificial, contrived or notional about these changes.

(g) Any other consequence

This factor is not relevant in the present case.

(h) The nature of any connection between the Company and any other persons

The relationship between the Company including other empIoyer companies in the Company's tax consolidated group and the Participants is one of employer/employee. It is accepted that the relationship will therefore generally be at arm's length.

The Trustee is an independent third party, unrelated to the Company and under a fiduciary obligation to act in the interests of the Participants in the Equity Plans. There is nothing to suggest that the parties to the 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

A consideration of all the factors referred to in subsection 177D(2) of the ITAA 1936 leads to the conclusion that the sole or dominant purpose of the parties to the scheme is not to obtain a tax benefit. Rather the sole or dominant purpose Is to provide remuneration to the Company's employees who participate in the scheme in a form that promotes the Company's business objectives, rather than to obtain a tax benefit.

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

Question 6

Summary

The provision of shares pursuant to the Equity Plans by the Company to the Participants are not fringe benefits within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986).

Detailed reasoning

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA 1986 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.

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 by the employer or an associate of the employer 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 a fringe benefit contained in subsection 136(1) of the FBTAA specifically excludes from the definition of a fringe benefit:

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;

An ESS interest in a Company is 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 (subsection 83A-10(1) of the ITAA 1997). An employee share scheme is a scheme under which ESS interests in the Company are provided to employees (or associates of employees) of the Company or subsidiaries of the Company, in relation to the employee's employment (subsection 83A-10(2) of the ITAA 1997).

The Company's employees will receive beneficial interests in PRs or Options to acquire beneficial interests in shares in respect of their employment, upon acceptance of participation in the plans in accordance with the relevant Equity Plans.

The Commissioner accepts that the scheme described in the facts is an employee share scheme under which relevant ESS interests (being beneficial interests in rights and options to acquire shares) are acquired by employees of the Company (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to the employment of those employees. Therefore, the provision of those rights will not be subject to fringe benefits tax because they are specifically excluded from the definition of fringe benefit.

The shares acquired by the Trustee under the relevant Equity Plans to satisfy the rights are also provided to employees under that same employee share scheme.

However, shares granted to employees under the plans to satisfy the PRs and Options acquired on acceptance of participation in those plans are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 apply (see subsection 83A-20(2) of the ITAA 197 and paragraph 83A-105(1)(a)of the ITAA 1997). Therefore the providing of these shares will not be specifically excluded from the definition of fringe benefits under paragraph (h) of the definition in subsection 136(1) of the FBTAA.

As stated above, a fringe benefit will only arise under subsection 136(1) of the FBTAA where the benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee.

Under the relevant plans, the benefit (beneficial interest in shares) that arises upon the end of the vesting period is considered to be provided as a result of the employee exercising rights (previously obtained upon acceptance to participate in the relevant plans).

The situation mentioned above is considered to be analogous to that stated in ATO Interpretative Decision ATO ID 2003/316 which refers to the case of FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901. In that case, an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The 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.

In the present circumstances, when an employee accepts an offer to participate in the Equity Plans, he or she obtains a right to acquire a beneficial interest in a share in the Company and this right constitutes an ESS interest, When this right is subsequently exercised, any benefit received, that is, a beneficial interest in shares, would be in respect of the exercise of the right, and not in respect of employment.

Therefore, the benefit that arises to an employee after the vesting period under the Equity Plans, being the beneficial interest in a share, does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of the employment relationship.

Question 7

Summary

The irretrievable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition of the Company shares, will not be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA.

Detailed reasoning

Subsection 136(1) of the FBTAA defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, and paragraph (ha) of that definition excludes:

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:

Meaning of employee share trust

130-85(4) 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).

The right to acquire a beneficial interest in an employer share is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997.

An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a Company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment.

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

Under the Company Equity Plans, the Company has also established the EST to acquire shares in the Company and to allocate those shares to Participants. Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

• the EST's sole activities are to acquires shares in the Company, and

• the operation of the EST ensures that the ESS interests, being the right to beneficial interests in those shares, are provided under an employee share scheme, to the Participants in accordance with the Trust Deed and rules of the relevant Equity Plans.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require that the Trustee undertake incidental activities that are a function of managing the plans and administering the trust. The incidental activities are covered by paragraph 130-85(4)(c) of ITAA 1997.

The EST is an employee share trust, as defined in subsection 995-1(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 EST from being a fringe benefit.

Accordingly, the Company will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the EST to fund the acquisition of the Company shares in accordance with the Trust Deed.

Question 8

Summary

The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefit taxable amount to the Company by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company shares.

Detailed reasoning

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, including in a private ruling. It succinctly explains how section 67 of the FBTAA 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.

Therefore, 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.

In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the EST and to Participants by way of the provision of PRs and Options under the Equity Plans are excluded from the definition of a fringe benefit as explained in Questions 6 and 7.

Therefore, as these benefits have been excluded from the definition of a fringe benefit and as there is also no FBT currently payable under the plans, the FBT 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 applies to include an amount in the aggregate fringe benefits amount of the Company in relation to a tax benefit obtained under the scheme from irretrievable contributions made by the Company to the Trustee of the EST to fund the acquisition of the Company shares under this scheme.