Edited version of your written advice

Authorisation Number: 1012693265639

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 the Company to the Trustee to fund the subscription for or acquisition on-market of the Company shares by the Company's Employee Share Trust (EST)?

Answer

Yes.

Question 2

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

Answer

Yes.

Question 3

Are irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of the Company shares by the EST, deductible to the Company at a time determined by section 83A-210 of the ITAA 1997?

Answer

Yes.

Question 4

If the EST satisfies its obligations under the Company's Employee Share Plan (the Plan) 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 seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition on-market of the Company shares by the EST?

Answer

No.

Question 6

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

Answer

No.

Question 7

Will the irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of Company 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 make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount of the Company, by the amount of tax benefit gained from the irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of the Company shares?

Answer

No.

This ruling applies for the following periods:

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

1 July 2017 to 30 June 2018

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

1 April 2017 to 31 March 2018

The scheme commences on:

1 July 2013

Relevant facts and circumstances

• The Company is a listed Australian public company.

• The Company developed the 'Company Employee Share Plan Rules' (ESP Rules) as a remuneration package to recruit and retain personnel in its mining operations.

• The Company's Employee Share Plan (the Plan) was approved by the Company's shareholders.

• Pursuant to the ESP Rules, eligible participants may be granted Performance Rights at the Board's discretion.

• It is the Company's intention to grant Performance Rights under the Plan for 2014 and following financial years

• The Plan is carried out through the Company's Employee Share Trust (EST).

• The terms of the EST are as detailed in the Trust Deed.

• The EST has been established as a sole purpose trust to acquire shares for Australian employees of the Company pursuant to employee equity plans of the Company.

• The Company appointed Trustee as trustee for the EST (Trustee).

• The Trustee of the EST is an independent party.

• The establishment of the EST allows the Company to administer its equity plans.

• The EST can also be used to provide a range of incentives involving shares in the Company as circumstances change in the labour market that require different incentives to be provided to attract, reward and retain employees by aligning the economic interests of employees with those of the Company's shareholders.

• The commercial benefits of using the EST is stated to include:

• Greater flexibility for the Company to accommodate the long term incentive arrangements both now and into the future as the Group continues to expand operations and therefore employee numbers.

• Capital management flexibility for the Company, in that the EST can use the contributions made by the Company either to acquire shares in the Company on market, or alternatively to subscribe for new shares in the Company.

• Providing an arm's-length vehicle through which shares in the Company can be acquired and held on behalf of the relevant employee. This assists the Company to satisfy corporate law requirements relating to a company dealing in their own shares.

• The EST is to be administered in accordance with the terms of the ESP Rules and Trust Deed.

• Pursuant to the ESP Rules, eligible participants may be granted Performance Rights at the Board's discretion under. A Performance Right is an entitlement of a participant to acquire a Company share. The Performance Rights may be subject to the satisfaction of certain pre-determined vesting hurdles and/or conditions prior to exercise.

• It is at the Board's discretion to extend an invitation to certain employees to apply for a number of Performance Rights specified on the invitation;

• Invitations will be extended on such terms and conditions as the Board decides, from time to time, including:

• the number of Performance Rights;

• the Performance Right Fee (if any);

• the Exercise Price (if any);

• the Exercise Period ;

• Vesting Conditions (if any);

• Performance Conditions (if any);

• the Restriction Period; and

• any right or restriction attaching to the Performance Rights or Plan Shares in respect of which the Performance Rights are exercisable being offered to the Participant.

• The terms of the ESP Rules are as detailed in the 'Company Employee Share Plan Rules' document.

The Trust Deed

• Pursuant to the Trust Deed, the shares acquired by the Trustee will be allocated to the relevant employees upon exercise of Performance Rights and the employees will become absolutely entitled to those shares from that point in time.

• The Trust Deed provides the general powers of the Trustee to administer the Plan.

• The Trust Deed provides restrictive provisions on the Trustee's powers to be exercised only for the purposes of the EST and only to give effect to the Plan which the EST supports.

• Pursuant to the Trust Deed, the Trustee is not entitled to receive from the Trust any fees, commission or remuneration in respect of its performance of its obligations as Trustee of the Trust. The Company may pay to the Trustee from the Company's own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as the Company and the Trustee agree from time to time.

• Pursuant to the Trust Deed, the funds will be used by the Trustee of the EST to acquire the shares in the Company either on-market or via a subscription for new shares in the Company, based on written instructions from the Company.

• Pursuant to the Trust Deed, the EST is funded by cash contributions from the Company for the purchase of shares in accordance with the Trust Deed, the Plan or relevant Terms of Participation.

• Pursuant to the Trust Deed, the shares allocated to each employee will generally be transferred into the name of the relevant employee following receipt of a Withdrawal Notice.

• Pursuant to the Trust Deed, the Trustee will be permitted to sell shares on behalf of an employee where permitted to do so.

• A Deed of Variation for the Trust Deed was executed.

The Deed of Variation

• The Deed of Variation replaced the definition of 'Net Income' to exclude any franking credits attaching to dividends received by the Trust during a year of income for that year of income.

• The Deed of Variation also replaced the wording in the Trust Deed to refer to the definition of employee share trust in section 130-85(4) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936

Income Tax Assessment Act 1936 part IVA

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177A(5)

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 paragraph 177D(b)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1936 subsection 177F(1)

Income Tax Assessment Act 1997

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 8-1(1)

Income Tax Assessment Act 1997 subsection 8-1(2)

Income Tax Assessment Act 1997 paragraph 8-1(2)(a)

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 subsection 20-20(2)

Income Tax Assessment Act 1997 subsection 20-20(3)

Income Tax Assessment Act 1997 section 20-30

Income Tax Assessment Act 1997 subsection 83A-10(1)

Income Tax Assessment Act 1997 subsection 83A-10(2)

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

Income Tax Assessment Act 1997 paragraph 83A-105(1)(a)

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 subdivision 83A-B

Income Tax Assessment Act 1997 subdivision 83A-C

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 division 104

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 subsection 104-35(1)

Income Tax Assessment Act 1997 paragraph 104-35(5)(c)

Income Tax Assessment Act 1997 subsection 104-155(1)

Income Tax Assessment Act 1997 paragraph 104-155(5)(c)

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

Income Tax Assessment Act 1997 paragraph 130-85(4)(a)

Income Tax Assessment Act 1997 paragraph 130-85(4)(b)

Income Tax Assessment Act 1997 paragraph 130-85(4)(c)

Income Tax Assessment Act 1997 subsection 995-1(1)

Fringe Benefits Tax Assessment Act 1986

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

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

Reasons for decision

Question 1

Summary

The Company is entitled to a tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made to the Company Resources Employee Share Trust (EST) to acquire shares in the Company by subscription or on-market acquisition for the purpose of providing a long term equity share plan to deliver equity based benefits to employees as part of their remuneration in carrying on the Company's business for the purpose of deriving assessable income.

Detailed reasoning

An employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an employee share trust 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, does not relate to the earning of exempt income or non-assessable non-exempt income and deductibility is not precluded by another provision of the ITAA 1997 or the Income Tax Assessment Act (ITAA 1936).

In order to satisfy the first limb of section 8-1 of the ITAA 1997, a contribution to the trustee of an employee share trust must be 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 and Taxation Ruling TR 94/26.

A contribution made to the trustee of an employee share trust is incurred only when the ownership of that contribution passes from an employer to the trustee of the employee share trust and there is no circumstance in which the employer can retrieve any of the contribution - Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; (2004) 58 ATR 210 (Pridecraft); Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 209 (Spotlight).

In the present case, the purpose of the Plan is to provide a benefit to employees by allowing them to obtain a right to a share in the Company at a discount. These contributions to the Trustee are part of the overall employee remuneration costs of the Company. Under the Plan, the Company contributes funds to the EST to provide benefits to eligible employees in the form of shares. The EST then allocates shares to the relevant participants, having subscribed for, or acquired on-market, sufficient shares to fulfill the obligations as necessary. Pursuant to the Trust Deed, the Company cannot retrieve its contributions to the EST. Accordingly the contributions made by the Company to the EST will be incurred at the time the contributions are made.

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 (1940) 78 CLR 47; 4 AITR 236; (1949) ATD 431; Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation [1980] FCA 150; 80 ATC 4542; (1980) 11 ATR 276).

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 employee share 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 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.

ATO Interpretative Decision ATO ID 2002/1074 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 provides 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 Company established the EST for the sole purpose of acquiring shares for the benefit of employees or otherwise facilitating the operation and implementation of Employee Share Schemes for the Company. The EST can also be used to provide a range of incentives involving shares in the Company as circumstances change in the labour market that require different incentives to be provided to attract, reward and retain employees. The purpose of the Company establishing the EST is to remunerate employees in such a way that the ongoing efficient performance of its business is aligned with the economic interests of employees as shareholders in the Company.

The irretrievable cash contributions are in the nature of an employee remuneration cost incurred in carrying on the business for the purpose of deriving assessable income. The contributions to the EST will be a recurring outgoing of the Company and are a necessary incident of the business of the Company, which is designed to produce assessable income. Furthermore, the amount of the contributions are equal to fair market value of the Company shares that have been or will be acquired for employees. The EST is also administered on an arm's length basis by the Trustee for a broad range of employees of the Company.

Therefore, the irretrievable contributions the Company provides to the Trustee of the EST for the purpose of remunerating its employees under the EST is an outgoing incurred in carrying on the Company's business for the purpose of gaining or producing assessable income.

Not a loss or outgoing of capital or of a capital nature

Pursuant to subsection 8-1(2) of the ITAA 1997, a loss or outgoing will not be deductible if it is of capital or of a capital nature despite satisfying either limb of subsection 8-1(1) of the ITAA 1997.

In Pridecraft &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 confirms the opinions expressed in ATO ID 2002/1074 and ATO ID 2010/103 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. Therefore, the irretrievable contributions the Company provides to the Trustee of the EST for the purpose of remunerating its employees under the EST is not a loss or outgoing of capital or of a capital nature.

Accordingly, the irretrievable cash contributions made by the Company to the EST to acquire shares, whether by subscription or on-market acquisition are incurred in gaining or producing assessable income and deductible under section 8-1 of the ITAA 1997.

Question 2

Summary

The Company is entitled to a tax deduction under section 8-1 of the ITAA 1997 for the costs incurred in relation to the implementation and on-going administration of the EST.

Detailed reasoning

The employee share scheme has been established as part of the Company's employee remuneration structure. The trust incurs ongoing administrative expenses associated with the costs of operating the Plan including costs incurred in:

• employee record keeping;

• production and dispatch of holding statements to employees;

• provision of annual income tax return information for employees;

• costs incurred in the acquisition of shares on market such as brokerage costs and the allocation of shares to participants;

• management of employee termination; and

• other Trustee expenses including the annual audit of the financial statements and annual income tax return of the EST.

In accordance with the Trust Deed, the Company reimburses the Trustee for the meeting of these expenses. These costs are part of the company's recurrent remuneration costs. There is sufficient nexus between the costs incurred by the Company in relation to the implementation and on-going administration of the Plan and the carrying on of the Company's business for the purpose of gaining or producing the assessable income. This view is consistent with ATO ID 2002/961, in which it was decided that such operating costs associated with the administration and implementation of an employee share plan are part of the ordinary employee remuneration costs of a taxpayer.

Consistent with the analysis in question 1 above, the costs incurred by the Company in relation to the on-going administration of the EST are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses and therefore are not excluded from being deductible under paragraph 8-1(2)(a) of the ITAA 1997.

Question 3

Summary

Irretrievable cash contributions made by the Company to the Trustee of the EST to fund the subscription for or an acquisition on-market of the Company shares by the EST are deductible to Panoramic at the time determined by section 83A-210.

Detailed reasoning

The deduction for the irretrievable cash contributions under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the Company incurred the outgoing. However, 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.

The term 'employee share scheme' (ESS) 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) of:

(a) the company; or

(b) *subsidiaries of the company;

in relation to the employees' employment.

For the purposes of subsection 83A-10(2), subsection 995-1(1) defines the term 'scheme' as follows:

(a) any *arrangement; or

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

Accordingly, section 83A-210 will only apply if there is a relevant connection between the irretrievable cash contributions provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by an individual under the employee share plan in relation to their employment.

An 'Employee Share Scheme' 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 Plan, a performance right granted to a Participant will be an ESS interest as it is a right to acquire a beneficial interest in a share in a company. This ESS interest will also be granted under an employee share scheme in relation to the employee's employment. A share acquired by the Trustee to satisfy a performance right, granted under the employee share scheme to an employee in relation to the employee's employment, is itself provided under the same scheme.

The granting of performance rights and the Company shares, the provision of irretrievable cash contributions 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 Plan. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme can operate as intended.

Consequently, the provision of irretrievable cash contributions to the Trustee to acquire the Company shares is considered to be for the purpose of enabling the participating employees, indirectly as part of the Plan, to acquire the performance rights. If the irretrievable cash contributions are provided before the performance rights are acquired by the participating employees, then section 83A-210 of the ITAA 1997 will apply. However, section 83A-210 of the ITAA 1997 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from performance rights already granted.

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

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 Performance Rights are granted, the contribution is deductible in the year that the Performance Rights are granted to participating employees; and

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

Question 4

Summary

If the EST satisfies the obligations under the 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 or trigger a CGT event under Division 104.

Detailed reasoning

Assessable income under 6-5

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. Furthermore, section 6-10 of the ITAA 1997 provides that a taxpayer's income also includes statutory income.

Income according to ordinary concepts is not defined in the ITAA 1997. However, there is a substantial body of case law which discusses factors which indicate whether an amount has the character of income according to ordinary concepts. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not derived in carrying on a business.

In Commissioner of Taxation v Montgomery [1999] HCA 34 the Court had to consider whether an amount received by the taxpayer should be characterised as capital or income. Gaudron, Gummow, Kirby and Hayne JJ quoted a passage from the judgment of Pitney J in the United States Supreme Court in Eisner v Macomber 252 U.S. 189 (1919) at 206-7, which included the following:

The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …

Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being `derived,' that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; - that is income derived from property. Nothing else answers the description.

In GP International Pipecoaters Pty Ltd v FCT (1990) 170 CLR 124 the High Court held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. They further state:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

In an employee share scheme, the Trustee subscribes to the company for an issue of shares, it pays the full subscription price for the shares and the company receives the subscription proceeds.

The character of the subscription proceeds received by the Company from the Trustee 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 as a result of the Trustee subscribing for new shares. The character of the newly issued share is one of capital. The subscription is consideration for the issue of shares by the Company to the Trustee of the EST and should be accounted for as contribution to the share capital of the Company in its books and records. The subscription proceeds accordingly are of a capital nature.

Accordingly, when the Company receives the subscription proceeds from the Trustee of the EST where the EST subscribes for new shares in the Company to satisfy its obligations under the Plan, the subscription proceeds received by the Company are a capital receipt. That is, the amount will not be on revenue account and not ordinary income under section 6-5.

Assessable income under 20-20

Division 20 deals with amounts included to reverse the effect of past deductions and section 20-20 deals with assessable recoupments. Subsections 20-20(2) and (3) refer to recoupment of a loss or outgoing, received by way of insurance, indemnity or other recoupment.

The subscription proceeds 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 participating employees are all interrelated components of the Plan. The subscription proceeds are not recoupments of losses or outgoings received by way of insurance, indemnity or other outgoing.

Also, the table at section 20-30 which shows the deductions for which recoupments are assessable, does not include provision for funding an EST to acquire shares for employees.

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).

Capital Gains tax event under Division 104

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.

Section 104-5 of the ITAA 1997 lists the types of CGT events. In the present case, given that 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 events are:

• D1 Creating contractual or other rights; or

• H2 Receipt for event relating to a CGT asset.

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 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. In this instance D1 will not apply as the legal or other equitable right (being the right of the employee to acquire shares in the Company upon the payment of the subscription proceeds) is created at the time the relevant right was first issued. The subsequent payment of the subscription proceeds is not in connection with the creation of rights; it is consideration for the issue of shares.

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

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)).

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, holding and the allocation of the shares by the Trustee to the participating employees are all interrelated components of the Plan. As part of the Plan, contractual rights of employees are exercised on their behalf to acquire shares in the Company, rather than an act, transaction or event relating to a CGT asset owned by the Company.

Paragraph 104-155(5)(c) also provides that CGT event H2 does not happen where a company issues or allots equity interests in the company, i.e. ordinary shares of the Company, which is applicable here.

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

Therefore, when the Trustee of the EST satisfies its obligations under the Plan by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under section 6-5 or section 20-20, or trigger a CGT event under Division 104.

Question 5

Summary

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 on-market of the company's shares by the EST.

Detailed reasoning

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.

Part IVA of the ITAA 1936 sets out the following requirements which 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.

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.

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 Plan, 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 employees.

Tax Benefit

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

(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 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 whether a tax benefit has been derived by the Company from the scheme, it is necessary to examine the alternative hypotheses or counterfactuals. That is, what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out and what other schemes the Company might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration.

The Company has provided two alternatives:

(i) the Company could fund the purchase of shares on-market (via a broker) in the name of the participant at vesting or exercise. Under this alternative, a tax deduction would be available to the Company for the purchase price of the shares, or alternatively

(ii) the Company could remunerate participants via payments of cash bonuses. Under this alternative, payments of the additional cash amounts would also be deductible to the Company.

A comparison between the two alternatives and the proposed scheme would likely reveal no tax benefit because the deductible amounts under both would be the same or similar to a tax deduction for irretrievable contributions made to the Trust.

Sole or Dominant Purpose

Under subsection 177A(5) and section 177D of the ITAA 1936, the Commissioner may only seek to disallow a tax benefit in connection with a scheme if the Commissioner considers that the dominant purpose of one of the persons who entered into the scheme was to enable the taxpayer to obtain a tax benefit.

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.

Paragraph 177D(b) of the ITAA 1936

Paragraph 177D(b) 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).

The consideration of the eight factors involves comparison of the scheme with the 'alternative hypothesis', or counterfactual. That is, the conclusion about the dominant purpose of a person entering into or carrying out the scheme, or any part of it, necessarily requires consideration of what may otherwise have occurred (paragraph 92 of PS LA 2005/24).

(i) The manner of the scheme

The first factor enables contrivance and artificiality to be identified by comparing the manner in which the scheme was entered into or carried out with the manner in which the counterfactual would have been implemented, for example, by the presence of a step or steps in a relevant transaction or arrangement that would not be expected to be present in a more straightforward or ordinary method of achieving the outcome of the transaction or arrangement (paragraph 93 of PS LA 2005/24).

The inclusion of the EST in the scheme does give rise to a tax benefit, but the Company contends that the establishment of the EST provides other commercial benefits. In particular, it states at page 27 to 28 of its application that such benefits include:

• Capital management flexibility as it provides a streamlined approach to using contributions received from the Company and employees to either acquire shares in the Company on market (in a more convenient manner than if no trust was used) or alternatively to subscribe for new shares in the Company. This provides flexibility as circumstances change in how shares are sourced for provision to employees.

• Administrative efficiency as it provides a single arm's length vehicle to facilitate the provision of shares to employees under the Plan. This is increasingly important as the Company continues to expand operations and employee number in the future years.

• Assisting the Company to meet Corporations Act requirements in relation to dealing in its own shares and insider trading. The Corporations Act generally prohibits a company from acquiring its own shares. The use of the EST will assist the Company to meet these requirements as it provides a mechanism for the acquisition of the Company shares through the EST. The EST is not prohibited from doing this because the Company has no beneficial interest in either shares held by the EST or the EST itself.

The EST may also help the Company manage any insider trading prohibitions in the Corporation Act as the Trustee, an independent party, is acquiring shares in accordance with a set policy for the sole benefit of employees.

Further, the Company noted that unlike in the case of Pridecraft, 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 EST on a recurring basis as the need arises.

It is accepted that the EST provides benefits to the operation of the scheme (other than tax benefits) that would not be available if the shares were provided directly by the Company in the relevant alternatives.

(ii) The form and substance

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 Plan. It takes the form of irretrievable contributions by the Company to the Trustee which will disperse funds to acquire shares for participants, either on market or by way of new issue.

There is no apparent discrepancy between the effect of the scheme under the Plan, and its form.

(iii) Time at which the scheme was entered into

This factor considers the time of the scheme, or any part of it, was entered into or carried out, and the length of the period during which it was carried out. This factor will enable consideration of the extent to which the timing and duration of the scheme go towards delivering the relevant tax benefit or are related to commercial opportunities or requirements (paragraph 101 of the PS LA 2005/24).

The scheme has neither been established to provide a substantial year-end deduction to the company nor with a contribution sufficiently large to fund the trust for several years, but by recurring contributions. There is nothing regarding this factor that suggests a dominant purpose of seeking to obtain a tax benefit in relation to the scheme.

(iv) The result of the scheme

This factor expressly focuses on the tax benefit and any other tax consequences resulting from the scheme.

In the present case, the result of the scheme is to provide the Company with allowable deductions 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 Panoramic to provide remuneration to participating the Company employees in a form that promotes the company's business objectives. The EST assists the Company in aligning corporate objectives with employee interests and remuneration in order to enhance business performance and shareholder returns. It is to be expected that a deduction would normally be allowable in these circumstances.

(v) 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 a trust as part of the scheme, in contrast to the Company providing shares to participants directly, it appears there is nothing artificial, contrived or notional about the Company's expenditure.

(vi) 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 i.e. for the acquisition/subscription of shares to ultimately be provided to participants in the Plan.

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 for the Trustee. The financial position of participants in the scheme will also undergo a real change.

However, there is nothing artificial, contrived or notional about these changes as the purpose of the Plan is to change the financial position of the participants by providing ESS interests as part of their remuneration, and the Trust is an independent third party which receives contributions only for the purpose of acquiring shares.

(vii) Any other consequences

This factor is not relevant to this scheme.

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

The relationship between the Company and the participants in the Plan is one of employer/employee. The Trustee and the Company are unrelated, but the Company does provide instructions to the Trustee as to whether the Trustee should acquire the shares on market or subscribe for new shares.

The contributions made by the Company to the Trustee are commensurate with the Company's stated aim of establishing incentive arrangements which attract, reward and retain key employees; resulting in improved performance of employees which in turn improves the operating performance of the Company. There is nothing to suggest that the parties to the Plan 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.

Further, as published in the 'ESS - guide for employers', the Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust to enable it to acquire securities to provide to employees.

Conclusion - the purpose of the scheme

In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the EST arrangement. There is nothing in this arrangement to suggest a dominant purpose of seeking to obtain a tax benefit in relation to a scheme.

Therefore, having regard to the eight factors set out in paragraph 177D(b) of the ITAA 1936, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by the Company in relation to the irretrievable contributions made to the EST under the scheme.

Question 6

Summary

The provision of Performance Rights to employees under the Plan will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986.

Detailed reasoning

A liability to fringe benefits tax (FBT) arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer of a year of tax. The fringe benefits taxable amount is calculated under the FBTAA 1986 by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a fringe benefit is provided.

As far as is relevant in this case, the term 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 to mean benefits provided by an employer, an associate of the employer or an arranger with the employer, to employees, in respect of the employment of the employee.

The Performance Rights will be provided to participants who are employees when they are granted. Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986, states that a fringe benefit does not include:

A benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83A-B or 83A-C of that Act applies

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).

It has been submitted that the Company's employees will receive Performance Rights to acquire beneficial interests in shares in respect of their employment upon acceptance of participation in the Plan.

The Commissioner accepts that the Plan described is an employee share scheme under which relevant ESS interests (being rights to acquire beneficial interests in performance shares) are acquired by employees (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 FBT because they are specifically excluded from the definition of fringe benefit.

The shares acquired by the trustee under the share plan to satisfy the rights are also provided to employees under the Plan. However, these shares 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 1997 and paragraph 83A-105(1)(a) of the ITAA 1997). Therefore the provision 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 1986.

As stated above, a fringe benefit will only arise under subsection 136(1) of the FBTAA 1986 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 Plan, 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 Plan).

The situation mentioned above is considered to be analogous to that stated in ATO ID 2003/316 which refers to the case of FC of T v. McArdle 89 ATC 4051;(1988) 19ATR 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 to participate in the Plan, he or she obtains a right to acquire a beneficial interest in a share and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received, that is, beneficial interest in shares, would be in respect of the exercise of the right, and not in respect of employment.

Therefore, the benefit received 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 on-market of the Company shares, will not be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA 1986.

Detailed reasoning

As far as is relevant in this case, subsection 136(1) of the FBTAA 1986 defines the term 'fringe benefit', in relation to an employee, to include a condition that the benefit must be provided in respect of the employment of the employee and paragraph (ha) of that defined term 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' (EST) is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4). Subsection 130-85(4) of the ITAA 1997 states that an EST for an ESS 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 ESS 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).

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 Plan is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which ESS interests, being either rights to acquire beneficial interests in the Company shares or beneficial interests in the Company shares, are provided to employees in relation to the employee's employment. Under the Plan, the Company has also established the EST to acquire shares in the Company and to allocated those shares to employees. Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

• the EST acquires shares in the Company; and

• the EST ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those Shares, are provided under an ESS, as defined in subsection 83A-10(2), by allocating those shares to the employees in accordance with the Trust Deed and the Plan.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) of the ITAA 1997 will require the Trustee to undertake incidental activities that are a function of managing the ESS and administering the Trust.

ATO ID 2010/108 lists the following examples of activities which are merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997:

• the opening and operation of a bank account to facilitate the receipt and payment of money;

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

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

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

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

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

• receiving and immediately distributing shares under a demerger.

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

In this case, the purposes of paragraph 130-85(4)(c) are reflected under the Trust Deed (as amended):

…the Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of section 130-85(4) of the ITAA 1997.

The EST is an employee share trust, as defined in subsection 995-1(1), as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and (b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). Consequently, paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 excludes the contributions to the Trustee of the EST from being a fringe benefit.

Accordingly, the 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 will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986.

Question 8

Summary

The Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 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 1986 operates. In particular, paragraphs 145 to 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, that the Commissioner would only seek to make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less FBT 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 employees by way of the provision of rights and shares under the Plan are excluded from the definition of 'fringe benefit' for the reasons given in questions 6 and 7 above. Therefore, the fringe benefits tax liability is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to include an amount in the aggregate fringe benefits amount of the Company by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of the Company shares.