Edited version of your written advice

Authorisation Number: 1012861843387

Date of advice: 28 August 2015

Ruling

Subject: Employee Share Scheme

Question 1

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

Answer

Yes

Question 2a

Are irretrievable contributions made by the taxpayer, to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, the taxpayer's shares by the Trust to satisfy ESS interests in respect of Participants, deductible to the taxpayer at a time determined by section 83A-210 of the Income Tax Assessment Act 1997, where the contributions are made before the acquisition of relevant ESS interests?

Answer

Yes

Question 2b

Are irretrievable contributions made by the taxpayer, to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, the taxpayer's shares by the Trust to satisfy ESS interests in respect of Participants, deductible to the taxpayer under section 8-1 of the Income Tax Assessment Act 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

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 July 2015

Issue 2 - Part IVA

Question 1

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

Answer

No

This ruling applies for the following period(s)

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on

1 July 2015

Issue 3 - Fringe Benefits Tax

Question 1

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

Answer

No

This ruling applies for the following period(s)

Year ended 31 March 2016

Year ended 31 March 2017

Year ended 31 March 2018

Year ended 31 March 2019

Year ended 31 March 2020

The scheme commences on

1 July 2015

Relevant facts and circumstances

Summary

Documents provided with the application:

1. Template letter invitation for the taxpayer's Employee Share and Option Plan

2. Template Award letter for shares

3. Plan rules for the taxpayer's Employee Share and Option Plan

4. Employee Share Trust Deed (the Trust Deed)

5. Summary of all open Share and Option grants awarded by the company.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Subsection 51(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

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

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

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

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 Subsection 83A-25(1)

Income Tax Assessment Act 1997 Section 83A-35

Income Tax Assessment Act 1997 Section 83A-105

Income Tax Assessment Act 1997 Section 83A-210

Income Tax Assessment Act 1997 Section 83A-205

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

Reasons for decision

Issue 1

Question 1

An employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an EST that is either:

• incurred in gaining or producing the employer's assessable income ('first limb'), or

• necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income ('second limb')

to the extent that the contribution is not private or domestic in nature, is not of capital, or of a capital nature and does not relate to the earning of exempt income or non-assessable non-exempt income.

To qualify for a deduction under section 8-1 of the ITAA 1997, a contribution to the trustee of an EST must be incurred. There is no statutory definition of the term 'incurred'.

As a broad guide, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance (TR 94/26).

A contribution made to the trustee of an EST is incurred only when the ownership of that contribution passes from an employer to the trustee of the EST and there is no circumstance in which the employer can retrieve that contribution - Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339 (Pridecraft); Spotlight Stores Pty Ltd v Commissioner of Taxation [2004] FCAFC 339 (Spotlight).

In the present case, the taxpayer has established the EST for the purposes of facilitating the acquisition, holding and allocation of shares to meet its obligations under the employee share plan. The taxpayer has a legal obligation to provide the shares to participants in accordance with the Plan rules and to fund the EST to acquire, hold and allocate the shares for that purpose. Therefore, the taxpayer will incur an outgoing at the time it makes irretrievable contributions to the trustee of the EST.

Further, to be deductible under section 8-1 of the ITAA 1997, a contribution must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

To satisfy the second limb of section 8-1 of the ITAA 1997, there must be the required connection between the outgoing and the business. An expense will have the relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' (Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56) and Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213.

Draft Taxation Ruling TR 2014/D1 Income tax: employee remuneration trust arrangements provides the Commissioner's view on a broad scope of taxation consequences for employers, trustees and employees who participate in an employee remuneration trust arrangement.

Paragraph 14 of TR 2014/D1 relevantly provides that where an employer:

• carries on a business for the purpose of gaining or producing assessable income and engages employees in the ordinary course of carrying on that business;

• makes a contribution to the trustee of an ERT [employee remuneration trust]; and

• at the time the contribution is made, the primary purpose of the contribution is for it to be applied, within a relatively short period, to the direct provision of remuneration of employees (who are employed in that business),

then such a contribution will satisfy the nexus of being necessarily incurred in carrying on that business.

In Spotlight and Pridecraft, both the Federal Court and Full Federal Court agreed that the employer's contribution to an EST was deductible under former subsection 51(1) of the ITAA 1936 because the employer intended from the outset that the contribution be applied by the trustee of the ERT to provide bonuses for employees over a five year period. The contribution was characterised as a 'prepayment of bonuses'.

Paragraph 178 of TR 2014/D1 makes clear that the Commissioner will generally accept a relatively short period of time for the trustee of an EST to diminish a contribution for the direct provision of remuneration to employees to be up to five years from the date the contribution was made by an employer to the trustee of an EST. However, where the contribution has been made to facilitate an employee having an interest in the EST corresponding to a particular number of shares (or right to acquire shares) in the employer or in its subsidiaries to which Subdivision 83A-C of the ITAA 1997 applies, a relatively short period of time for these arrangements will generally be accepted as being up to seven years from the date the contribution is made.

Under the Plan, the maximum time between the allocation of shares subject to trading restrictions until the removal of trading restrictions is 3 years. The irretrievable contributions made by the taxpayer to the trustee of the EST are in the nature of an employee remuneration cost incurred in carrying on the taxpayer's business for the purposes of deriving assessable income. Consistent with the guidance provided by paragraph 178 of TR 2014/D1, the contribution will be applied with a relatively short period to the direct provision of remuneration of employees (through the allocation of shares).

On the facts, the Commissioner does not consider the contributions to be a loss or outgoing:

• of a private or domestic nature

• related to the earning of exempt income or non-assessable, non-exempt income, or

• for which deductibility is precluded by another provision of the ITAA 1997 or ITAA 1936.

Accordingly, it is considered that the irretrievable contributions made by the taxpayer to the trustee of the EST will be an outgoing incurred in carrying on a business and will satisfy the nexus of being necessarily incurred in carrying on that business for the purpose of gaining or producing assessable income.

Whether the contribution could be capital or of a capital nature

Where a contribution satisfies either limb of subsection 8-1(1) of the ITAA 1997, it may still be capital or of a capital nature. Pursuant to subsection 8-1(2) of the ITAA 1997, the contribution will not be deductible to an employer under section 8-1 to the extent to which it is capital of or a capital nature.

Whether an outgoing is capital or revenue in nature can generally be determined by reference to the test articulated by Dixon J in the leading case on the capital/revenue distinction, Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337. In that case Dixon J stated that:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay…

TR 2014/D1, discusses when a contribution made to the trustee of an employee share trust may be of a capital nature. Relevantly, paragraphs 186 and 187 of TR 2014/D1 state:

186. A contribution to the trustee of an ERT is of capital or of a capital nature, when the contribution secures for an 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.

187. A contribution by an employer to the trustee of an ERT is considered to be capital or of a capital nature, in whole or in part, where the contribution…

• is ultimately and in substance, applied by the trustee to acquire a direct interest in the employer (for example shares).

In the present case, irretrievable contributions are provided by the taxpayer, as an employer to the trustee of the EST. The contributions may ultimately and in substance be applied by the trustee of the EST to subscribe for equity interests in the taxpayer's shares. In this way the taxpayer could be considered as having acquired an asset or advantage of an enduring nature which is capital or of a capital nature, in whole or in part.

In cases where a contribution is made for the purpose of securing advantages for the employer of both a capital and revenue nature, section 8-1 of the ITAA 1997 may require the contribution to be apportioned into deductible and non-deductible components. However, paragraph 198 of TR 2014/D1 provides that where the advantages of a capital nature are only expected to be very small or trifling in comparison, apportionment may not be required.

Relevantly, paragraph 202 of TR 2014/D1 states:

…where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period (as discussed in paragraph 178…) of the contribution being made, it is considered that any amount of the contribution attributable to securing a capital structure advantage will only be very small or trifling where the employer:

• intends that any direct interest in the employer acquired by the trustee of the ERT (for example shares) will be transferred to employees within that relatively short period, and

• does not anticipate that such shares will be on-sold to third parties at that time or shortly thereafter.

Under the taxpayer's employee share plan, the time between the making of the contribution and the remuneration of the employee by the allocation of shares to the employee is typically a maximum of three and a half years and this is considered to be a 'relatively short period' as discussed in paragraph 178 of TR 2014/D1.

Therefore, the Commissioner accepts that any advantages of a capital nature that may arise from the irretrievable contributions made by the taxpayer to the trustee of the EST are expected to be very small or trifling and that apportionment of the deductible amount under section 8-1 of the ITAA 1997 is not required.

Irretrievable contributions made by the taxpayer to the trustee of the EST are deductible under section 8-1 of the ITAA 1997. To the extent that any part of the contribution is of capital or of a capital nature, the Commissioner accepts that such amounts will be very small or trifling, such that apportionment to account for any capital component of the contribution would not be required.

Question 2a

Irretrievable contributions that are deductible under section 8-1 of the ITAA 1997 would generally be an allowable deduction in the income year in which the outgoing was made. However, under certain circumstances, the timing of the deduction is instead determined under section 83A-210 of the ITAA 1997.

Section 83A-210 of the ITAA 1997 provides that:

(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.

An ESS interest, in a company, is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. An employee share scheme is a scheme under which the ESS interests in the company (or subsidiaries of the company) are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2) of the ITAA 1997).

Therefore, broadly, section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the trustee of the EST, and the acquisition of ESS interests (directly or indirectly) by the employee under an employee share scheme in relation to their employment.

As established in question 1, the taxpayer (and its subsidiary) make irretrievable contributions to the EST and under the terms of the trust deed, the trustee is required to acquire, hold, and allocate shares to employees participating in employee share plans operated by the taxpayer.

The Plan rules allow the taxpayer to offer employees rights to acquire fully paid shares subject to the terms of the invitation and the Plan rules. The rights meet the definition of ESS interests (subsection 83A-10(1) of ITAA 1997) as they are beneficial interests in rights to acquire beneficial interests in shares in the taxpayer. The Plan meets the definition of an employee share scheme (subsection 83A-10(2) of ITAA 1997) in that it is a scheme under which the rights to shares in the taxpayer are provided to employees or their associates of the taxpayer in relation to the employee's employment.

The arrangement is constituted by the rules for the Plan, the creation of the EST under the trust deed and the provision of money to the trustee of the EST to acquire and hold shares to satisfy the allocation of shares to participants under the ESS. The granting of ESS interests, the provision of the money to the trustee under the arrangement, the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees are all interrelated components of the ESS. All the components of the scheme must be carried out so that the scheme can operate as intended.

The provision of money by the taxpayer or its subsidiary, to the trustee is considered to be for the purpose of enabling the participating employees, directly or indirectly, as part of the ESS, to acquire the ESS interests.

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 taxpayer 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 Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust (ATO ID 2010/103) which considers the timing of deductions allowable to an employer in respect of money provided to the trustee of an employee share trust.

However, where the irretrievable contributions are made by the taxpayer and its subsidiaries to the trustee of the EST before the income year in which the ESS interests are granted to the employee, section 83A-210 will apply. Under section 83A-210 of ITAA 1997, if an amount of irretrievable contributions are made to the trustee under the arrangement to purchase shares in excess of the obligations for the ESS interests already granted, the amount will be deductible in the income year in which the relevant ESS interests are granted to the participating employees, that is the income year in which the employee acquires the ESS interests.

Question 2b

As concluded under question 1 above, the irretrievable contributions made by the taxpayer to the trustee of the EST will be deductible to the taxpayer under section 8-1 of the ITAA 1997.

Further, as explained above in the reasoning for question 2(a), section 83A-210 of the ITAA 1997 applies if, under the arrangement, an amount of irretrievable contributions are made to the trustee to acquire shares to satisfy future obligations under the employee share plan, which is before the grant of the ESS interests that are rights to the shares to participating employees.

Section 83A-210 of the ITAA 1997 will not apply where the taxpayer makes irretrievable contributions to the EST to fund the acquisition of the taxpayer's 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 taxpayer to the trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which the taxpayer makes the contribution.

Issue 2 - Part IVA

Question 1

Law Administration Practice Statement PS LA 2005/24 (PSLA 2005/24) Application of General Anti-Avoidance Rules addresses the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1) of the ITAA 1936. The following requirements must be met before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936:

• a 'tax benefit', as identified in section 177C, was or would, but for subsection 177F(1), have been obtained;

• the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and

• having regard to section 177D, the scheme is one to which Part IVA applies.

The Scheme

Subsection 177A(1) of the ITAA 1936 (subsection 995-1(1) of the ITAA 1997) 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 proposed arrangement under the Plan which utilises contributions made by the taxpayer to the trustee of the EST (in accordance with the trust deed), to fund the acquisition of the taxpayer's shares on behalf of participating employees by the trustee.

Tax Benefit

'Tax benefit' is defined in paragraph 177C(1)(b) of the ITAA 1936 as including:

(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; or…

In order to determine the tax benefit that would be derived by the taxpayer or its subsidiary from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the companies might reasonably have been expected to enter into to achieve the taxpayer's aims in relation to employee remuneration.

The applicant has provided the following counterfactuals:

Alternative 1. The taxpayer could fund the purchase of shares on-market in the name of the participant upon exercise of the options or shares vesting. 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 (ie cash equivalent amounts based on the value of shares) rather than grant awards 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. Under this alternative, the taxpayer would be entitled to a tax deduction for costs incurred in issuing and transferring the shares, but it is unlikely to receive a deduction for the cost/value of the shares issued.

Consideration of the tax advantages of the counterfactuals/alternative forms of remuneration and the proposed scheme suggests there is no tax benefit for the first two counterfactuals because the deductible amounts under both of them would be the same or similar from the taxpayer's tax perspective under the current ESS arrangement. Counterfactual 1 would result in a deduction for the purchase cost of the shares. Counterfactual 2 would equally result in a similar tax benefit as payments of the additional cash amounts would also be deductible to the taxpayer.

However, the third counterfactual acknowledges that if the taxpayer were to issue new shares to fulfil the rights, it would not be entitled to any deduction for the shares, only the costs incurred when issuing and transferring any shares, unless section 83A-205 of the ITAA 1997 was satisfied. This provision requires that:

• the taxpayer must have provided an ESS interest to an individual under an employee share scheme

• the taxpayer did this as the individual's employer (or as the holding company of the employer)

• with the exception of paragraph 83A-35(2)(b) of the ITAA 1997, section 83A-35 must have applied to reduce the amount included in that individual's assessable income under subsection 83A-25(1).

If the shares did meet these conditions, that taxpayer would be entitled to a deduction equal to the amount of the reduction allowable to the individual under section 83A-35 of the ITAA 1997 to a total amount of $1,000.

By contrast the use of the trust arrangement permits the taxpayer, subject to the requirements of sections 8-1 and 83A-210 of the ITAA 1997, to claim a deduction for the full amount of the contributions it makes to the trust. It is probable that this amount would exceed that which would be allowable under section 83A-205 of the ITAA 1997 in the third counterfactual above. Therefore, to the extent of any increased deductions because of the trust arrangement, the taxpayer obtains a tax benefit.

While, for the reasons noted above by the applicant, it is unlikely that it would choose any other incentive plan that did not give rise to an allowable deduction (and therefore there would not be the necessary tax benefit), the analysis below proceeds on the assumption that the Commissioner would in fact be able to identify a relevant tax benefit.

Section 177D of the ITAA 1936 provides that Part IVA only applies if, after having regard to certain factors specified in subsection 177D(2) of the ITAA 1936, it would be concluded that a person who entered into the scheme did so for the sole or dominant purpose of enabling the tax payer to obtain the tax benefit.

Subsection 177D(2) of the ITAA 1936

Subsection 177D(2) of the ITAA 1936 sets out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit:

(a) the manner in which the scheme was entered into or carried out;

(b) the form and substance of the scheme;

(c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(e) 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;

(f) 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;

(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

(a) The manner of the scheme

In considering whether or not Part IVA applies, the necessary comparison to be made in relation to the factors listed in paragraph 177D(b) of the ITAA 1936 is between the scheme as proposed and the relevant counterfactual.

The inclusion of the EST in the scheme does give rise to a tax benefit, but the taxpayer has provided the following commercial reasons for the operation of the trust:

As a company, the taxpayer is unable to hold its own shares under Australian corporations law. The trust is a vehicle which will enable 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. Using the EST allows the taxpayer to:

• Warehouse shares in the EST (ie acquire and hold shares before they are to be allocated to participants).

• Hedge the cost of satisfying rights by funding the acquisition of shares via the trust at the time rights are granted or at any appropriate time during the performance/vesting period.

• 'Recycle' shares that are no longer required for rights that are forfeited under the Plan, to satisfy other rights.

• Subject shares to a restriction on dealing (for example, to enforce the company's share trading policy or to enforce any holding lock), for a specified period of time after vesting/exercise of rights, during which time they will be held in the EST (should the taxpayer decide to impose such restrictions). The EST is the legal owner of the shares until they are transferred out of the EST to the participant when the holding lock ends.

• Have greater choice in the source of the shares used to satisfy rights and options eg market purchase, new issue or other transfer.

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

• Shares can be acquired in such manner as the taxpayer considers appropriate, consistent with its capital management strategy at the particular time.

It is accepted that the trust provides benefits to the operation of the scheme that would not be available if the shares were provided directly by the taxpayer in the third counterfactual.

(b) The Form and Substance of the scheme

The substance of the scheme is the provision of remuneration in the form of shares to employees who participate in the ESS. It takes the form of payments by the taxpayer to the trustee which acquires the shares and transfers them to employees.

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

(c) The timing of the scheme

The irretrievable cash contributions made by the taxpayer to the trustee enable the trustee to acquire shares in the taxpayer in satisfaction of employee rights and to use market conditions advantageously to meet potential employee share requirements in advance.

The application of section 83A-210 to cash contributions made before the employee receives the right, prevents any timing advantage for the deductibility of those contributions.

(d) The result of the scheme

The result of the scheme is to provide the taxpayer with allowable deductions for the contributions they make to the EST. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of the taxpayer to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances.

(e) Any change in the financial position of the taxpayer

As noted above, the taxpayer makes irretrievable cash contributions to the trust and those contributions constitute a real expense with the result that the taxpayer's financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with a trust as part of the scheme, in contrast to the taxpayer providing shares to employees directly, there is nothing artificial, contrived or notional about the taxpayer's expenditure.

(f) Any change in the financial position of other entities or persons

The contributions by the taxpayer to the trustee will form the corpus of the trust and must be dealt with by the trustee in accordance with the terms of the trust deed, that is, for the acquisition of shares to ultimately be provided to participants in the ESS. The taxpayer is not a beneficiary of the trust and its contributions cannot be returned to it in any form except where the trustee acquires shares from the taxpayer by subscribing for new shares at market value. Therefore, the contributions made by the taxpayer amount to a real change to the financial position of the trustee.

The financial position of employee participants and their associates in the scheme will also undergo a real change. This will be the case whether the shares are acquired through the EST or provided directly by the taxpayer. There is nothing artificial, contrived or notional about these changes.

(g) Any other consequence

There are no other consequences for the taxpayer, their employees and or their associates that would be relevant as evidence of a dominant purpose of obtaining a tax benefit.

(h) The nature of any connection between the taxpayer and any other persons

The relationship between the taxpayer and the participants in the Plan is one of employer/employee. The parties are unrelated.

The contributions made by the taxpayer to the trustee are commensurate with that taxpayer's aim of providing the participants with remuneration in a form that aligns their personal financial rewards with the risks and returns of the taxpayer's shareholders. There is nothing to suggest that the parties to the employee share scheme are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit.

Conclusion - the purpose of the scheme

A consideration of all the factors referred to in subsection 177D(2) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the taxpayer's employees who participate in the scheme in a form that promotes the Group's business objectives, rather than to obtain a tax benefit.

Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the taxpayer in relation to irretrievable contributions made by the taxpayer to the trust to fund the acquisition of employer shares in accordance with the scheme as outlined above.

Issue 3

Question 1

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

Pursuant to subsection 136(1) of the FBTAA, a fringe benefit is defined to exclude:

…

(h) 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; or

(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)…

Subsection 995-1(1) of the ITAA 1997 provides that the meaning of 'employee share trust' (EST) is defined as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2) of the ITAA 1997 is a trust whose sole activities are:

(a) obtaining *shares or rights in a company; and

(b) ensuring that *ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to *associates of employees, of:

(i) the company; or

(ii) a *subsidiary of the company; and

(c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b).

The terms 'ESS interest' and 'employee share scheme' which are defined in section 83A-10 of the ITAA 1997, were considered in Questions 2a and 2b and it is accepted the Plan is an employee share scheme under which ESS interests (being rights or restricted shares) are provided to employees, or associates, or employees of the taxpayer's group.

The taxpayer has established the EST and under the trust deed, the EST's sole activities are to acquire, hold and allocate shares to employees participating in employee share plans operated by the taxpayer. There are some incidental activities undertaken by the trustee to manage and administer the EST, such as the operation of bank accounts.

Therefore, the EST is an employee share trust as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130(4)(b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the trustee of the EST from being a fringe benefit.

Therefore, the irretrievable contributions the taxpayer makes to the trustee of the EST, to fund the subscription for, or acquisition on-market of, the taxpayer's shares in accordance with the trust deed are not a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986.