Edited version of your written advice

Authorisation Number: 1012840855132

Date of advice: 14 July 2015

Ruling

Subject: Share and Option Trust

Question 1

Will the Company obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by the Company, to the Trustee of the Employee Share Trust (the Trust) to fund the subscription for, or acquisition on-market of, the Company's shares in respect of employees based in Australia (Participants)?

Answer

Yes.

Question 2a

Are irretrievable cash contributions made by the Company, to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of the Company's shares by the Trust to satisfy ESS interests in respect of the Participants, deductible to the Company at a time determined by section 83A-210 of the ITAA 1997, in respect to 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 2b

Are irretrievable cash contributions made by the Company, to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of the Company shares by the Trust to satisfy ESS interests in respect of the Participants, deductible to the Company under section 8-1 of the ITAA 1997 in the income year when the contributions are made, where the contribution is made after the acquisition of the relevant ESS interests?

Answer

Yes.

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the arrangement where irretrievable contributions are made to the Trust to fund the acquisition of the Company's shares in respect of Participants, where a share is a fully paid ordinary share in the capital of the Company?

Answer

No.

Question 4

Is the provision of rights and shares by the Company to employees of the Company (or subsidiary member employees) a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

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

Answer

No.

The rulings for questions 4 to 5 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.

The Company is an Australian Public company that is the parent entity of a number of wholly-owned and partially-owned subsidiaries.

The company established a Share and Option Plan which has had several amendments.

Operation of the Share Plan

The Plan is governed by the Rules of the Share and Option Plan.

Pursuant to the Plan Rules an Eligible Participant may be granted options and or shares at the discretion of the Board of Directors, being the Board of Directors of the Company so comprised from time to time (the Board).

Pursuant to the Trust Deed, one Option represents one right to acquire a share in the Company.

An eligible person is defined in the plan Rules.

An Invitation to Apply for Options given to an Eligible Person will be extended on such terms and conditions as the Board decides, from time to time, including:

• the number of Options

• the Exercise Price (if any)

• the Exercise Period

• Vesting Conditions

• Performance Conditions (if any)

• the Restriction Period

• and any right or restriction attaching to the Options or the Company's shares in respect of which the Options are exercisable being offered to the Eligible Person

An Eligible Person will be able to take up all (or a portion) of their entitlement. The number of Options not taken up will be forfeited irrevocably.

Options are not listed for Official Quotation on the Australian Securities Exchange (ASX) and were granted for nil consideration.

Where an Eligible Person ceases to be an Eligible Person by reason of the cessation of his or her employment with the Company for whatever reason, including redundancy, resignation or retirement (unless otherwise determined by the Board in its absolute discretion), all unexercised Options held will immediately lapse.

Where the Trustee holds shares on behalf of a Participant (excluding shares which are stockpiled for other Eligible Persons) as a Shareholder pursuant to the Plan:

• the dividends payable on those shares will be paid to the Trustee, at such time as the Participant becomes absolutely entitled to the dividend

• each Shareholder may direct the Trustee by notice in writing as to how to exercise the voting rights attaching to the Company's shares held on their behalf by the Trustee, either generally or in respect of a particular resolution, by way of proxy

Options may be exercised during pre-defined Window Periods in accordance with the table below provided that, if applicable, certain pre-determined vesting hurdles and or/conditions have been satisfied.

Subject to the satisfaction of the Exercise Conditions (defined as including performance, vesting or other conditions), options may be exercised during the Exercise Period.

Employee Share Trust

The EST was established for the sole purpose of acquiring shares for employees of the Company pursuant to the Plan and any other employee, executive or director equity plan operated by the Company. It is operated in accordance with the Trust Deed.

The EST is funded by payment of exercise price by employees and by cash contributions from the Company for the acquisition of the Company's shares in accordance with the Trust Deed and the Plan Rules.

The Trustee is able to sell the Company's shares on behalf of an employee where permitted to do so.

Pursuant to 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 EST. In addition, it is not permitted to carry out activities which result in the Participants in the Plan being provided with additional benefits other than the benefits that arise from any relevant plan rules.

Pursuant to the Trust Deed, any Group company can instruct the Trustee, by way of notice in writing, to subscribe for, purchase and/or allocate the requisite number of the Company's shares specified in the notice.

Pursuant to the Trust Deed, the Trustee is not obliged to act upon any instruction from A Group Company unless sufficient funds have been provided by either a Group Company or a Participant.

The Company's shares acquired by the Trustee may be allocated to the relevant employees (assuming there are no further restrictions attaching) upon exercise of Options and the employees will become absolutely entitled to such shares from that point in time.

The Trustee (or any other party which the Trustee considers appropriate) may identify and separately record various categories of income and capital in accordance with the Trust Deed.

While the Company shares are held in trust, the Participant will be entitled to dividend and voting rights.

All funds received by the Trustee from the Company will constitute accretions to the corpus of the trust and no Participant will be entitled to receive such funds.

The EST is not part of the tax consolidated group.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Fringe Benefits Tax Assessment Act 1986 Section 66

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(f)

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

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

Fringe Benefits Tax Assessment Act 1986 Paragraph 136(1)(s)

Income Tax Assessment Act 1997 Section 8-1

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

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-10

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

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

Will the Company obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by the Company, to the Trustee of the Employee Share Trust (the Trust) to fund the subscription for, or acquisition on-market of, the Company's shares in respect of employees based in Australia (Participants)?

Answer

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, the Trustee is not obliged to subscribe for or acquire the Company's shares unless it is provided with all the funds (contributions) required to enable it to subscribe for or acquire the Company's shares in accordance with the Trust Deed. The Trustee will, in accordance with instructions received pursuant to the Company's Plans, acquire, deliver and allocate the Company 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 the Company will be irretrievable and non-refundable. The Trust Deed provides that funds provided to the Trustee will not be repaid to the Company. On this basis, it is concluded that the irretrievable contributions made by the Company or any subsidiary member of the Company's 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 the Company 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 the Company.

All the documentation provided indicates that the contributions are made to the Trustee of the EST solely to enable the Trustee to acquire the Company's shares for eligible employees of the business.

Accordingly, there is a sufficient nexus between the outgoings (contributions made by the Company) and the derivation of the Company'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 to satisfy Awards granted under the Plan (in accordance with the Trust Deed and the terms of the Plan). 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. 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 the Company 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 the Company makes irretrievable contributions to the Trustee to fund the acquisition of the Company's shares in accordance with the Trust Deed, those contributions will be an allowable deduction to the Company under section 8-1.

Question 2a

Are irretrievable cash contributions made by the Company, to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of the Company's shares by the Trust to satisfy ESS interests in respect of the Participants, deductible to the Company at a time determined by section 83A-210 of the ITAA 1997, in respect to 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

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

The Company's adoption of the Plan, the establishment of the EST, and' 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's Plan, Options issued to Eligible Employees are a right to acquire a beneficial interest in a share in the Company 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)). The Company's Plan is a scheme under which ESS interests in the Company are provided to employees of the Company and its subsidiaries in relation to their employment, and is accordingly an employee share scheme. A share acquired by the Trustee to satisfy an option 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 Options, the provision of the money to the Trustee under the arrangement, the acquisition and holding of the Company's shares by the Trustee, and the allocation of those 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 shares is considered to be for the purpose of enabling Participants, indirectly as part of the Company's Plan, to acquire Options (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 Options are granted to them.

Accordingly, when the Company 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 (Options issued under the Company's Plan) are granted (acquired).

Question 2b

Are irretrievable cash contributions made by the Company, to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of the Company shares by the Trust to satisfy ESS interests in respect of the Participants, deductible to the Company under section 8-1 of the ITAA 1997 in the income year when the contributions are made, where the contribution is made after the acquisition of the relevant ESS interests?

Answer

A deduction for the purchase of shares or to fund subscription for shares to satisfy the existing obligations arising from the grant of ESS interests is allowable to the Company in the year in which the money was paid to the trustee, under section 8-1 of the ITAA 1997. This is consistent 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 which considers the timing of deductions allowable to an employer in respect of money provided to the trustee of an employee share trust.

As discussed in the previous answer to question 2a, section 83A-210 of ITAA 1997 applies if, under an arrangement, an amount of irretrievable contributions are made to the trustee to acquire shares to satisfy future obligations under the Company's Plan, which is before the grant of the ESS interests that are Options, to participating employees.

Section 83A-210 of the ITAA 1997 will not apply where the Company or its subsidiaries make irretrievable contributions to the EST to fund the acquisition of shares by the trust to satisfy ESS interests, where the contribution is made after the acquisition of the relevant ESS interests.

In this situation, the irretrievable contribution by the Company to the trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which irretrievable contributions are made.

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the arrangement where irretrievable contributions are made to the Trust to fund the acquisition of the Company's shares in respect of Participants, where a share is a fully paid ordinary share in the capital of the Company?

Answer

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 the discretion 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 subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies.

The Scheme

A scheme is defined in subsection 177A(1) of the ITAA 1936 which states:

(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 arrangements including provision of ESS interests under the Company's Plan, the creation of the EST - (including the Trust Deed), and the payment of the irretrievable cash contributions to the Trustee.

Tax Benefit

'Tax benefit' is defined in subsection 177C(1) of the ITAA 1936 of which the relevant paragraph is:

Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

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

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

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

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

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

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

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

Rather than entering into the Scheme, other alternatives include:

• Alternative 1: The Taxpayer could fund the purchase of Shares on-market via a broker in the name of the Participant upon exercise of the Options. Under this alternative, a tax deduction would be available to the Taxpayer for the purchase cost of the Shares.

• Alternative 2: The Taxpayer could remunerate employees via payments of salary, bonuses or superannuation contributions (i.e. cash equivalent amounts based on the value of the Shares) rather than grant Options and deliver Shares. Under this alternative, payments of the additional cash amounts would be deductible to the Taxpayer.

• Alternative 3: The Taxpayer could issue new Shares directly to Participants when Options are exercised. Under this alternative, the Taxpayer would be entitled to a tax deduction for costs incurred in issuing and transferring the Shares, but is unlikely to receive a deduction for the cost / value of the Shares issued.

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

Dominant purpose

Subsection 177D(2) of the ITAA 1936 sets out certain factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit. For Part IVA to apply, subsection 177A(5) of the ITAA 1936 requires the purpose of obtaining a tax benefit to be the 'dominant purpose' for undertaking the scheme.

In considering whether Part IVA applies, it is necessary to compare the following factors from paragraph 177D(2)(b) between the scheme as proposed and the relevant alternate action:

i. the manner in which the scheme was entered into or carried out

ii. the form and substance of the scheme

iii. the time at which the scheme was entered into and the length of the period during which the scheme was carried out

iv. the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme

v. any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme

vi. any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme

vii. any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out

viii. the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi).

(i) The Manner of the Scheme

The inclusion of the EST in the scheme does give rise to a tax benefit, but the Applicant contends that the presence of the EST provides other commercial benefits. In particular, in its application, it provides:

• The Trust was established to provide the following commercial benefits that are not available if the Shares were provided directly by the Company to participants (under Alternative 3): A company is unable to hold its own shares. The Trust is a vehicle enabling the Taxpayer to effectively acquire and hold its own Shares for the purposes of fulfilling its obligations resulting from new and existing grants under the Plan

• The Trust facilitates the acquisition of Shares either on-market or by a new issue of Shares by the Company.

• The Trust allows the Company to place a disposal restriction on Shares, requiring that Shares allocated to a Participant on the exercise of Options are held by the Trust for a specified period after the vesting date.

• The Trust provides an arm's length vehicle for acquiring and holding Shares in the Company, either by way of new issue or acquiring on-market, i.e., providing flexibility relating to capital management.

• Contributing to the Trust may enable the Company to hedge against share price growth where Shares are to be purchased on-market (i.e, by acquiring Shares before they are required to be allocated to Participants). Making a contribution to the Trust, regardless of whether Shares are to be acquired on-market or via a subscription for new Shares ensures a consistent process whether the Company is required to fund the Trust to meet the related cost of providing the Shares.

• The Trust provides the flexibility to acquire and hold Shares that will be allocated to employees under the Plan. When vesting conditions are not met, Options are forfeited and the Trust enables Shares held for such forfeited Options to be 'recycled' to satisfy other grants of Options.

• Shares may be delivered to employees in order to satisfy exercise of Options where such exercise occurs outside of a trading window.

• The Trust establishes independent records and accounts for participating employees.

• Sufficient Shares may not be available on market should a vesting occur in certain circumstances eg in a takeover scenario as contemplated in the Plan. Therefore the Trust allows the Taxpayer to prepare for this potential vesting event by issuing Shares to the Trust before the Change of Control occurs. The Trustee may then allocate Shares to Participants in a timely manner, and in accordance with any transaction timeline which may be imposed on the Taxpayer and the Acquirer.

Further, it is noted that the arrangement is not deliberately and intentionally established close to the end of the Company's income year nor is it intended that the Company will provide large up-front payments to provide for the EST's operations for several years into the future (as happened in Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210.) Rather, the Company will fund the EST on a recurring basis as the need arises.

The manner of the scheme does not support a dominant purpose of obtaining a tax benefit.

(ii) The Form and Substance

The substance of the scheme is the provision of remuneration in the form of the Company's shares to Participants who participate in the Plan. It takes the form of payments of the Exercise Price by Participants, and payments by the Company to the Trustee who acquires the Company's shares and transfers them to Participants.

While existence of the EST confers a tax benefit, it cannot be concluded that it is the only benefit provided as outlined above. The Company has argued that the form of the arrangement with the EST provides the scheme with multiple non-tax benefits and this is accepted.

(iii) The Timing of the Scheme

As noted above, the scheme has not been established at a time to provide a substantial year-end deduction to the Company nor with a contribution sufficiently large to fund the EST for several years, but by recurring (periodic) contributions. There is nothing in this factor to suggest a dominant purpose of seeking to obtain a tax benefit in relation to the scheme.

(iv)The Result of the Scheme

The result of the scheme is to provide the Company with allowable deductions for the contributions they make to the Trustee. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of the Company to achieve a business outcome. The Applicant has argued that the EST and the Company are an integral part of the overall remuneration strategy of the Company which are likely to result in improved employee performance and ultimately will improve the Company' operating performance. This is the intended outcome and it is to be expected that a deduction would normally be allowable in these circumstances.

(v) Any Change in the Financial Position of the Company

As noted above, the Company makes irretrievable contributions to the Trustee and those contributions constitute a real expense with the result that the Company's financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with an EST as part of the scheme than would be the case if the Company provided shares to Participants directly, there is nothing pointing to a dominant purpose of obtaining a tax benefit.

(vi) Any Change in the Financial Position of other Entities or Persons

The contributions by the Company to the Trustee will form part of the corpus of the EST and must be dealt with by the Trustee in accordance with the terms of the Trust Deed i.e. for the acquisition the Company's shares to provide to Participants under the Plan. The Company is not a beneficiary of the EST and its contributions cannot be returned to it in any form except where the Trustee acquires the Company's shares from the Company by subscribing for new issues at market value.

Therefore, the contributions made by the Company amount to a real change to the financial position of the Trustee. The financial position of Participants in the schemes will also undergo a real change.

There is nothing pointing to a dominant purpose of obtaining a tax benefit.

(vii) Any Other Consequence

Not relevant to this scheme.

(viii) The Nature of any Connection between the Company and any Other Persons

The relationship between the Company and the Participants of the Plan is one of employer/employee. The Trustee is under a fiduciary obligation to act in the interests of the employees who participate in employee share schemes and in particular, in this case, the Company's Plan. The contributions made by the Company to the Trustee are commensurate with the Company's stated aim of recognising the ongoing ability of employees and their contribution to the long term performance and success of the Company. There is nothing to suggest that the parties to the employee share scheme are not acting at arm's length to one another.

There is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit.

Accordingly provided that the scheme as implemented is materially identical to the scheme described in this ruling it is considered that Part IVA of the ITAA 1936 would not apply in respect of your arrangement.

Question 4

Is the provision of Options by the Company to employees of the Company (or subsidiary member employees) a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

The provision of Options

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.

Division 83A will apply, broadly, if an ESS interest is acquired at a discount, under an employee share scheme. If Division 83A applies, then either Subdivision 83A-B or 83A-C will apply.

A Participant's beneficial interest in an option will constitute an ESS interest as it constitutes a right to acquire a beneficial interest in a Share to be held on their behalf by the Trustee.

The term 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as:

...a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of:

(a)        the company; or

(b)        *subsidiaries ….

in relation to the employees' employment.

For the purposes of subsection 83A-10(2) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 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 as it constitutes an arrangement that is operated in accordance with the Plan Rules and incorporates the use of the EST operated in accordance with the Trust Deed.

Under the plan, an ESS interest (being a beneficial interest in a Share (an option) is provided to Participants - being employees of the employer in relation to their employment.

The ESS interests will be acquired at a discount as the Participants will acquire the Options for no consideration.

The Commissioner accepts that the Company's Plan comprise an employee share scheme, that the Options are ESS interests and that Subdivision 83A-B or 83A-C applies to those interests.

Accordingly, the acquisition of ESS interests (being the Options) pursuant to the Plan 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 the Company's shares upon exercise of Options

The provision of Shares to employees, on the exercise of an Option under the Plan should not be subject to fringe benefits tax. This is because the benefit arises due to the exercise of the Option, and not in respect of employment (ATO ID 2010/219).

Question 5

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

Answer

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 teed contains the clause titled 'Objects of the Trust' and provides that:

The objects of the Trust are for the sole purpose of:

(a) acquiring and holding Shares; and

(b) providing beneficial interests in those Shares, under the Plan to Beneficiaries;

(c) conducting other activities that are merely incidental such as the holding of cash and other assets as the Trustee considers necessary to carry out the objects of the Trust.

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

• the EST acquires shares in a company; 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's 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, the Company 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 the Company.