Edited version of your written advice

Authorisation Number: 1012919461882

Date of advice: 9 December 2015

Ruling

Subject: Employee share scheme

Question 1

Will the Commissioner confirm that the contribution of the funds by the Company to the Trust will not be a fringe benefit for the purpose of the Fringe Benefits Tax Assessment Act 1986 ("FBTAA")?

Answer

Yes

Question 2

Will the Commissioner confirm that the irretrievable contributions made by the Company to the Trust to enable the Trust to acquire shares, by subscribing for those shares or purchasing them on market, will be an allowable income tax deduction to the Company under section 8-1 of the Income Tax Assessment Act 1997 ("ITAA 1997")?

Answer

Yes

Question 3

Will the Commissioner confirm that the deduction for the Company in respect of the irretrievable contributions to the Trust will be allowed in the year of income when the contribution is made to the Trust, provided it is in respect of rights to acquire shares that have previously been granted to employees?

Answer

Yes

Question 4

Will the Commissioner confirm that he will not make a determination under Part IVA of the Income Tax Assessment Act 1936 ("ITAA 1936") in relation to any part of these arrangements?

Answer

Yes

This ruling applies for the following periods:

1 July 20XX to 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This description of facts is based on the following documents, which form part of and are to be read with this description:

• Your private ruling application (and appendices) lodged to the ATO.

• Plan Rules.

• Trust Deed.

Background

The Company is listed on the ASX.

The Company has established a Performance Rights and Options Plan ("Plan"), an employee share plan as part of its long-term strategy of creating shareholder wealth. The Company has established the Plan in accordance with governing rules ("Plan Rules").

The Company has also established an employee share scheme trust ("Trust") for the purpose of obtaining shares for the benefit of participating senior executives. The Company intends that the Trust will be available to facilitate the requirements of any future equity plans it implements.

Plan

Under the Plan, senior executives are provided with performance rights, being a right to acquire shares in the future at no cost, or options, being a right to acquire shares in the future on payment of an exercise price. Both performance rights and options are subject to the satisfaction of any vesting conditions.

The purpose of the plan is to assist in the reward, retention and motivation of eligible participants, and attract new employees. The Plan will facilitate the Company's long-term strategy of creating shareholder wealth by:

• Rewarding hard work of senior executives in a way that is competitive, market related and cost-effective for the business;

• Motivating and promoting long-term retention of senior executives in the Company;

• Reflecting importance of senior executives to the future success of the Company;

• Enabling the executives to benefit in the long term growth and ownership of the Company by participating in the Plan;

• Attracting new executive talent to achieve the Company's strategy.

Trust

The Company's reasons for utilising a Trust include:

• The Trust provides employees with knowledge that the shares, and any incidental dividend income or associated rights, are held independently of the Company. Further the trustee has a fiduciary obligation to act in the interests of the beneficiaries.

• The Trust enables shares to be acquired progressively over time either on-market or by subscription.

• The Company can manage its cost and share capital position.

• The Trust provides opportunity to improve cash flow planning, as it gives the Company flexibility to determine the most appropriate time to make contributions.

• The Trust is the most appropriate vehicle to be used to acquire shares and accumulate dividend income during the vesting period.

• The Trust enables easier administration of the Plan.

The relevant features of the Trust are:

• The sole purpose and activities of the Trust are limited to obtaining shares for the benefit of the participants in the Plan and other incidental activities (such as distributing dividends to employees and meeting the administrative costs of the Trust).

• The Trustee must use any funds contributed to the Trust to acquire shares to provide to the employees of the Company in satisfaction of any share or right grant.

• The contributions made to the Trust cannot be refunded, repaid or returned to the Company.

• The Trustee has all powers that are legally permissible for the Trustee to exercise, including the power to establish and/or support the employee share plan.

• The trustee has the power to acquire shares by an on-market purchase, by subscribing for shares in the Company, or through a combination of both.

• The Trustee has the power to sell, allocate or transfer shares in accordance with the plan rules.

• The Trustee does not have the power to do anything that may cause it to fail the definition of an employee share trust in section 130-85(4) of the ITAA 1997.

• The beneficiaries of the Trust are participants who participate in the Company's employee share plan, a trust established and maintained for the benefit of all employees of the tax consolidated group, or other employees participating in the long term incentive plan.

• The Company will not be a beneficiary under the Trust Deed. The Company has no legal or beneficial entitlement to any of its shares forming part of the Trust fund at any time, and may not acquire such an interest.

• The Trustee has the discretion to distribute any capital receipts, dividends, distributions or other entitlements received in respect of any shares to the beneficiaries of the Trust. No employee will have beneficial entitlement to the shares or income of the Trust unless the Trustee exercises its discretion to distribute same.

• To the extent the Trust derives interest or dividend income from holding shares that is in excess of the costs of the Trust, such income may be used to acquire more shares to deliver to employees or may be distributed to employees who have become beneficially entitled to the income.

• All the shares acquired by the Trust will be ordinary shares in the Company. The shares acquired by the Trustee will be registered in the name of the Trustee as the legal owner of the shares.

• At all times the Trustee's decision will be made in accordance with the Trust Deed and in fulfilment of the Trustee's fiduciary duty to the beneficiaries.

Under the Trust Deed, contributions to the Trust are made on the following basis:

• The Trust may acquire shares in the Company determined appropriate and necessary by management;

• The funds are transferred to the Trust to enable it to acquire shares in the Company;

• The amount of contributions made to the Trust will depend on the number of rights granted to employees, the estimated forecast of performance rights vesting and the number of shares held at that time by the Trustee.

• To ensure contributions to the Trust are timely, the CEO of the Company and any nominees of the CEO have the authority to approve contributions.

• Management will review forecasts and provide periodic recommendations to the Board;

• The Board will provide its instructions to the Trustee on how the Trustee should acquire the shares, i.e. whether by market purchase or subscription;

• Trustee will consider the Board's instructions, have regard to its broader obligations under the Trust Deed and trust law and act accordingly;

• If Trustee's course of action includes subscription, then the Company must issue to the Trustee the requisite number of shares on behalf of the participants.

The Company has already made a number of contributions to the Trust earlier this year. The Company proposes to make further contribution to the Trust prior to the vesting date in order to ensure the Trust will have appropriate shares having regard to potential vesting in 20XX and subsequent years.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

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

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 section 177CB

Income Tax Assessment Act 1936 section 177CB(1)

Income Tax Assessment Act 1936 subsection 177CB(2)

Income Tax Assessment Act 1936 subsection 177CB(3)

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1936 subsection 177F(1)

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 83A

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

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

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 130-85

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

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

Income Tax Assessment Act 1997 paragraphs 130-85(4)(b)

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

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

Reasons for decision

Question 1

Summary

As the Trust is an employee share trust, contributions made by the Company to the Trust to fund the acquisition of shares in the Company will be excluded from being a fringe benefit.

Detailed reasoning

The definition of a fringe benefit in paragraph 136(1)(ha) of the FBTAA states that a fringe benefit does not include:

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) of the ITAA 1997 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' (ESS) 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).

An 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) in relation to the employees' employment. Subsection 83A-10(1) defines an ESS interest to be a beneficial interest in a share in the company, or a right to acquire a beneficial interest in a share in the company.

Under the Plan, performance rights are granted to employees in relation to the employee's employment, providing the employees a right to acquire a beneficial interest in a share in the Company. The Plan is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which performance rights and ultimately shares are provided to eligible employees in relation to the employee's employment.

The Trust Deed provides that the Trust will be managed and administered so that it is an employee share trust. The sole activities of the Trust are receiving funds from the Company for the purpose of acquiring shares, holding those shares until they vest in the employee and then transferring them to the employee in accordance with the Trust Deed and relevant Plan Rules. The Trust also has the power to carry out other clerical and administrative functions, which are merely incidental to the operation of the Trust. ATO ID 2010/108 explains the activities which are considered to be merely incidental.

Therefore, the Trust is an employee share trust as the activities of the Trust involve acquiring shares and allocating beneficial interests in those shares to employees. The other activities of the Trust are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Hence, the contributions by the Company to the Trust will be excluded from being a fringe benefit under paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

Question 2

Summary

Contributions made by the Company to the Trust to enable the Trust to acquire shares are irretrievable and necessarily incurred in carrying on the business of the Company. There is nothing to indicate that the contributions should otherwise be excluded by subsection 8-1(2) of the ITAA 1997. As such the contributions are deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

The contributions made by the Company to the Trust will be deductible under section 8-1 of the ITAA 1997 if either of the positive limbs in subsection 8-1(1) are satisfied and none of the negative limbs in subsection 8-1(2) apply.

Subsection 8-1(1) of the ITAA 1997 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 assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. 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.

Losses or outgoings incurred

The Company provides contributions to the Trust to be used in accordance with the Trust Deed and Plan Rules for the sole purpose of enabling the Trustee to acquire shares in the company for the benefit of eligible employees.

A contribution will be incurred when ownership of the contribution passes from an employer to the trustee and the employer cannot retrieve the contribution.¹ The contributions made by the company to the Trustee are irretrievable as they cannot be refunded, repaid or returned to the company.

Therefore the contributions are considered to be losses or outgoings incurred for the purposes of subsection 8-1(1).

Relevant nexus

A sufficient connection must exist between the contributions made to the Trustee and the derivation of assessable income by the Company for a deduction to be available under section 8-1 of the ITAA 1997.²

The purpose of the Plan is to assist in the reward, retention and motivation of eligible participants, and attract new employees. The Plan would enhance the Company's profits, provide employees with the opportunity to participate in the profit growth of the Company and improve business performance by aligning financial rewards for employees with those experienced by the company's shareholders. The purpose of the contributions is to fund the acquisition of shares in the Company by the Trustee to be allocated to employees under the Plan. The contributions to the Trust form part of the overall remuneration structure of the company.

Accordingly, there is a sufficient nexus between outgoing contributions made by the Company to the Trustee and the derivation of the Company's assessable income.

Capital

Deductions are not allowable to the extent that the contributions are capital in nature. Under the Plan, the outgoings incurred by the Company in carrying 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.

Further, ATO ID 2010/103 states that the provision of money to the trustee of an employee share trust by the employer for the purpose of remunerating its employees under an employee share scheme is an outgoing in carrying on the employer's business and is deductible under section 8-1 of the ITAA 1997.

As established in question 1 above, the Plan is an employee share scheme and the Trust is an employee share trust. Therefore, the irretrievable contributions made by the Company to the Trust to enable the Trust to acquire shares will be an allowable income tax deduction under section 8-1 of the ITAA 1997.

Question 3

Summary

The irretrievable contributions will be deductible to the Company in the income year in which they are made by the Company to the Trust, provided the contributions are made in respect of rights already granted to employees.

Detailed reasoning

The deduction for irretrievable contributions under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the Company incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.

Section 83A-210 of the ITAA 1997 applies if 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.

Section 83A-210 will operate in circumstances where the contribution occurs before the time the beneficiary acquires the ESS interest. In such circumstances section 83A-210 will operate to delay the deduction under section 8-1 until such time as the relevant ESS interest is acquired by the employee.

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 right to acquire a beneficial interest in a share in the company. As established in question 1 above, the performance right provided to the employees are ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, as they are a right to acquire a beneficial interest in a share in the Company.

Therefore, provided the rights to which the contributions relate have been granted at the time the contributions are made, section 83A-210 will not apply and the contributions will be deductible under section 8-1 of the ITAA 1997 in the income year they are incurred.

Question 4

Summary

Part IVA will not apply as the Commissioner does not consider that any party to the scheme entered into the scheme for the sole or dominant purpose of obtaining a tax benefit.

Detailed reasoning

Part IVA is a general anti-avoidance provision, giving the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would (but for section 177F) have been obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

In order for Part IVA to apply, the following requirements must be satisfied:

• there is a scheme to which Part IVA applies;

• a tax benefit was or would (but for subsection 177F(1)) have been obtained;

• the identified tax benefit was or would have been obtained in connection with the identified scheme; and

• the person who entered into or carried out the identified scheme (or any part of the scheme) did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit.

Scheme

A 'scheme' is broadly defined in subsection 177A(1) as:

(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.

Under this definition, a scheme can be a series of steps taken together or a single step.

What constitutes a scheme is ultimately meaningful only in relation to the tax benefit that has been obtained since the tax benefit must be obtained in connection with the scheme. Likewise, the dominant purpose of a person entering into or carrying out the scheme, and the existence of the tax benefit, must both be considered against a comparison with an alternative.

The scheme for the purposes of section 177A(1) of the ITAA 1936 is the establishment of the Plan and the Trust, as well as payments by the Company to the Trust to enable the Trust to obtain shares for the benefit of the participants in the Plan.

Tax Benefit

Having established the existence of a scheme, Part IVA will only apply if it is determined that a tax benefit was or would have been obtained in connection with that scheme.

Broadly, subsection 177C(1) identifies four types of tax benefits as follows:

• an amount not being included in the taxpayer's assessable income;

• a deduction being allowable to the taxpayer;

• a capital loss being incurred by the taxpayer; and

• a foreign tax credit being allowable to the taxpayer.

In order to determine that a tax benefit has been obtained, it is necessary to compare the tax consequence of the scheme in question with the tax consequences that would have arisen, or might reasonably be expected to have arisen, if the scheme had not been entered into or carried out.

Section 177CB - The bases for identifying tax benefits

For schemes entered into or carried out on or after 16 November 2012 newly enacted section 177CB provides the framework for deciding under section 177C whether any of the following tax effects would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out:

(a) an amount being included in the assessable income of the taxpayer;

(b) the whole or part of a deduction not being allowable to the taxpayer;

(c) the whole or part of a capital loss not being incurred by the taxpayer;

(d) the whole or part of a foreign income tax offset not being allowable to the taxpayer;

(e) the taxpayer being liable to pay withholding tax on an amount.

The 'would have' and 'might reasonably be expected to' limbs of subsection 177CB(1) are separate and distinct bases upon which the existence of a tax effect can be demonstrated.³

Subsection 177CB(2) confirms that 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) (the annihilation approach). In considering such a postulate, the scheme must be assumed never to have happened, that is, it is annihilated, deleted or extinguished to determine the tax effects based on the remaining events or circumstances.

Generally the annihilation approach will be applicable where there are no economic consequences from the scheme other than the tax benefit. The annihilation approach is not appropriate in this case as annihilating the scheme would be inconsistent with the non-tax results and consequences sought by the participants in the scheme.

Subsection 177CB(3) explains that 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 (the reconstruction approach).

In determining whether such a postulate is a reasonable alternative, particular regard must be had to the substance of the scheme and any result or consequence for the taxpayer that is or would be achieved by the scheme. Any results in relation to the operation of the Act (as defined) that would be achieved by the postulate for any person (whether or not a party to the scheme) must be disregarded.

In order to determine the tax benefit that would be derived by the Company from this scheme, it is necessary to examine what the Company might reasonably have been expected to enter into to achieve its aim in relation to employee remuneration.

If the scheme was not entered into and the Company instead chose to issue new shares to the employees for no consideration, it may not receive a tax deduction for this amount. However, the applicant has stated that issuing shares directly to employees would be an impractical and commercially less attractive approach.

The applicant has stated that the commercial alternatives to the scheme would be more conventional forms of remuneration such as increased salary, bonuses or deductible superannuation payments, which would give rise to identical or similar level of deductible expenses, revealing no tax benefit. Nevertheless the analysis below proceeds on the assumption that there is a relevant tax benefit.

Dominant Purpose

Section 177D provides that Part IVA applies to a scheme if it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of:

(a) enabling a taxpayer (a relevant taxpayer) to obtain a tax benefit in connection with the scheme; or

(b) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme;

whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers.

The applicant in its application provides various commercial reasons for entering into the scheme. The Trust provides non-tax, commercial benefits to the operation of the Plan that would not be available if the Company provided shares directly to employees.

The scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain entry into the Plan and Trust arrangements.

In light of the commercial objectives of the scheme, and having regard to substance of the scheme and the eight matters listed in subsection 177D(2) of the ITAA 1936, the Commissioner does not consider that any party to the scheme entered into the scheme for the sole or dominant purpose of obtaining a tax benefit.

¹ TR 2014/D1 paragraph 169; Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 58 ATR 210 at 220; Spotlight Stores Pty Ltd v Commissioner of Taxation (2004) 55 ATR 745.

² Herald & Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113; Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295; W Nevill & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290; Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47; and Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344.

³ Explanatory Memorandum to tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013, paragraph 1.44.