Edited version of your written advice

Authorisation Number: 1012773071717

Ruling

Subject: Employee Share Scheme

Question 1

Will Company A as head entity of the tax consolidated group headed by Company A obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act (ITAA 1997) in respect of the irretrievable cash contributions made by Company A or any subsidiary member of the Company A tax consolidated group to the Trustee to fund the subscription for or acquisition on-market of ordinary shares in Company A shares by the Trust?

Answer

Yes

Question 2

Will Company A as head entity of the tax consolidated group headed by Company A obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by Company A or any subsidiary member of the Company A tax consolidated group in relation to the implementation and on-going administration of the Trust?

Answer

Yes

Question 3

Will irretrievable cash contributions made by Company A or any subsidiary member of the tax consolidated group headed by Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A shares by the Trust, be deductible to Company A at a time determined by section 83A-210 of the ITAA 1997?

Answer

Yes

Question 4

If the Trust satisfies its obligation under the Company A Long Term Incentive Plan by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A under section 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 ITAA 1936 applies to deny, in part or full, any deduction claimed by Company A as head entity of the tax consolidated group made by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for or acquisition on-market of Company A shares by the Trust?

Answer

No

Question 6

Is the provision of performance rights by Company A to Company A employees under the Plan a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No

Question 7

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

Answer

No

Question 8

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

Answer

No

Background

1. Company A is a listed Australian company.

2. Company A has established a long term incentive plan - the Company A Long Term Incentive Plan (the Plan). The Plan will be a key part of Company A's executive remuneration framework which aims to increase alignment of employee interests to shareholders' interests, drive improved business performance and attract and retain key talent

3. Pursuant to the specific rules of the Plan, eligible employees identified by the Board of Directors (Board) may be granted performance rights. Each performance right results in an entitlement to one share in Company A, subject to the satisfaction of certain pre-determined exercise conditions set by the Board.

The Plan

4. The Plan will enable eligible employees to share in the growth of Company A through a grant of performance rights.

5. The Plan broadly operates as follows:

• It is at the absolute discretion of the Board to extend an invitation to grant performance rights to eligible employees selected by the Board (Participants).

• Exercise of a performance right constitutes an acceptance by the Participant of an irrevocable offer by Company A that entitles the Participant to one fully paid ordinary share in Company A. Shares allotted upon exercise of the performance rights will rank equally with all other ordinary shares of Company A.

• A performance right may not be exercised unless and until that performance right has vested in accordance with the Plan rules, or such earlier date on which the Participant is entitled to exercise that performance right in accordance with the Plan rules.

• The price (if any) to be paid by the Participant when exercising that performance right is as specified in the relevant invitation.

• Accordingly once all vesting conditions on the performance rights, as determined by the Board, have been satisfied the Participant will be entitled to exercise the performance rights.

• The performance right is exercised by the Participant by the delivery of a signed Notice of Exercise and the payment of the performance right exercise price (if any), to the Company Secretary or other such person as the Board designates.

• A performance right will automatically be forfeited and lapse if the performance right is not exercised at any time prior to the earlier of (i) the date which is 6 months following the issuance of the vesting notice; and (ii) the expiry date.

• A performance right will be forfeited in the circumstances set out in the Plan rules, including failure to satisfy vesting conditions.

• Performance rights are not transferrable without the consent of the Board.

Operation of the Trust

6. Company A established a Trust as a sole purpose trust to subscribe for, or acquire, allocate, hold and deliver shares for employees of Company A pursuant to the Plan and other future employee equity plans for the benefit of Participants.

7. Company A appointed an independent third party, Company T as trustee for the Trust (the Trustee).

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

9. 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. Company A may pay the Trustee from its own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as Company A and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement.

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

11. The Trust operates as follows:

• The Trust is funded by contributions from Company A for the purchase of shares in accordance with the Trust Deed and the Plan. Generally, Company A makes a contribution to the Trust to acquire shares at or around the time of vesting of the performance rights.

• These contributions will be used by the Trustee to acquire shares in Company A either on-market or via a subscription for new shares in Company A, based on written instructions from Company A. The Trustee acquires shares from Company A by subscribing for newly issued shares at market value.

• Shares acquired by the Trustee will be allocated to the Participant following exercise of the performance rights. The Participant will become absolutely entitled to such shares from that point in time.

• The structure of the Trust and the plan rules are such that Company A shares allocated to each employee will generally be transferred into the name of the relevant employee following receipt by the Trustee of a Withdrawal Notice.

• The Trustee can sell shares on behalf of an employee where permitted to do so by the employee.

• The Trustee will, in accordance with instructions received pursuant to the plan rules, acquire, allocate and deliver Company A shares for the benefit of Participants provided that the Trustee receives sufficient payment from a Participant to subscribe for or purchase such shares and/or has sufficient unallocated trust shares available.

• The Trustee will establish and maintain a separate Trust Share Account or record in respect of each Participant.

• While Company A shares are held in trust, the Participant will be entitled to dividend and voting rights. These shares may be subject to a sale restriction under an ASX administered holding lock.

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

Contributions made by the Trust to Company A

12. Company A makes cash contributions to the Trust on an ongoing basis. The Trust must use these cash contributions exclusively to purchase shares in Company A for employees under the Plan and, pending such an acquisition, form part of the Trust's assets.

13. Company A will make cash contributions to the Trust at or around the time of vesting of performance rights although on occasion contributions may be made between the issue of a performance right and on the vesting of that performance right to the Participant. At no stage will contributions be made before a Participant has been issued rights.

14. Funds received by the Trustee from Company A may be paid to Company A where the Trustee subscribes for Shares in accordance with the Trust Deed, the plan rules or Terms of Participation.

15. Shortly after vesting, the Trustee will then allocate shares to the relevant Participants, having subscribed for or acquired on-market sufficient shares to fulfil the obligation as necessary.

16. The Trustee of the Trust holds all Company A shares pursuant to the Plan on capital account.

Use of the Trust to facilitate the Plan

17. A Trust is utilised for a range of reasons in addition to being a vehicle for the delivery of Shares to employees. In the present case, the Trust:

• provides an arm's length vehicle for acquiring and holding shares in Company A, either by way of new issue or acquiring on-market, and provides Company A with a convenient and efficient way to undertake on-market acquisitions as compared to alternative arrangements;

• assists Company A with meeting its Corporations Law requirements in relation to dealing in its own shares. The Corporations Act generally prohibits a company from acquiring its own shares. The use of the Trust provides a mechanism to allow for the acquisition of Company A's shares through the Trust and the Trust is not prohibited from doing so as a result of Company A having no beneficial interest in any shares held by the Trust or the Trust itself;

• assists Company A with managing any insider trading issues as the Trustee, an independent party, is acquiring shares in accordance with a set policy. This is in part because the Corporations Regulations specifically exempt certain activities from some of the insider trading prohibitions in the Corporations Act. In particular, the regulations provide an exemption where there is an acquisition of the financial products of a company by, or by a trustee for, employees of that company or its related companies, under a scheme established solely or primarily for the benefit of employees. In addition, the ability of the Trust to acquires shares in advance may allow the Trust to hold those shares on behalf of employees at a time when Company A would be otherwise prevented from issuing shares to its employees in order to satisfy obligations under the Plan;

• provides Company A with capital management flexibility, i.e. by allowing for on-market purchases of shares using cash or a new issue of shares by Company A where cash is retained. The Trust forms part of Company A's wider capital management policy which takes into account matters such as the need for funding and its dividend policy;

• allows for Company A to give effect to disposal restrictions after vesting. As the Trustee is the legal owner of the shares, employees as beneficial owner have no ability to deal in the shares;

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

Costs incurred by Company A to administer the Trust

18. Company A incurs various costs in relation to the implementation and on-going administration of the Trust. Company A will incur costs associated with the services provided by the Trustee of the Trust.

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 subsection 67(1)

Fringe Benefits Tax Assessment Act 1986 subsection 67(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

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

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

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177C

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 subsection 177CB(2)

Income Tax Assessment Act 1936 subsection 177CB(3)

Income Tax Assessment Act 1936 subsection 177CB(4)

Income Tax Assessment Act 1936 section177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1936 subsection 177F(1)

Income Tax Assessment Act 1997 section 6-5

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 Division 20

Income Tax Assessment Act 1997 section 20-20

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

Income Tax Assessment Act 1997 section 20-30

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

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

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

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 section 83A-205

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 Division 104

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

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

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

Income Tax Assessment Act 1997 paragraph130-85(4)(a)

Income Tax Assessment Act 1997 paragraph130-85(4)(b)

Income Tax Assessment Act 1997 section 974-75

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

Reasons for decision

All subsequent legislative references are to the ITAA 1997 unless otherwise indicated.

The consolidation provisions allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 the subsidiary members of a consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period they are members of the consolidated group with the head company of the group being the only entity recognised for income tax purposes.

The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997.

As a consequence, the actions and transactions of the subsidiary member are treated as having been undertaken by the Australian head company of the Company A tax consolidated group.

Question 1

Summary

Company A as head entity of the tax consolidated group headed by Company A will obtain an income tax deduction, pursuant to section 8-1 in respect of the irretrievable cash contributions made by Company A or any subsidiary member of Company A tax consolidated group to the Trustee to fund the subscription for or acquisition on-market of Company A shares by the Trust

Detailed reasoning

Section 8-1

The irretrievable cash contributions will be deductible under section 8-1 if either of the positive limbs in subsection 8-1(1) are satisfied and it does not fall within any of the negative limbs in subsection 8-1(2). The relevant negative limb is paragraph 8-1(2)(a), which denies a deduction to the extent that the expenditure is capital, or of a capital nature.

Company A provides cash contributions to the Trustee to be used in accordance with the Trust Deed and the Plan rules for the sole purpose of subscribing for and/or acquiring Company A shares for the benefit of Participants. Such contributions are irretrievable or non-refundable to Company A and therefore a loss or outgoing is incurred for the purpose of subsection 8-1(1).

The purpose of the contributions is to provide an incentive to employees linked to the operating performance of the Company A business.

As Company A's irretrievable cash contributions to the Trustee are part of the overall remunerations of its employees and deductible under section 8-1. It is concluded that the contributions are not capital or capital in nature.

Question 2

Summary

Company A as head entity of the tax consolidated group headed by Company A will obtain an income tax deduction, pursuant to section 8-1, in respect of costs incurred by Company A or any subsidiary member of the Company A tax consolidated group in relation to the implementation and on-going administration of the Trust.

Detailed reasoning

Company A incurs various costs in relation to the implementation and on-going administration of the Trust. Furthermore, Company A will incur costs associated with the services provided by the Trustee of the Trust.

The costs incurred by Company A in relation to the implementation and on-going administration of the Trust are deductible under section 8-1. The view that the costs incurred by Company A are deductible under section 8-1 is consistent with ATO ID 2014/42 Income Tax - employer costs for the purpose of administering its employee share scheme are deductible in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer.

Consistent with the analysis in Question 1, the costs 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).

Question 3

Summary

Irretrievable cash contributions made by Company A or any subsidiary member of the tax consolidated group headed by Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A shares by the Trust, will be deductible to Company A at a time determined by section 83A-210.

Detailed reasoning

The deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which Company A incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210.

The provision of irretrievable cash contributions to the Trustee to acquire Company A shares is considered to be for the purpose of enabling the Participants, of the Plan, to acquire their performance rights. If the irretrievable cash contributions are provided before the performance rights are granted to the Participants, then section 83A-210 will apply to determine the timing of deduction of the cash contributions under section 8-1. This accords with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust. However, section 83A-210 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from performance rights already granted.

On occasions if irretrievable cash contributions are made around the time the performance rights are granted to Participants section 83A-210 may apply. In this instance, the payment will only be deductible to Company A in the income year when the relevant performance rights are granted to Participants.

Question 4

Summary

If the Trust satisfies its obligation under the Plan by subscribing for new shares in Company A, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20-20 or trigger a CGT event under Division 104.

Detailed reasoning

Ordinary Income

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. The classic definition of 'income' in Australian law was given by Jordan CJ in Scott v DCT (NSW) (1935) 35 SR (NSW) 215, whereby it states that:

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts.

A leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). According to Eisner v Macomber 252 US 189 (1919) :

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.

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In accordance with an employee share scheme, the Trustee subscribes to the company for an issue of shares, it pays the full subscription price for the shares and the company receives a contribution of share capital from the Trustee.

The character of the contribution of share capital received by Company A from the Trustee can be determined by 'the character of the right or thing disposed of in exchange for the receipt'. Here, Company A is issuing the Trustee new shares in itself by either purchasing shares on-market or subscribing for new shares. The character of the newly issued share is one of capital. Consequently, the receipt of the subscription is treated as consideration for the issue of shares from Company A to the Trustee of the Trust and accounted for as a contribution to the share capital of Company A in its books and records. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of the share capital, and accordingly, is of a capital nature.

Accordingly, when Company A receives the subscription proceeds from the Trustee of the Trust where the Trust subscribes for new shares in Company A to satisfy its obligations under the Plan, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account and not ordinary income under section 6-5 and consistent with the view expressed in ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee.

Section 20-20

Division 20 deals with amounts included to reverse the effect of past deductions and section 20-20 deals with assessable recoupments, which are described at subsection 20-20(2) as 'an amount you receive by way of insurance, indemnity or other recoupment'.

The subscription proceeds received by Company A from the Trust are for shares and are integral to the arrangement, whereby the acquisition and holding of the shares by the Trustee and the allocation of shares to the participating employees are all interrelated components of the Plan. The character of the subscription proceeds paid to Company A for the shares is not one of 'insurance, indemnity or other recoupment'.

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

For the above reasons, the subscription proceeds received by Company A do not constitute assessable recoupments under section 20-20.

Capital Gains Tax

Section 102-5(1) provides that your assessable income includes your net capital gain for the income year.

Given that a capital gain or capital loss is made only if a CGT event happens, the initial step is to ascertain whether such an event has occurred. Also, given that the transaction is the payment of subscription proceeds by the Trust to Company A for shares, the possible events are:

• D1 Creating contractual or other rights; or

• H2 Receipt for event relating to a CGT asset.

Subsection 102-25(3) 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'.

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 A Shares.

As event DI is excluded, CGT event H2 is to be considered. 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 Company A from the Trust 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 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 Company A, rather than an act, transaction or event relating to a CGT asset owned by Company A.

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

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

Therefore, when the Trust satisfies its obligations under the Equity Plans by subscribing for new shares in Company A, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20-20, nor trigger a CGT event under Division 104.

Question 5

Summary

The Commissioner will not seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, any deduction claimed by Company A as head entity of the tax consolidated group made by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for or acquisition on-market of Company A shares by the Trust.

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.

The following requirements must be met before the Commissioner can exercise the discretion in respect of Part IVA of the ITAA 1936 under subsection 177F(1) of the ITAA 1936 (paragraph 47 of PS LA 2005/24):

(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 Plan, which utilise payments made by Company A to the Trustee (in accordance with the Trust Deed) to fund the acquisition of Company A shares on behalf of Participants by the Trustee.

Tax Benefit

Tax benefit to the extent that it is relevant is defined in subsection 177C(1) of the ITAA 1936 to include:

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

In order to determine whether a tax benefit would be derived by Company A from this scheme, subsections 177CB(2) and (3) of the ITAA 1936 provide that there are two alternative bases upon which the existence of a tax effect can be demonstrated, these alternative bases are referred to as the annihilation and reconstruction approaches respectively. These approaches are:

177CB(2) A decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme).

177CB(3) A decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme.

A decision that a tax effect 'would have' occurred if the scheme had not been entered into or carried out, must be made solely on the basis of a postulate comprising all of the events or circumstances that actually happened or existed, other than those that form part of the scheme (subsection 177CB(2) of the ITAA 1936). When postulating what would have occurred in the absence of the scheme, the scheme must be assumed not to have happened, that is it must be 'annihilated' or extinguished. However, the alternative postulate must incorporate all the events or circumstances that actually happened or existed.

A decision that a deduction 'might reasonably be expected not to have been allowable' if the scheme had not been entered into or carried out, must be made on the basis of a postulate that is a reasonable alternative to the scheme (subsection 177CB(3) of the ITAA 1936). Whether a postulate is a reasonable alternative to a scheme must be worked out having particular regard to the substance of the scheme and its results and consequences for the taxpayer, and disregarding any potential tax results and consequences (see subsection 177CB(4)). This reconstruction approach is a way to identify a tax benefit in relation to a scheme that also achieves substantive non-tax results and consequences. In these cases, simply annihilating the scheme would be inconsistent with the non-tax results and consequences sought by the Participants in the scheme.

Within the above statutory parameters, the Applicant examined predictions of events for the purpose of concluding upon a postulate that is a reasonable alternative to the entering into or carrying out of the Scheme. It stated:

'If the scheme were not entered into, (i.e. the Trust was not used and Company A simply chose to issue new shares) Company A may not receive a tax deduction for this amount. However, it is noted that Company A could have chosen to simply buy shares for employees on-market via a broker (subject to company law requirements) or alternatively remunerate the employees via an entirely different method such as cash bonuses both of which would have been entitled Company A to a deduction.'

Accordingly, if Company A issued new shares directly to eligible employees it would not receive a deduction for the same amount as under section 8-1 in respect of issuing the shares; any deduction received would be limited to that allowable under section 83A-205. Therefore by using a Trust, a tax benefit is created through the greater deduction Company A will receive under section 8-1 for the irretrievable cash contributions it makes to the Trustee.

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 subsection 177D (2) 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.

The Commissioner believes that comparison between the two alternatives/counterfactuals 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.

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 Trust arrangement. Therefore, having regard to the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner will not make a determination under section 177F of the ITAA 1936 in respect of Company A to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trust to fund the subscription for, or acquisition on-market of, Company A shares by the Trust.

Question 6

Summary

The provision of performance rights by Company A to Company A employees under the Plan will not be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

A fringe benefit will generally arise where benefits are provided to employees or associates of employees in respect of employment of the employee. Some benefits are expressly excluded as fringe benefits.

Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA, 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;

The terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10.

The 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 Company A), is provided to eligible employees in relation to their employment in Company A in accordance with the Trust Deed.

Therefore, the granting of performance rights under the Plan to Participants will not be subject to fringe benefits tax because they are specifically excluded under Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

Question 7

Summary

The irretrievable cash contributions made by Company A or any subsidiary of Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A shares, will not be treated as a fringe benefit within the meaning of subsection 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, but does not include:

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

An 'employee share trust' is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4).

Subsection 130-85(4) provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2)) 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 a Company A share is an ESS interest within the meaning of subsection 83A-10(1).

An employee share scheme is defined in subsection 83A-10(2) 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) because it is a scheme under which rights to acquire beneficial interests in shares in Company A are provided to employees in relation to the employee's employment.

Under the Plan, the employer has also established the Trust to acquire shares in Company A and to allocate those shares to employees. Therefore, paragraphs 130-85(4)(a) and (b) are satisfied because:

• the Trust acquires shares or rights in Company A; and

• the Trust ensures that the ESS interests being beneficial interests in those shares or rights, are provided under an employee share scheme, to the employees in accordance with the Trust Deed and relevant rules of the Plan.

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

For the purposes of paragraph 130-85(4)(c) and ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities, activities which are merely incidental include:

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

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

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

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

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

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

The Trust 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). As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the Trust from being a fringe benefit.

Accordingly, the irretrievable cash contributions made by Company A to the Trustee of the Trust, to fund the subscription for or acquisition on-market of Company A shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Question 8

Summary

The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company A or any subsidiary of Company A, by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Company a 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 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 Fringe Benefits Tax-Response to questions by major rural organisation 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 Trust, and to employees by way of the provision of rights under the Plan are excluded from the definition of a fringe benefit for the reasons given in questions 7 and 8 above. Therefore, as these benefits have been excluded from the definition of a fringe benefit and as there is also no fringe benefits tax currently payable under the Plan, the fringe benefits tax liability is not any less than it would have been but for the arrangement.

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