Edited version of your written advice

Authorisation Number: 1012783587202

Ruling

Subject: Company A Equity Plans

Question 1

Will Company A obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by Company A to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A shares to satisfy ESS interests issued pursuant to the Company A Equity Plans?

Answer

Yes.

Question 2

Will Company A obtain a deduction under 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 Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares by the Trustee of the EST to satisfy ESS interests issued pursuant to the Company A Equity Plans, deductible to Company A at a time determined by section 83A-210 of the ITAA 1997, in respect of those ESS interests which are subject to Division 83A of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes.

Question 4

If the Trustee of the EST satisfies its obligation under the Company A Equity Plans by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997?

Answer

No.

Question 5

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

Answer

No.

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

Year ending 30 June 2014 - year ending 30 June 2018

Question 6

Is the provision by Company A of Performance Rights or shares in Company A to employees of Company A under the Company A Equity Plans a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 7

Will the irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares, be treated as a fringe benefit within the meaning of section 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 aggregate fringe benefits amount of Company A by the amount of the tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A shares?

Answer

No.

The rulings for questions 6 to 8 inclusive each apply for the following periods:

Year ending 31 March 2014 - year ending 31 March 2018

Relevant facts and circumstances

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

Company A is listed on the Australian Stock Exchange.

The shareholders of Company A have implemented a simple Executive Share Option Plan (ESOP) to help attract, motivate and retain executives and to encourage participation by executives of Company A through share ownership.

The ESOP was later amended to accommodate the establishment of an Executive Share Trust (EST). In particular, Company A established the Company A EST pursuant to a Trust Deed (Trust Deed) entered into between Company A and Company B (Trustee) to facilitate the provision of ordinary shares in Company A to executives under the Company A ESOP and future executive and employee equity plans. The purpose of the EST was to, amongst other things, result in better performance measurement for the Company A group entities, allow Company A to better manage its capital structure, provide greater flexibility in incentive arrangements and allow for a streamlined approach to the administration of the ESOP.

The Company A Board (Board) has adopted the following plans:

• a Short Term Incentive Plan (STIP))

• a Long Term Incentive Plan (LTIP A) and

• Executive Engagement Award (EEA)

• Long Term Incentive Plan (LTIP B); and

• Deferred Equity Plan (DEP)

These plans are collectively referred to as the Company A Equity Plans.

(Note: the LTIP A replaced the former Company A ESOP. As at the date of this ruling, all options issued under the Company A ESOP either lapsed or were cancelled.)

Company A maintains a strong focus on attraction, motivation and retention of staff to facilitate the continued growth of the company over the short to medium term. Fundamental to this growth strategy is the continued maintenance of the EST to administer the existing Company A Equity Plans and future executive and employee equity plans. The EST Deed has not been amended since its establishment.

The Company A Equity Plans

STIP - overview

The STIP was adopted by a resolution of the Board and was established pursuant to the STIP Rules.

The purpose of the STIP is to

• provide incentives to certain eligible executives and senior managers and

• align Eligible Participant reward outcomes with the accomplishment of annual business plans and targets that drive divisional and group performance

• Administration of the STIP is vested in the Board and it is as the Board's discretion to offer Annual Incentives to certain employees.

It is at the Board's absolute discretion to offer the STIP to certain employees. The eligibility conditions for the grant of these rights are determined by the Board.

Eligible Participants are entitled to a benefit consisting of the payment of a cash component and the issue of Performance Rights. The mix of cash and Performance Rights will depend on the seniority of the Eligible Participant and will be determined at the discretion of the Board.

LTIP A - overview

LTIP A was adopted by resolution of the Board and was established pursuant to the LTIP A Rules.

The purpose of the LTIP A Rules is to:

• provide incentives to certain eligible executives and senior managers

• foster a responsible balance between shot term and long term corporate goals

• build and maintain a strong spirit of performance and entrepreneurship and

• bring Company As incentive arrangements into line with some best practice guidelines consistent with market practice alternatives

• Administration of the LTIP A is vested in the Board and it is at the Board's absolute discretion to offer Performance Rights to certain employees. The eligibility conditions for the grant of these rights are determined by the Board.

EEA - overview

The EEA was adopted by resolution of the Board and was established pursuant to the EEA Plan Rules.

The purpose of this plan is to:

• provide 'one-off' incentives to retain certain eligible executives and senior managers and encourage equity holding in Company A by those people and

• foster a responsible balance between short term and long term corporate results and alignment with longer term shareholder value creation and build and maintain a strong spirit of performance and entrepreneurship

Administration of the EEA is vested in the Board and it is at the Board's absolute discretion to offer Performance Rights to certain employees. The eligibility conditions for the grant of these rights are determined by the Board.

LTIP B - overview

LTIP B was adopted by resolution of the Board and was established pursuant to the LTIP B Rules.

The purpose of the LTIP B is to provide the Board with the ability to offer a long-term incentive to an employee in the form of the grant of Performance Rights under this plan. Pursuant to this plan Eligible Participants may be entitled to exercise Performance Rights subject to the achievements of certain terms and conditions and/or any restrictions (including performance hurdles and disposal restrictions) that the Board may determine from time to time.

Administration of the LTIP B is vested in the Board and it is at the Boards absolute discretion to offer Performance Rights to certain employees. The eligibility conditions for the grant of these rights are determined by the Board.

DEP - overview

The DEP was adopted by resolution of the Board and was established pursuant to the DEP Rules.

The purpose of the DEP is to provide the Board with the ability to allocate a portion of the appropriate bonus or incentive payment to which an employee may become entitled in the form of the grant of Performance Rights pursuant to the DEP. Under the DEP, Eligible Participants may be entitled to exercise Performance Rights subject to the achievement of certain terms and conditions and/or any restrictions (including performance hurdles and disposal restrictions) that the Board may determine from time to time.

Administration of the DEP is vested in the Board and it is at the Board's absolute discretion to offer Performance Rights to certain employees. The eligibility conditions for the grant of these rights are determined by the Board.

Common terms

The following terms are common to the operation of all the Equity Plans:

• A Performance Right is defined in the rules of the respective plans as an option granted to an Eligible Employee to subscribe for one ordinary share in Company A (Company A share). The Performance Rights issued are not listed securities

• Eligible Participants are not entitled to any voting rights or dividends by virtue of ownership of Performance Rights, prior to the Performance Right being exercised

• A Performance Right is issued under the Company A Equity Plans for no consideration

• The Exercise Conditions which are applicable in respect of each Performance Right issued are determined by the Company A Board and will be set out in the Offer Document

• Subject to certain circumstances, an Eligible Participant will be entitled to exercise the Performance Rights granted under the respective Company A Equity Plan in respect of which all Exercise Conditions have been satisfied and are capable of exercise. At this point, each Performance Right can be converted into one ordinary share in Company A. Exercise of the Performance Rights can only occur where the shares have been quoted throughout a 12 month period immediately preceding the exercise date, without suspension for more than a total of 5 trading days during that period

• The Performance Rights will immediately lapse and all rights are lost where:

• the Eligible Participant ceased to be an employee or director of Company A for any reason and the Exercise Conditions have not been met

• the Exercise Conditions are unable to be met

• the Lapsing Date has passed

• the Eligible Participant ceased to be an employee or director of Company A for any reason and the Exercise Conditions have been met, but the Eligible Participant does not exercise the Performance Rights granted within 60 days of ceasing employment

• If employment ceases prior to Performance Rights becoming exercisable, the Board can exercise its discretion such that the Performance Rights held by the relevant participant do not lapse, provided they are exercised within the additional exercise period provided

• Where an Eligible Participant dies, becomes Permanently Disabled, retires from the workforce or is made redundant by Company A during the life of a Performance Right granted to such a participant:

• the participant (or their legal representative) may exercise the Performance Rights at that date provided they are exercisable, have not already been exercised and have not lapsed

• if the Performance Rights have not become exercisable or have lapsed, the Board has absolute discretion to resolve that the participant may exercise these Performance Rights. Where such discretion is exercised by the Board, the Performance rights will not immediately lapse, provided the participant exercises the Performance Rights within the timeframes required by the Plan Rules

• Cessation of employment for any other reason will cause any Performance Rights on issue to immediately lapse, unless the Board determines otherwise

• Upon exercise of the Performance Right the Eligible Participant must deliver the relevant notices to the Company A company secretary and a payment must be made, payable to Trustee, of an amount equal to the Performance Right's Exercise Price (set by the Company A Board) multiplied by the number of Performance Rights being exercised (unless the Exercise Price is nil)

• Company A then instructs the Trustee, in writing, to subscribe for, acquire or allocate the relevant number of shares to the Eligible Participant, in respect of the exercise of the Performance Rights after which, the Trustee must act on the instructions, such that the Trustee will hold those shares as trustee for and on behalf of the participant as beneficial owner

• From and including the date of acquisition by the Trustee, the participant is the beneficial owner of the shares and entitled to deal with those shares as beneficial owner

• As soon as practicable following the acquisition of the shares by the Trustee, the Trustee should transfer to the participant the relevant shares allocated to it

• In the event of a new issue of shares or rights, an Eligible Participant in respect of a Performance Right may only participate in the new issue of shares or rights to shareholders if the Performance Right has been exercised

• In the event that Company A makes a bonus issue of Company A shares hares to ordinary shareholders during the life of a Performance Right, upon later exercise of that Performance Right, the Eligible Participant will receive so many additional shares to ensure they remain entitled to the same proportion of shares in Company A to which they were entitled, prior to the bonus issue

• Eligible Participants to whom Performance Rights have been granted under any of the Company A Equity Plans is referred to as a Participant in the singular, or as Participants in the plural

Operation of the EST

The EST was established solely for the purpose of subscribing for or acquiring, delivering, allocating and holding Company A shares under the Company A Equity Plans or any future plans set up and operated for the benefit of Participants.

Pursuant to the broad powers enumerated in the Trust Deed the Trustee has full power to do all things that a trustee is permitted to do at law in respect of the EST, the trust shares and the trust assets.

Contributions made by Company A to the EST

Company A will make irrevocable and non-refundable contributions to the Trustee, on an ongoing basis for the sole purpose of enabling the Trustee to subscribe for new shares or acquire Company A shares on -market for the benefit of Eligible Participants.

The amount of each cash contribution to be made by Company A to the EST will broadly equal the fair market value of shares to be acquired by the EST as at the date of exercise of Performance Rights, less the Performance Right's exercise price (if any) payable to the EST by the Eligible Participant.

The Trustee of the EST holds all Company A shares issued under of the Company A Equity Plans on capital account for income tax purposes.

Company A is a tax consolidated group with each of its 100% owned Australian subsidiary companies. As such, contributions made to the EST will be treated as contributions made by Company A itself for Australian income tax purposes, rather than a subsidiary of Company A.

Use of an EST to facilitate the Company A Equity Plans

The use of the EST provides Company A greater flexibility to accommodate the long term incentive arrangements of the company. Similarly, it allows for a streamlined approach to the administration aspect of the Company A Equity Plans. The Company A EST can also be used to provide a range of incentives involving shares in Company A as circumstances change in the labour market that require different incentives to be provided in order to attract, reward and retain key executives and employees.

The Commercial benefits of Company A using an EST include:

• assisting the company with its management, as Company A can direct the EST to use the contributions received to either acquire shares on-market, which will prevent the dilution of interests held by existing shareholders, or alternatively to subscribe for new shares in Company A

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

• allows for greater flexibility for Company A to accommodate its long term incentive arrangements both now and into the future, as the company continues to grow and expand its operations and as a result, its employee numbers

On-going costs incurred by Company A to administer the EST

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

• costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to Participants)

• employee plan record keeping

• production and dispatch of holding statements to employees

• provision of annual income tax return information for employees

• management of employee termination and

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 20-20

Income Tax Assessment Act 1997 Section 20-25

Income Tax Assessment Act 1997 Section 20-30

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 104-155

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

Income Tax Assessment Act 1997 Section 974-75

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

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)

Reasons for decision

Question 1

Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. Broadly, the provision provides an entitlement to a deduction from assessable income for any loss or outgoing, to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, subsection 8-1(2) of the ITAA 1997 prevents such a deduction to the extent that it is a loss or outgoing of capital, or of a capital nature, is a loss or outgoing of a private or a domestic nature, is incurred in gaining or producing exempt income, or is prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

Losses or outgoings

Pursuant to the Trust Deed, Company A must provide the Trustee with all the funds (contributions) required to enable it to subscribe for, or acquire Company A shares in accordance with the Trust Deed. The Trustee will, in accordance with instructions received pursuant to the Company A Equity Plans, acquire, deliver and allocate Company A shares for the benefit of Participants provided that the Trustee receives sufficient payment to subscribe for or purchase such shares and / or has sufficient unallocated trust shares available. These contributions made to the Trustee by Company A will be irretrievable and non-refundable (the Trust Deed provides that funds provided to the Trustee will not be repaid to Company A and no Participant shall be entitled to receive the funds). On this basis, it is concluded that the irretrievable contributions made by Company A or any subsidiary member of the Company A income tax consolidated group are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997.

Relevant nexus

The purpose of Company A in establishing and making irretrievable contributions to the Trustee of the EST is to provide benefits to certain eligible employees in the form of shares in Company A.

All the documentation provided indicates that the contributions are made to the Trustee of the EST solely to enable the Trustee to acquire Company A shares for eligible employees of the business. As stated by the applicant in its private ruling application:

We submit that the contributions should be deductible to Company A on the basis that they would be incurred to facilitate the achievement of the purposes set out in the Plan Rules governing the Company A Equity Plans. These purposes were ultimately designed to boost Company A's operating performance and therefore, its assessable income, through the alignment of employee and shareholder's interest....

Accordingly, there is a sufficient nexus between the outgoings (contributions made by Company A) and the derivation of Company A's assessable income (The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288, W. Nevill And Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin No Liability v The Federal Commissioner of Taxation(1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147).

Capital or Revenue

Contributions will be recurring and be made from time to time as and when Company A shares are to be subscribed for or acquired pursuant to the Trust Deed. Therefore, to this end, it is concluded that the contributions are not prima facie capital in nature, but rather revenue outgoings incurred by the company in carrying on its business. In support of this conclusion, the Court held in Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; Spotlight Stores Pty Ltd v Federal Commissioner of Taxation [2004] FCA 650; 2004 ATC 4674; 55 ATR 745 that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature.¹ This confirms the view expressed in ATO ID 2002/1074 that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made to the trustee of its employee share scheme.

Apportionment

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

A contribution to the trustee of an employee share trust is capital or of a capital nature where the contribution secures for the employer an asset or advantage of an enduring or lasting nature that is independent of year to year benefits that the employer derives from a loyal and contented workforce.

Where a contribution is, ultimately and in substance, applied to the trustee of an employee share trust to subscribe for equity interests in the employer (for example shares), the employer has also acquired an asset or advantage of an enduring nature.

Where a contribution is made for the purpose of securing for the employer advantages of both a revenue and capital nature, but the advantages of a capital nature are only expected to be very small or trifling by comparison, apportionment may not be required.

In this case, the outgoings incurred by Company A by way of contributions to the EST in order to carry on its business are either not capital in nature or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction.

Private or domestic in nature

Finally, nothing in the facts suggests that the contributions are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

Therefore, when Company A makes irretrievable contributions to the Trustee to fund the acquisition of Company A shares in accordance with the Trust Deed, those contributions will be an allowable deduction to Company A under section 8-1.

Question 2

Company A will incur various costs in relation to the on-going administration of the EST. For example, Company A will incur costs associated with the services provided by the Trustee of the EST. These costs are likely to include:

• costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to Participants);

• employee plan record keeping;

• production and dispatch of holding statements to employees;

• provision of annual income tax return information for employees;

• Management of employee termination; and

• 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 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 may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement.

The costs incurred by Company A in relation to the implementation and on-going administration of the EST are deductible under section 8-1 of the ITAA 1997 as either:

• costs incurred in gaining or producing the assessable income of Company A; or alternatively

• costs necessarily incurred in carrying on Company A's business for the purpose of gaining or producing the assessable income of Company A.

The view that the costs incurred by Company A are deductible under section 8-1 of the ITAA 1997 is consistent with ATO ID 2002/961 in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer.

Consistent with the analysis above in Question 1 (above), the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses, and are accordingly deductible under section 8-1 of the ITAA 1997.

Question 3

Section 83A-210 states:

If:

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

(i) under an arrangement; and

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

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

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

Section 83A-210 will only apply if there is an arrangement under which there is a relevant connection between the money provided to the trustee and the acquisition of ESS interests (directly or indirectly) by the employee under an employee share scheme in relation to the employee's employment.

Arrangement

Company A's adoption of the Company A Equity Plans, the establishment of the EST, and Company A's provision of money to the Trustee, is considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i).

ESS interest

An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in a company or a beneficial interest in a right to acquire a beneficial interest in a share in a company. Under the Company A Equity Plans, Performance Rights issued to Eligible Employees are a right to acquire a beneficial interest in a share in Company A and are accordingly 'ESS interests'.

Employee share scheme

An employee share scheme is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2)). Each of the Company A Equity Plans is a scheme under which ESS interests in Company A are provided to employees of Company A and its subsidiaries in relation to their employment, and is accordingly an employee share scheme. A Company A share acquired by the Trustee to satisfy a Performance Right to acquire a share under the ESS, granted to an employee in relation their employment, is itself provided under the same ESS.

Relevant connection

The granting of the Performance Rights, the provision of the money to the Trustee under the arrangement, the acquisition and holding of the Company A shares by the Trustee, and the allocation of those Company A shares to the Participants are all interrelated components of the ESS. All the components of the arrangement must be carried out so that the ESS can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed. Accordingly, the provision of money to the Trustee to acquire Company A shares is considered to be for the purpose of enabling Participants, indirectly as part of the Company A Equity Plans, to acquire Performance Rights (that is ESS interests).

Contribution made prior to the acquisition of ESS interests

Section 83A-210 will only apply in situations where a contribution is made to the Trustee prior to the time when the ultimate beneficiary acquires the ESS interests. When it does apply, it operates by deferring the timing of the deduction to the income year in which the ultimate beneficiary acquires the ESS interests.

For the purposes of paragraph 83A-210(b), a Participant acquires the ESS interests when the Performance Rights are granted to them.

Accordingly, when Company A makes a cash contribution to the Trustee before the acquisition time for these ESS interests occurs, the timing of the deduction allowable under section 8-1 will be determined by section 83A-210 as being the income year in which these ESS interests (Performance Rights issued under the Company A Equity Plans) are granted (acquired).

Contribution made after to the acquisition of ESS interests

For the reasons stated above, section 83A-210 will not apply if Company A makes cash contributions after the time that the ultimate beneficiary acquires the relevant ESS interests. Where this occurs, the cash contribution will be deductible under section 8-1 in the income year in which the loss or outgoing is properly incurred.

The deductibility of money provided to employee share trusts is considered 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. The facts described in ATO ID 2010/103 are comparable to Company A's circumstances, and therefore the reasoning in it is relevant to Company A.

Question 4

Ordinary Income

Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. The classic definition in Australian law was given by Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215. Chief Justice Jordan considered that:

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

The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that:

The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description.

In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that:

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

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

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

The character of the contribution of share capital received by Company A from the Trustee of the EST can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, Company A is issuing the Trustee with new shares in itself. The character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature.

Accordingly, when Company A receives subscription proceeds from the Trustee of the EST where the Trustee has subscribed for new shares in Company A to satisfy obligations to Participants, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account, and not ordinary income under section 6-5 of the ITAA 1997.

Section 20-20 of the ITAA 1997

Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year.

Company A will receive an amount for the subscription of shares by the Trustee of the EST. There is no insurance contract in this case, so the amount is not received by way of insurance.

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

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

Recoupment of a loss or outgoing is defined in subsection 20-25(1) to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing.

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

So far as a deduction under section 8-1 of the ITAA 1997 allowed for bad debts or rates or taxes is concerned, section 20-30 of the ITAA 1997 will apply such that if there was a recoupment of that deduction, that amount would be assessable. However, it can be argued that in subscribing for new shares in Company A the Trustee of the EST is acquiring new shares in Company A and this cannot be said to be a recoupment under subsection 20-25(1) of the ITAA 1997.

In any event, the receipt by Company A made in return for issuing shares to the Trustee would not be a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes to which section 20-30 of the ITAA 1997 could apply.

Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20 of the ITAA 1997.

Capital Gains Tax

Section 102-20 of the ITAA 1997 states that you make a capital gain or loss, if and only if a CGT event happens. No CGT events occur when the Trustee of the EST satisfies its obligations under the Company A Equity Plans by subscribing for new shares in Company A.

The relevant CGT events that may be applicable when the subscription proceeds are received by Company A are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset).

However, paragraph 104-35(5)(c) of the ITAA 1997 states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, Company A is issuing shares, being equity interests as defined in section 974-75 of the ITAA 1997, to the Trustee, therefore CGT event D1 does not happen.

In relation to CGT event H2, paragraph 104-155(5)(c) of the ITAA 1997 also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Therefore, CGT event H2 does not occur.

Since no CGT event occurs, there is no amount that will be assessable as a capital gain to Company A.

Therefore, when the EST satisfies its obligations under the Company A Equity Plans by subscribing for new shares in Company A, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20-20 ITAA 1997, nor trigger a CGT event under Division 104 of the ITAA 1997.

Question 5

Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise his discretion to make a determination in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are:

• there must be a scheme within the meaning of section 177A of the ITAA 1936

• a tax benefit must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out, and

• having regard to the matters in paragraph 177D(b) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies (dominant purpose).

On the basis of an analysis of these requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable contributions Company A made to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A shares by the EST.

Question 6

The provision of Performance Rights

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA, which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided.

No amount will be subject to FBT unless a 'fringe benefit' is provided.

In general terms 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee.

However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. Paragraph (h) of the definition of 'fringe benefit' states that a fringe benefit does not include:

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

The Commissioner accepts that the Company A Equity Plans comprise an employee share scheme, that the Performance Rights are ESS interests (see question 2 above) and that Subdivision 83A-B or 83A-C applies to those interests.

Accordingly, the acquisition of ESS interests (being the Performance Rights) pursuant to the Company A Equity Plans will not be subject to fringe benefits tax on the basis that they are acquired under an employee share scheme (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

The provision of Company A shares upon exercise of Performance Rights

As stated above, in general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee.

The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. Heerey, Merkel and Finkelstein JJ at page 410 stated:

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

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

When an employee of Company A or its subsidiaries accepts an offer to participate in any of the Company A Equity Plans, they obtain a Performance Right (being a right to acquire a beneficial interest in a share in Company A) and this Performance Right constitutes an ESS interest. When this Performance Right is subsequently exercised, any benefit received would be in respect of the exercise of the Performance Right, and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

Therefore, the benefit that arises to an employee upon the exercise of a vested Performance Right (being the provision of a share in Company A) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee.

Question 7

Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include:

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

An 'employee share trust' for an employee share scheme is defined in subsection 130-85(4) as 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).

For the purposes of paragraph 130-85(4)(c), activities which are merely incidental, as set out in 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, 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 Deed is titled 'Sole activities test' and provides that Company A and the Trustee:

Without limiting the generality of [this clause], the Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the sole activities test for the purposes of subsection 139(C)5 of the ITAA 1936 and be an 'employee share trust' as defined in subsection 995-1(1) of the ITAA 1997, as interpreted in ATO ID 2007/179

(Note the applicant comments that 'This clause includes references to legislation and an ATO ID that have since been repealed/withdrawn, following the introduction of the new Division 83-A Employee Share Scheme regime in 2009. This does not affect the Clause, for the purposes of this Application' - the Commissioner agrees as the current legislative provisions have the same effect as subsection 139(C)5 of the ITAA 1936.)

For the avoidance of doubt, this statement is supported by Recitals B and C of the Trust Deed which provide that the EST was established by Company A to facilitate the Company A Equity Plans and for the purposes of holding Company A shares for the benefit of Participants who are, or will become, the beneficial owners of such shares pursuant to 'the Plan'. It is further supported by the Trust Deed which effectively outlines how the EST works, and expressly provides for the Trustee to apply funds it acquires from Company A to obtaining Company A shares, and to ensuring that those shares are allocated or transferred to relevant Participants.

Therefore, the EST satisfies the definition of an employee share trust in subsection 130-85(4) as:

• the EST acquires shares in a company (being Company A); and

• the EST ensures that ESS interests as defined in subsection 83A-10(1), being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2), by allocating those shares to the Participants in accordance with the Company A Equity Plans; and

• the Trust Deed does not provide for the Trustee to participate in any activities which are not considered merely incidental to a function of managing the employee share scheme and administering the trust.

As paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the EST from being a fringe benefit, Company A will not be required to pay FBT in respect of irretrievable contributions made to the Trustee of the EST to fund the acquisition of shares in Company A.

Question 8

As mentioned in the answer to Question 5, PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 of PS LA 2005/24 provide as follows:

145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

It is clear, therefore, that the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 under the heading 'Appendix, Question 18' where, on the application of section 67 of the FBTAA, 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 PS LA 2005/24 provides:

151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

Under the Company A Equity Plans, if an EST was not used, no fringe benefits tax would be payable and nor is it likely that benefits provided to employees under alternative remuneration plans would result in fringe benefits tax being payable.

In addition, under the Company A Equity Plan arrangements (with an EST), the benefits provided by way of irretrievable contributions to the EST and the provision of Performance Rights (and the Company A shares received on their vesting) to Eligible Employees are excluded from the definition of a fringe benefit for the reasons given in the responses to questions 6 and 7 above. Therefore, as these benefits have been excluded from the definition of a fringe benefit, no fringe benefit arises and no fringe benefits tax will be payable by using an EST. As there would be no fringe benefits tax payable under the Company A Equity Plans without the use of an EST (and nor likely would fringe benefits tax be payable under alternative remuneration plans), the fringe benefits tax liability is not any less than it would have been but for the arrangement.

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

¹ It should be noted that although the Court held that the payments were deductible under subsection 51(1) of the ITAA 1936, it found that subsection 177F(1) of Part IVA of the ITAA 1936 applied to cancel the tax benefit arising from the deduction.