Edited version of your written advice

Authorisation Number: 1012965454255

Date of advice: 17 February 2016

Ruling

Subject: Employee share scheme

Question 1

Will Company A, as the head entity of the Company A income tax consolidated group, be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group) to Company B Pty Ltd (the Trustee), as trustee of the Company A Employee Share Trust (the Company A Share Trust), to fund the subscription for, or acquisition on-market of, Company A shares (Shares) to satisfy ESS interests issued pursuant to the Company A Share Rights Plan (the Company A SRP)?

Answer 1

Yes.

Question 2

Will the irretrievable cash contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group) to the Trustee to fund the subscription for, or acquisition on market of, Shares to satisfy ESS interests issued pursuant to the Company A SRP be deductible to Company A under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests?

Answer 2

Yes.

Question 3

Will the irretrievable cash contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group) to the Trustee to fund the subscription for, or acquisition on market of, Shares to satisfy ESS interests issued pursuant to the Company A SRP be deductible to Company A under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the acquisition of the relevant ESS interests?

Answer 3

Yes.

Question 4

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

Answer 4

No.

The rulings for questions 1 to 4 inclusive each apply for the following periods:

• Income tax year ended 31 December 2016

• Income tax year ended 31 December 2017

• Income tax year ended 31 December 2018

• Income tax year ended 31 December 2019

• Income tax year ended 31 December 2020

Question 5

Will the provision of Share Rights or Shares to employees of Company A (or a subsidiary member of the Company A income tax consolidated group) under the Company A SRP constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer 5

No.

Question 6

Will the irretrievable cash contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group) to the Trustee to fund the subscription for, or acquisition on-market of, Shares pursuant to the Company A SRP constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA ?

Answer 6

No.

The rulings for questions 5 and 6 apply for the following periods:

• Fringe benefits tax year ended 31 March 2016

• Fringe benefits tax year ended 31 March 2017

• Fringe benefits tax year ended 31 March 2018

• Fringe benefits tax year ended 31 March 2019

• Fringe benefits tax year ended 31 March 2020

Relevant facts and circumstances

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

Company A is operating in the general insurance industry in Australia.

Company A is listed on the Australian Securities Exchange (ASX).

Company A is the head company of an income tax consolidated group comprising of Company A itself and various wholly-owned subsidiaries.

Review of Company A Share Rights Plan

The Company A Share Rights Plan (Company A SRP) is an employee incentive plan operated by Company A for selected employees. Established in 20XX, the Company A SRP is part of Company A's retention strategy focusing on the attraction, motivation and retention of key employees. The objective of the Company A SRP is to (Clause A of the Company A SRP):

a) align the interests of Eligible Employees with those of Shareholders;

b) provide incentives to attract, retain and motivate Eligible Employees for the long term benefit of Company A; and

c) provide Eligible Employees with the opportunity to acquire Share Rights, and ultimately Shares, in accordance with the Company A SRP Rules.

The Company A SRP allows Company A to offer a right to acquire a fully paid share in Company A (Share Right) to an Eligible Employee subject to the terms of the particular offer and the Company A SRP rules.

An Eligible Employee becomes a Participant of the Company A SRP by accepting the offer to participate and completing an Acceptance Form (Clause B of the Company A SRP).

There have been to date X separate grants of Share Rights made under the Company A SRP. These include:

Incentive Offer

Participants were granted Share Rights on 1 January 20YY which vest subject to the following performance metrics:

i. Underlying Return on Equity; and

ii. Earnings Per Share

Participants must also remain employed by Company A for a continuous period of X years from the date of grant in order for Share Rights to vest. The Company A SRP details special circumstances (such as retirement or redundancy) where Participants may be eligible for a pro rata portion of the Share Rights to remain 'on foot' in the event of employment ceasing.

Equity Offer

On 1 March 20YY Participants were granted Share Rights, of which X% of the total number of Share Rights vest on the 1^st, 2^nd, 3^rd and 4^th anniversary of the grant, subject to the continuous employment of the Participant, except in special circumstances detailed in the Company A SRP.

Grant Offer

Participants were granted Share Rights on the X of XXX 20XX with one-third of the total number of Share Rights vesting in the 2^nd, 3^rd and 4^th anniversary of the grant, subject to the continuous employment of the Participant, except in special circumstances detailed in the Company A SRP.

Incentive Offer B

One-third of the value of the Participants total short-term incentive award is delivered via a grant of Share Rights, which vest 12 months from grant date subject to continuous active employment of the Participant and Board satisfaction that no adverse findings/ results have occurred in the period between award and vesting.

Share Rights

Share Rights do not carry dividend or voting rights. However, under the Incentive Offer and the Incentive Offer B, Participants are entitled to an additional number of vested Share Rights which immediately convert to Shares when the Share Rights vest based on the value of the dividends paid on the underlying Shares during the applicable vesting period. The award of these 'dividends equivalent' Share Rights, and delivery of the additional Shares, is subject to the relevant Share Rights vesting. When the Performance Criteria/ vesting conditions of the particular Share Rights are satisfied at the end of the vesting period, Shares are automatically allocated to the employee for no consideration.

Once vested, the Company A Board must procure the transfer of Shares to the Participant in satisfaction of the vested Share Rights.

No interest in Shares will arise until the relevant vesting conditions are met and a Share Right has vested. All unvested Share Rights will generally lapse immediately upon the Participant's cessation of employment, except in special circumstances detailed in the Company A SRP.

According to the Company A SRP, where Company A is required to cause the issue of, or arrange or procure the transfer of a Share the subject of a Vested Share Right to a Participant, Company A may, in its absolute discretion, instead of doing so, and in full and final satisfaction of its obligation to deliver the Share, pay to the Participant a cash amount equal to the market value of the Share less the exercise price per Share Right and any taxes in respect of the payment.

The Company A Share Trust

Company A established the Company A Share Trust under the Company A Employee Share Trust Deed (Trust Deed) to facilitate the acquisition, holding of, and allocation of Shares to Participants in accordance with employee equity plans, including the Company A SRP.

The Company A Share Trust is an independent legal entity and is not part of the Company A consolidated group. The Trust Deed states that Company A and any other member of the consolidated group cannot be a beneficiary of the Company A Share Trust. Company A will have no interest in the Shares held by the Company A Share Trust (Clause C of the Trust Deed).

Company A's reasons for using an employee share trust arrangement for the existing and any future equity based incentive plans include:

a) a company is unable to hold its own shares. The Company A Share Trust is a vehicle which will enable Company A to effectively acquire and hold its own Shares for the purpose of fulfilling its obligations resulting from new and existing grants under the Company A SRP;

b) the Company A Share Trust will facilitate the acquisition of Shares either on-market or by new issue of Shares by Company A;

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

d) the Company A Share Trust will be an efficient structure for giving effect to vesting conditions. As the Trustee is the legal owner, employees have no ability to deal in the Shares;

e) contributing to the Company A Share Trust to acquire Shares before Share Rights vest may enable Company A to hedge against a potential increase in costs to satisfy Share Rights due to share price growth, as well as the potential for insufficient Shares being available on-market immediately prior to vesting;

f) the Company A Share Trust provides the flexibility to acquire and hold Shares that will be allocated to employees under the Company A SRP. When vesting conditions are not met, Share Rights are forfeited and the Company A Share Trust enables Shares held for such forfeited Share Rights to be 'recycled' to satisfy other grants of Share Rights;

g) the Company A Share Trust establishes independent records and accounts for Participants.

The proposed Company A Share Trust will broadly operate as follows:

The Trustee of the Company A Share Trust will be Company B Pty Ltd. The sole activities of the Trustee will be acquiring Shares for the purpose of providing them to Participants on vesting of their Share Rights under the Company A SRP and the administration of the Company A Share Trust. The Trustee will acquire Shares at market value and will either acquire them on-market or subscribe for new Shares.

Under the terms of the Trust Deed, Company A will instruct the Trustee to subscribe for, purchase or allocate a number of Shares specified in the notice. This instruction may occur at any time Share Rights are granted or at a later time depending on Company A's capital management strategy.

In determining whether to request the Trustee to subscribe for or purchase Shares on-market, the Company A Board will consider the following:

a) Company A's current capital management strategy;

b) the dilution impact any issue of new Shares will have;

c) the liquidity (trade volume) of Company A Shares;

d) the Board's expectations regarding Company A's Share price movements and volatility over the short and longer term; and

e) trading restrictions or anticipated activity that may prompt restrictions in trading of Company A shares.

The Trustee will, in accordance with instructions received pursuant to the Company A SRP Rules, acquire, deliver and allocate Shares to participants provided the Trustee receives sufficient payment from Company A to subscribe for or purchase Shares and/or sufficient unallocated Shares available in the Company A Share Trust.

Contributions to the Company A Share Trust

The Company A Share Trust will be funded by Company A as the head entity of the consolidated group through irretrievable contributions to the Trustee as required. All funds received by the Trustee will constitute accretions to the corpus of the Company A Share Trust.

Any funds contributed to the Company A Share Trust, other than specifically in the form of a loan, cannot be refunded, repaid or returned to Company A other than by way of the Trustee paying the issue price where it subscribes for Shares.

The Trustee must carry out the objects of the Company A Share Trust in a manner consistent with the definition of 'employee share trust' in section 130-85 of the ITAA 1997.

The Trustee is not permitted to acquire any Share or deliver any Share to any Participant if to do so would contravene applicable law. 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 Company A Share Trust in accordance with the Company A SRP Rules. Furthermore, the Trustee is not permitted to carry out activities which result in the Participants being provided with additional benefits other than the benefits that arise under the Company A SRP Rules.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 67(1)

Fringe Benefits Tax Assessment Act 1986 subsection 67(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

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

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

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 subsection 177F(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 8-1(1)

Income Tax Assessment Act 1997 subsection 8-1(2)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

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

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

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 section 83A-210

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

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

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

Income Tax Assessment Act 1997 section 701-1

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

Reasons for decision

Questions 1 to 4 - application of the single entity rule in section 701-1

The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 of the ITAA 1997 the subsidiary members of a consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period they are members of the consolidated group with the head company of the group being the only entity recognised for income tax purposes.

The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997. As a consequence, the actions and transactions of the subsidiary members of the Company A tax consolidated group are treated for income tax purposes as having been undertaken by the Australian head company of the Company A tax consolidated group (Company A).

Questions 5 and 6

The SER in section 701-1 of the ITAA 1997 has no application to the FBTAA. Accordingly the Commissioner has provided a ruling to Company A and each subsidiary member of the Company A consolidated group in relation to questions 5 and 6.

All references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

The general deduction provision is section 8-1 which states:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your * exempt income or your * non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

Losses or outgoings

The Trustee or a broker on behalf of the Trustee must, on direction by the Company A Board, acquire Shares to enable Company A to satisfy its obligations under the terms of the Company A SRP (Clause D(f) of the Trust Deed). This may occur outside a trading window where the Trustee has confirmed applicable protocols (Clause D(b) of the Trust Deed). Company A must provide the Trustee with all the funds required to enable it to subscribe for, or acquire those Shares once a completed Acceptance Form is received from a Participant (Clause E of the Company A SRP). Nothing in the Trust Deed requires the Trustee (or any Allocated Trust Property Beneficiary) any right to have such a payment made with the money intended to be paid, unless and until the same has actually been paid or credited to the Trustee by Company A (Clause F of the Trust Deed).

The Trustee will hold allocated Shares on trust for the benefit of Participants (Clause G of the Trust Deed), and will allocate or transfer those Shares to particular Participants as directed by the Company A Board in accordance with the Company A SRP Rules and Trust Deed (Clause G(c) of the Trust Deed).

The contributions made to the Trustee by Company A will be irretrievable and non-refundable to Company A in accordance with the Trust Deed as Company A may not acquire any interest in the Capital (or corpus) and may not be entitled to any Income of the Trust Fund (Clause H).

On termination of the Company A Share Trust, the Trustee must, as soon as reasonably practical, wind up the Company A Share Trust and transfer the Trust Fund or the proceeds on sale of the Allocated Trust Property to the appropriate Allocated Trust Property Beneficiary (Clause I).

On termination of the Company A Share Trust, the Trustee must, as soon as reasonably practical, wind up the Company A Share Trust and transfer the Trust Fund or the proceeds on sale of the General Trust Property by:

• transferring any Company A Shares to one or more Beneficiaries at the discretion of the Trustee, having regard to any corresponding request from the Company A Board (Clause I(1));

• selling or converting into money any remaining investments of the Company A Share Trust (Clause I(2));

• paying out any debts and liabilities in relation to the Company A Share Trust (Clause I(3));

• distributing the balance of the Company A Share Trust at the discretion of the Trustee, having regard to and not inconsistent with the object of the Company A Share Trust (Clause I(4)).

Under the terms of the Trust Deed contributions made to the Trustee by Company A will be irretrievable and will therefore be considered a loss or outgoing for the purpose of subsection 8-1(1).

Sufficient nexus

In order for a loss or outgoing to be deductible under subsection 8-1(1) it must be either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. A line of authorities have established that there will be a link between a loss or outgoing and the derivation of income where there is a sufficient nexus (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).

Company A established the Company A Share Trust to facilitate the Company A SRP. Its objectives are to provide an incentive for employees to remain in their employment in the long term, and to recognise their ongoing ability and contribution to the long term success of Company A. The incentive offered is the opportunity to acquire Shares in Company A. Company A makes irretrievable contributions to the Company A Share Trust to enable the Trustee to acquire and hold Shares for the benefit of Participants in the Company A SRP (refer, Background A. in the Deed).

The contributions made by Company A to the Trustee are part of the overall employee remuneration costs of Company A. The benefits provided to employees under the Company A SRP are designed to attract, retain and motivate employees and to encourage participation by employees of Company A through share ownership.

All the documentation provided indicates that Company A makes the contributions to the Company A Share Trust solely to enable the Trustee to acquire Shares for Participants in accordance with the Company A SRP in order to remunerate and retain critical staff members. Accordingly, it is considered that there is a sufficient nexus between the outgoings (contributions made by Company A) and the derivation of Company A's assessable income.

Capital or Revenue

Company A will make contributions on a recurring basis from time to time, as and when Shares are required to be subscribed for or acquired pursuant to the Company A SRP.

In ATO ID 2002/1074 Income Tax - deductibility - irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme the view is expressed that a company will be entitled to a deduction for irretrievable contributions made to the trustee of its employee share scheme under section 8-1.

In Spotlight Stores Pty Ltd v Federal Commissioner of Taxation (2004) 55 ATR 745 and Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 58 ATR 210 it was determined that payments by an employer company to an employee share trust established for the purpose of providing incentive payments to employees were on revenue account and were not capital or of a capital nature.

Apportionment

The combined operation of subsections 8-1(1) and 8-1(2) may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a different nature. This would be relevant in the circumstances where contributions made by Company A to the Trustee for the purposes of administering the Company A SRP are used to subscribe for Shares.

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

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

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

In this case, the outgoings incurred by Company A by way of contributions to the Trustee 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 made by Company A to the Trustee 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.

Conclusion

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

Question 2

The deduction for the irretrievable cash contributions under section 8-17 would generally be allowable in the income year in which Company A incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210.

Section 83A-210 provides that if:

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

(i) under an arrangement; and

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

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

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

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

Arrangement

Company A's adoption of the Company A SRP under which Share Rights are acquired by Participants, the establishment of the Company A Share Trust, and Company A's provision of money to the Trustee, are 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 the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

Under the Company A SRP, a Share Right granted to a Participant is an ESS interest as it is a right to acquire a beneficial interest in a share in a company.

Employee share scheme

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

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

(a) the company; or

(b) *subsidiaries of the company;

in relation to the employees' employment.

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

(a) any *arrangement; or

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

The Company A SRP is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a share), is provided to a Participant in relation to their employment in Company A in accordance with the Trust Deed.

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

Relevant connection

The granting of Shares, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the Shares by the Trustee and the allocation of Shares to the Participants are all interrelated components of the Company A SRP. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme can operate as intended. 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 A SRP, to acquire Share Rights (that is ESS interests).

Accordingly, if the irretrievable contributions are provided before the Shares are acquired by the Participants, then, section 83A-210 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1. In this instance the contribution will only be deductible to Company A in the income year when the relevant Share Rights (ESS interests) are granted to Participants. 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.

Indeterminate rights

Share Rights acquired under the Company A SRP are indeterminate rights for the purposes of section 83A-340. That is because they may be satisfied by either delivery of a Share or payment of a cash equivalent at the discretion of the Company A Board. They are not considered to be a right to acquire a beneficial interest in a share unless and until the time when the proportion of the Share Rights that will be satisfied by the provision of Shares is determined by the Company A Board.

Once this proportion is determined, section 83A-340 operates to treat these Share Rights as though they had always been a right to acquire a beneficial interest in a share.

If the money is provided to the Trustee before these Share Rights are acquired (and the Share Rights do subsequently become an ESS interest), then section 83A-340 operates to deem the Share Rights to always have been an ESS interest. Where this occurs, section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1. In such a case a deduction to fund the exercise of the Share Right would be available to Company A in the income year in which the Share Rights were acquired by Participants.

Note

Where the Share Rights do not become an ESS interest because they are ultimately satisfied in cash, the outgoing should not flow through the Company A Share Trust. This is because the Company A Share Trust would not then be satisfying the sole activities test for the purposes of subsection 130-85(4).

Question 3

As discussed in Question 2, section 83A-210 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme in relation to the employees employment and the contributions are made before the acquisition of the ESS interests.

Accordingly, section 83A-210 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Shares to satisfy Share Rights, where the contribution is made after the acquisition of the relevant Share Rights.

In such a situation, the irretrievable contributions by Company A to the Trustee will be deductible under section 8-1 in the income year in which the irretrievable contributions are made where Share Rights are ultimately satisfied with Shares.

Question 4

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

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

2. 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

3. 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 (dominant purpose).

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

Question 5

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.

The provision of Share Rights

Paragraph (h) of the definition of 'fringe benefit' relevantly states that a fringe benefit does not include:

(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 83AB or 83AC of that Act applies.

The Commissioner accepts that the Company A SRP is an employee share scheme, that the Share Rights are ESS interests and that Subdivision 83A-B or 83A-C applies to those interests.

Accordingly, the provision of Share Rights pursuant to the Company A SRP will not be subject to fringe benefits tax on the basis that they are acquired by Participants 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 Shares

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

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

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

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

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

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

Question 6

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);

Subsection 995-1(1) states that the expression an 'employee share trust' has the same meaning given by subsection 130-85(4).

Subsection 130-85(4) states:

An employee share trust, for an employee share scheme, 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

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

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

Paragraphs 130-85(4)(a) and (b)

The beneficial interest in a share (Share Right) received by a Participant when an ordinary share in Company A is granted to them under the terms of the Trust Deed is an ESS interest within the meaning of subsection 83A-10(1).

Subsection 83A-10(2) defines an employee share scheme as being 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.

The Company A SRP is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which Share Rights are provided to employees in relation to the employee's employment.

Company A has established the Company A Share Trust to acquire ordinary shares in Company A and to allocate those Shares to employees in order to satisfy ESS interests (Share Rights) acquired by those employees under the Company A SRP. The beneficial interest in the Share is itself provided under an employee share scheme because it is provided under the same scheme under which the Share Rights are provided to employees in relation to their employment.

Paragraphs 130-85(4)(a) and (b) are therefore satisfied because:

• the Company A Share Trust acquires Shares in a company, namely Company A; and

• the Company A Share Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the Shares), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those Shares to the employees in accordance with the Trust Deed and Company A SRP.

Paragraph 130-85(4)(c)

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the Company A SRP.

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 sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c):

• 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 to be merely incidental.

The Trustee has, subject to the Trust Deed and the Company A SRP, all of the powers in respect of the Trust that it is legally possible for a Trustee that is a body corporate to have in addition to the power, authorities and discretions vested in it by any other provision of the Trust Deed (clause J of the Trust Deed). However, Company A and the Trustee have agreed that the Company A Share Trust will be managed and administered in a manner consistent with the definition of 'employee share trust' for the purpose of section 130-85 (clause K of the Trust Deed).

Paragraph 130-85(4)(c) is satisfied as all other activities undertaken by the Trustee are merely incidental to managing the Company A SRP.

Conclusion

The Company A Share Trust satisfies the definition of an employee share trust in subsection 130-85(4) as:

• the Company A Share Trust acquires Shares in a company (being Company A);

• the Company A Share Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the Shares), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those Shares to the employees in accordance with the Trust Deed and the Company A SRP; and

• the Trust Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to a function of administering the Company A Share Trust.

Consequently, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions by Company A to the Trustee from being a fringe benefit.

Accordingly, the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA.