Edited version of your written advice

Authorisation Number: 1012807375926

Ruling

Subject: Employee share scheme

Question 1

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

Answer

Yes

Question 2

Will the Employer, as head entity of the Group, obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by the Employer or any of the Group in relation to the implementation and on-going administration of the Trust?

Answer

Yes

Question 3

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

Answer

Yes

Question 4

If the Trust satisfies its obligation under the Plan by subscribing for new shares in the Employer, will the subscription proceeds be included in the assessable income of the Employer 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 the Employer as head entity of the Group in respect of the irretrievable cash contributions made by the Employer (or any member of the Group) to the Trustee to fund the subscription for or acquisition on-market of the Employer shares by the Trust?

Answer

No

This ruling for questions 1 to 5 inclusive each apply the following period(s)

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Question 6

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

Answer

No

Question 7

Will the irretrievable cash contributions made by the Employer (or any member of the Group) to the Trustee, to fund the subscription for or acquisition on-market of the Employer shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer

No

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to the Employer (or any member of the Group), by the amount of tax benefit gained from irretrievable cash contributions made by the Employer (or any member of the Group) to the Trustee, to fund the subscription for or acquisition on-market of Employer shares?

Answer

No

This ruling for questions 6 to 8 inclusive each apply for the following period(s)

Year ending 31 March 2016

Year ending 31 March 2017

Year ending 31 March 2018

Year ending 31 March 2019

Year ending 31 March 2020

The scheme commences on

30 June 2014

Relevant facts and circumstances

Background

The Employer is a listed Australian company.

The Employer has put in place a long term incentive plan (the Plan) for key employees of the business. This plan is governed by the Plan Rules.

Participants in the Plan are employees of the Employer.

This aspect of employee remuneration is considered crucial to rewarding and retaining key management personnel who are important to the Employer's long term success. It is a key part of the Employer's executive remuneration framework which aims to increase alignment of employee interests to shareholders' interests, drive improved business performance and attract, reward, retain and motivate key talent.

The Plan enables eligible executives to share in the growth of the Employer through a grant of Performance Rights. The Performance Rights are capable of being exercised into the Employer's ordinary shares following the satisfaction of certain vesting conditions over a three year period. Under the current offer, the Performance Rights will be subject to time-based vesting conditions and performance-based conditions or requirements.

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;

• subject to the terms attaching to the Performance Rights as determined by the Board and specified in an Invitation Letter, each Performance Right entitles the Participant to one fully paid ordinary share in the capital of the Employer (Share). If any of the terms specified in the Invitation Letter are inconsistent with the Plan Rules, then the Plan Rules will prevail;

• to participate in the Plan, the Eligible Employee must deliver an Application to the Employer in response to the Invitation Letter. If the Application is accepted, then the Eligible Employee becomes a Participant. No amount is payable by the Participant to participate in the Plan;

• once all conditions on the Performance Rights as determined by the Board and specified in the Invitation Letter have been satisfied, the Performance Rights vest and the Employer issues a Notification to the Participants, upon which the Performance Rights are automatically exercised. A Performance Right has a nil exercise price;

• a Performance Right will be automatically forfeited if a Participant becomes a Bad Leaver.

The Employee Incentive Trust

The Employer has established the Employee Incentive Trust (the Trust), a sole purpose trust to acquire Shares for Australian employees of the Employer and the Group entities pursuant to the Plan and the appointment of a trustee operate the Trust as Trustee (the Trustee). The establishment of the Trust for such a purpose is specifically allowable under the Plan Rules.

The Trustee is an independent third party specialising in the provision of trustee services to listed Australian groups for the operation of employee incentive plans through trusts.

The Trust will operate in accordance with the Trust Deed.

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 Trust Deed and the Plan Rules.

The Trustee is not entitled to receive from the Trust any fees, commission or remuneration for operating or administering the Trust. The Employer must pay the Trustee from its own resources such fees, commission or other remuneration and may reimburse expenses incurred by the Trustee as the Employer and the Trustee agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement.

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

The Trust will operate as follows:

• the Trust will be funded by contributions from the Employer for the purchase of Shares in accordance with the Plan;

• these contributions will be used by the Trustee to acquire Shares either on-market or via a subscription for new Shares, based on written instructions from the Employer;

• 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 Trustee can sell Shares on behalf of a Participant where permitted to do so by the Participant;

• the Trustee will, in accordance with instructions received pursuant to the Plan Rules, subscribe for, purchase or allocate Shares for the benefit of Participants provided that the Trustee receives sufficient funds from the Employer to subscribe for or purchase such Shares and/or has sufficient unallocated Trust Shares available;

• the Trustee must establish and maintain a separate Trust Share Account or record in respect of each Participant;

• while Shares are held in trust, the Participant will be entitled to dividend and voting rights;

• all funds provided to the Trustee from the Employer will constitute accretions to the corpus of the trust and will not be repayable by the Trustee. The contributions will not be repaid to the Employer unless they are used to subscribe for Shares.

Contributions made by the Employer to the Trust

The Employer will make cash contributions equal to the fair market value of Shares that will be acquired for Participants. The Trust has and will use the cash contributions exclusively to purchase Shares for Participants under the Plan and, pending such an acquisition, form part of the Trust's Assets.

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.

The Trustee holds all Shares pursuant to the Plan on capital account.

Use of the Trust to facilitate the Plan

Offering equity to employees creates another administrative task for the Employer and involves a range of skills that the Employer staff do not have. The use of a trust by the Employer and in particular the outsourcing of these services to the Trustee is designed to solve these problems by outsourcing the operation of the Trust to those with the necessary skills.

The issuing of equity can also be dilutive to existing shareholders, meaning the Group would need flexibility to acquire Shares on market or issue new Shares to meet its obligations to employees under the Plan. The use of a trust by the Employer would address this challenge and assist the Employer in retaining flexibility. The use of a trust by the Employer also has the advantage of creating flexibility in terms of needing to seek shareholder, ASX and Australian Securities and Investment Commission approval, which are required when new Shares above a certain threshold are issued to the market.

Further, the ability for the Employer to acquire shares in itself on market is difficult given the general prohibition of companies holding shares in themselves. The Trust will allow Shares to be acquired at or before Performance Rights vest and be held without breaching the rules relating to a company holding shares in itself.

Finally, the existence of a third party trustee, together with the Employer's share trading restriction policy assists the Employer to show shareholders and the market that share trades by employees do not occur with insider or inappropriate knowledge.

In conclusion, the use of a trust to operate the necessary employee incentive plan achieves a number of commercial objectives and addresses the challenges previously identified.

Costs incurred by the Employer to administer the Trust

The Employer will incur various costs in relation to the on-going administration of the Trust. For example, the Employer will incur costs associated with the services provided by the Trustee of the Trust.

In addition to the services to be provided by the Trustee, the Employer has incurred and will incur various implementation costs, including the services provided by the Employer's accounting, tax and legal advisors.

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 section 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 section 177D

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 paragraph130-85(4)

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

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

Income Tax Assessment Act 1997 section 701-1

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 stated.

Questions 1 to 5 - application of the single entity rule in section 701-1

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 (the Employer or any subsidiary member of the tax consolidated group) are treated as having been undertaken by the Australian head company of the Employer tax consolidated group.

Question 1

Summary

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

Detailed reasoning

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.

Positive Limb

The Employer provides cash contributions to the Trustee to be used in accordance with the Trust Deed and Plan Rules for the sole purpose of subscribing for and/or acquiring Shares for the benefit of Participants. Such contributions are irretrievable or non-refundable to the Employer and therefore a loss or outgoing is incurred.

The Trust is established for the sole purpose of obtaining Shares for the benefit of Participants. The purpose of the contributions is to provide an incentive to employees linked to the operating performance of the Employer business.

Accordingly, there is a sufficient nexus between the Employer's contributions to the Trustee and the derivation of its assessable income (Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113; (1932) 2 ATD 169, Amalgamated Zinc (De Bavay's) Ltd v FCT (1935) 54 CLR 295; (1935) 3 ATD 288, W Nevill & Co Ltd v FC of T (1937) 56 CLR 290; 4 ATD 187; (1937); 1 AITR 67, Ronpibon Tin NL v FCT (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344; (1956) 6 AITR 379; (1956) 11 ATD 147).

Consistent with this, the Commissioner's view is set out in ATO Interpretative Decision ATO ID 2002/1074 Income Tax - deductibility - irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme that where the purpose of an employee share scheme is to provide a benefit to its employees as part of the overall remuneration of the employees, a company will be entitled to a deduction under section 8-1 for its irretrievable cash contributions made to the trustee of its employees share scheme.

Accordingly, the irretrievable cash contributions made by the Employer to the Trustee will be entitled to an income tax deduction under the positive limb of section 8-1.

Negative Limb

In Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745, payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and neither capital nor of a capital nature.

The Employer's cash contributions are revenue in nature as the amount and timing of the contributions are designed to correspond to meeting employee obligations over a relatively short period of time and those obligations are accepted as being components of employee remuneration. As the Employer's cash contributions to the Trustee are part of the overall remuneration of its employees it is concluded that the contributions are not capital or capital in nature.

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 differing 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 by 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 which is capable of having 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. Advantages of a capital nature will be considered small or trifling if the capital advantage obtained is permanently diminished within a relatively short period of time.

In this case, the outgoings incurred by the Employer by way of contributions to the Trust 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.

Question 2

Summary

The Employer as head entity of the Group will obtain an income tax deduction, pursuant to section 8-1, in respect of costs incurred by the Employer or any member of the Group in relation to the implementation and on-going administration of the Trust.

Detailed reasoning

Section 8-1

The Employer will incur various costs in relation to the implementation and on-going administration of the Trust. The Employer will also incur costs associated with the services provided by the Trustee of the Trust.

The costs incurred by the Employer in relation to the implementation and on-going administration of the Trust are deductible under section 8-1 as either:

• costs incurred in gaining or producing the assessable income of the Employer; or

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

The view that the costs incurred by the Employer are deductible under section 8-1 is consistent with ATO ID 2014/42 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 above 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 the Employer or any subsidiary member of the tax consolidated group headed by the Employer to the Trustee, to fund the subscription for or acquisition on-market of Shares by the Trust, will be deductible to the Employer 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 the Employer incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210.

Section 83A-210 provides that if:

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

(i) under an arrangement; and

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

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

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

Section 83A-210 will only apply if there is a relevant connection between the irretrievable cash contributions provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by the Employer under the Plan in relation to the Participant's employment.

ESS interest

An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

Under the Plan, a Performance Right granted to a Participant is an ESS interest as it is a right to acquire a beneficial interest in a share in a company.

The term '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) of:

(a) the company; or

(b) *subsidiaries of the company;

in relation to the employees' employment.

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

(a)  any ^*arrangement; or

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

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 to acquire a beneficial interest in a Share), is provided to Participant in relation to their employment in the Employer in accordance with the Trust Deed.

Division 83A will apply, broadly, if an ESS interest is acquired at a discount under an employee share scheme. The ESS interests acquired by the Participants under the Plan will be acquired at a discount as the Performance Rights have a nil exercise price.

ESS interest acquired by the Trustee of the Trust

A Share acquired by the Trustee to satisfy a Performance Right granted under the employee share scheme to an employee in relation to the employee's employment, is itself acquired under the same scheme.

The granting of Performance Rights, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the Shares by the Trustee and the allocation of Shares to the Participants are all interrelated components of the Plan. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme can operate as intended.

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. In this instance the contributions will only be deductible in the income year when the relevant performance rights are granted to Participants. 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 that have already been granted.

Question 4

Summary

If the Trust satisfies its obligation under the Plan by subscribing for new Shares, the subscription proceeds will not be included in the assessable income of the Employer under section 6-5 or 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 definition of 'income' was observed by Jordan CJ in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219; 3 ATD 142 at 144-145 where his Honour said:

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). 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 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 the Employer from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, the Employer is issuing the Trustee with a new share 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. This view is supported by the reasoning in ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee.

As the Employer receives subscription proceeds from the Trustee where the Trust has subscribed for new Shares to satisfy obligations to Participants, that subscription price received by the Employer is a capital receipt, is not on revenue account, and not ordinary income under section 6-5.

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 the Employer 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 Participants are all interrelated components of the Plan. The character of the subscription proceeds paid to the Employer 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 the Employer do not constitute assessable recoupments under section 20-20.

Capital Gains Tax (CGT)

Section 102-20 states that a taxpayer can only make a capital gain or loss if a CGT event happens. It is not possible to make a capital gain or loss if there is no CGT event.

No CGT events occur when the Trust satisfies its obligations under the Plan by subscribing for new Shares.

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

Also, paragraph 104-35(5)(c) 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, the Employer is issuing Shares, being equity interests as defined in section 974-75, to the Trustee and therefore CGT event D1 does not happen.

In relation to CGT event H2, paragraph 104-155(5)(c) 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.

As no CGT event occurs, there is no amount that will be assessable as a capital gain to the Employer.

Therefore, when the Trust satisfies its obligations under the Plan by subscribing for new Shares, the subscription proceeds will not be included in the assessable income of the Employer 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 ITAA 1936 applies to deny, in part or full, any deduction claimed by the Employer as head entity of the tax consolidated group made in respect of the irretrievable cash contributions made by the Employer to the Trustee to fund the subscription for or acquisition on-market of Shares by the Trust.

Detailed reasoning

Part IVA of the ITAA 1936 applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA of the ITAA 1936 applies to a scheme, the Commissioner can make a determination under section 177F of the ITAA 1936 to cancel the tax benefit obtained under the scheme.

1. 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 the Employer to the Trustee (in accordance with the Trust Deed) to fund the acquisition of Shares on behalf of Participants by the Trustee.

2. The tax benefit

Broadly, subsection 177C(1) of the ITAA 1936 provides that a tax benefit exists for the purposes of Part IVA of the ITAA 1936 where it might reasonably be expected that an amount would be included in assessable income, a deduction would not be allowable, a capital loss would not be incurred, or a foreign tax credit would not be allowable to the taxpayer in a year of income, if the scheme had not been entered into or carried out. Determining whether this is the case depends on the facts and involves 'a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable'. This prediction is often referred to as the 'counterfactual'.

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. According to the Applicant, if the scheme was not entered into (i.e. the Trust was not used) the Employer may not receive a tax deduction for the contributions. Accordingly, the Employer may obtain a tax benefit in the form of a deduction for contributions to the Trust, which the Employer otherwise may not be entitled to.

However, the Applicant also noted that if the Employer chose 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), the Employer would be entitled to an income tax deduction, in which case there is no tax benefit.

If the Employer 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 as 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 the Employer will receive under section 8-1 for the irretrievable cash contributions it makes to the Trustee.

3. The applicable purpose test

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.

Having regard to the Part IVA analysis set out in the ruling request and the Commissioner's consideration of the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of obtaining a tax benefit.

Question 6

Summary

The provision of Performance Rights by the Employer to its employees or the employees of the Group 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

The Employer's liability to fringe benefits tax 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 fringe benefits tax unless a fringe benefit is provided.

A fringe benefit will only arise under subsection 136(1) of the FBTAA where benefits are provided by employers to employees or associates of employees. Under the definition of fringe benefit, a benefit must also be provided 'in respect of the employment of the employee'.

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 Commissioner accepts that the Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interests is provided to employees in relation to their employment in the Employer (see question 3 above) and that Subdivision 83A-B or 83A-C applies to those ESS interests.

The Shares acquired by the Trustee under the Plan to satisfy Performance Rights are also provided to employees under that same employee share scheme.

When an employee of the Employer accepts an offer to participate in the Plan they obtain a right to acquire a beneficial interest in a Share and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received would be in respect of the exercise of the right and not in respect of employment. (refer 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 provision of Performance Rights to the Employer employees who participate under the Plan 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 the Employer or any member of the Group to the Trustee, to fund the subscription for or acquisition on-market of 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).

As stated in question 3 and question 6, the right to acquire a beneficial interest in the Employer share is an ESS interest within the meaning of subsection 83A-10(1) and the Plan is an employee share scheme within the meaning of subsection 83A-10(2).

Under the Plan, the Employer has also established the Trust to acquire Shares and to allocate those Shares to its employees. Therefore, paragraphs 130-85(4)(a) and (b) are satisfied because:

• the Trust acquires Shares or rights in the Employer; 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 purposes of paragraph 130-85(4)(c) are also reflected under the Trust Deed:

The Trust Deed reinforces this as it states that the Employer wishes to establish an employee incentive trust for the purpose of acquiring, holding and transferring Shares in connection with equity incentive plans established by the Employer for the benefit of Participants in those plans.

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).

Consequently, 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 the Employer or any subsidiary of the Group to the Trustee of the Trust, to fund the subscription for or acquisition on-market of 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 the Employer or any member of the Group, by the amount of tax benefit gained from irretrievable cash contributions made by the Employer to the Trustee, to fund the subscription for or acquisition on-market of Shares.

Detailed reasoning

Law Administration Practice Statement PS LA 2005/24 was 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 Performance 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.