Edited version of your written advice

Authorisation Number: 1012985899561

Date of advice: 18 March 2016

Ruling

Subject: Employee share scheme

Question 1

Will Company A obtain an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of irretrievable cash contributions made by Company A to Company B (the Trustee) as trustee of Company A Employee Share Trust (the Trust) to fund the subscription for or acquisition on-market of Company A shares by the Trust?

Answer

Yes.

Question 2

Will Company A obtain an income tax deduction under section 8-1 of the ITAA 1997 in respect of costs incurred in relation to the on-going administration of the Trust?

Answer

Yes.

Question 3

Will the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for or acquisition of on-market of Company A shares by the Trust, be deductible to Company A 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

Yes.

Question 4

If the Trust satisfies the obligations under the Company A Long Term Incentive Plan (the Plan) by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A under sections 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997?

Answer

No.

Question 5

Is the provision of performance rights or shares by Company A to Company A employees under the Plan a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act (FBTAA1986)?

Answer

No.

Question 6

Will the Irretrievable cash contributions made by Company A to the Trustee of the Trust, to fund the subscription for or acquisition on-market of Company A shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA 1986?

Answer

No.

Question 7

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

Answer

No.

Question 8

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

Answer

No.

This ruling applies for the following period(s)

For the substituted accounting periods:

1 January 2016 to 31 December 2016

1 January 2017 to 31 December 2017

1 January 2018 to 31 December 2018

1 January 2019 to 31 December 2019

1 January 2020 to 31 December 2020

Relevant facts and circumstances

1. Background

Company A (the Company) is an ASX listed company which delivers online solutions to organisations of all sizes.

2. Remuneration and incentives

Company A's Long Term Incentive Plan (the Plan) is aimed at rewarding employees in a manner that aligns this element of remuneration with the creation of shareholder wealth. Under the Plan, grants of Awards are made to executives, senior management and staff who are able to influence the generation of shareholder wealth and thus have direct impact on the company's performance against the relevant long term performance hurdle. Under the Plan, grants to employees are delivered in the form of performance rights to achieve alignment between comparative shareholder return and reward for executives and staff.

3. The Plan

The Plan is designed to allow the Board of the Company to make Awards to Employees which provide the opportunity to acquire Shares in the Company to assist with:

a) Attracting, motivating and retaining Employees;

b) Delivering rewards to Employees for performance;

c) Allowing Employees to become shareholders in the Company; and

d) Aligning the interests of Employees with those of Company shareholders.

The Board in its absolute discretion may operate the Plan may grant an Award to an Employee or invite an Employee to apply for a grant in accordance with the Rules of the Plan and the terms and conditions determined by the Board. Where an invitation to apply or grant is made the Board must provide the employee with a Grant Letter setting out the terms and conditions of the Award.

An Employee is defined as any employee (including any executive director) of a Group Company or any other person so designated by the Board. A Participant is an Employee who has been granted Awards under the Plan.

An Award is defined in the Rules as a performance right to acquire a Share (or to receive a Cash Equivalent Value, at the discretion of the Board), granted to a Participant under the Plan on terms and conditions determined by the Board.

A Share is a fully paid ordinary share in the capital of the Company.

Awards granted under the Plan only vest if terms and conditions advised to the Participant in the Grant Letter are satisfied, subject to certain rules listed in the Plan.

A sample of a Grant Letter provided with the application indicates that under the Plan no consideration is payable by the Employee on grant or vesting of the Award.

If all or some of the performance rights vest, the Company must allocate, or procure the transfer of, one Share for each Award that vests or is exercisable (as relevant), to or for the benefit of the Participant.

Vesting Awards may be satisfied, at the discretion of the Board, in cash rather than Shares, by the payment of the Cash Equivalent Value which is equal to the gross value of the Shares that would have been allocated or transferred to the Participant. The Board retains the discretion as to how the gross value is calculated for the purpose of this rule.

Pursuant to the Plan, the Board may implement a Share Trust (an employee share trust) for the purposes of delivering and holding Shares on behalf of Participants.

4. Employee Share Trust

The Company uses a trust, Company A Employee Share Trust (the Trust), to facilitate the provision of shares to employees as part of its employee incentive strategy. The Trust is used to provide greater flexibility for the Company to accommodate its long term incentive arrangements as the Group continues to expand and increase its employee numbers, to allow for increased capital management flexibility, and to assist the Company in satisfying corporate law requirements relating to a company dealing in its own shares.

Company B agreed to act as the initial trustee of the Trust on the terms set out in the Trust Deed signed in June 20XX.

5. The Trust Deed

According to the Recitals in the Trust Deed (the Deed), the Trust was established by the Company:

'for the sole purpose of obtaining Shares for the benefit of the Participants, including subscribing for or acquiring, allocating, holding and delivering Shares under the Performance Rights Plan for the benefit of the Participants'

The Deed includes the following definitions:

• 'Participant' means former, current or future employee or director of the Group who is participating, or who may participate in the future, under the terms of a Plan or Plans and who receives Shares to be held by the Trustee under the terms of this Deed.

• 'Group' means the Company and any Related Body Corporate of the Company, but not the Trustee.

• 'Plan Rules' means the rules of the relevant Plan as amended from time to time.

• 'Terms of Participation' means, in respect of any Participant, the specific terms upon which the Trust Shares are held by the Trustee on behalf of the Participant under the terms of issue made in accordance with the relevant Plan Rules.

• 'Trust Assets' means the property, rights and income of the Trust and includes any Accretions and Unallocated Trust Shares.

• 'Trust Share' means a Share which is held by the Trustee in accordance with the terms of this Deed and includes any bonus shares issued in respect of the Trust Share under any Bonus Issue made by the Company to shareholders and any shares subscribed as part of a Rights Issue.

The Trustee declares in respect of each Participant:

• the Trust Shares held by the Trustee on behalf of that Participant;

• the proceeds of sale arising from the sale by the Trustee of rights under a Rights Issue on behalf of that Participant; and

• all other benefits and privileges related to or arising from Trust Shares held by the Trustee on behalf of that Participant

will be held by the Trustee on trust for and on behalf of that Participant on the terms of the Deed and subject to the relevant Plan Rules and relevant Terms of Participation.

Each Participant is, subject to the relevant Plan Rules and Terms of Participation, the beneficial owner of the Trust Shares held by the Trustee on their behalf, and absolutely entitled to all other benefits and privileges attached to, or resulting from holding, those Trust Shares.

The Trustee will, in accordance with instructions received from the Company pursuant to the Plan Rules and as soon as reasonably practicable, acquire, allocate and deliver Shares for the benefit of a Participant provided that the Trustee receives sufficient payment to subscribe for or purchase Shares, and/or it has sufficient Unallocated Trust Shares available.

Nothing in the Deed 'confers or is intended to confer on the Company any charges, lien or any other proprietary right to proprietary interest in the Shares acquired by the Trustee in accordance with this Deed'.

At no time will any member of the Group or the Trustee have or be entitled to obtain any beneficial interest in the Trust Assets, other than the Trustee's right of indemnity.

The general powers of the Trustee to do the things necessary to administer and maintain the Trust and the Trust assets are provided the Plan and include opening and operating bank accounts, the receipt of dividends and the selling and transfer of Shares.

The Deed provides that the Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of section 130-85(4).

The Deed provides that the Trustee is not entitled to receive any fees, commissions or remuneration in respect of the performance of its obligations as trustee of the Trust. The Company may pay to the Trustee any fees, commission or remuneration and reimburse such expenses incurred by the Trustee as the Company and the Trustee agree to from time to time.

The Plan deals with the acquisition of Trust Shares and provides that:

• The Board must by notice in writing instruct the Trustee to subscribe for, purchase and/or allocate a number of Shares specified in the notice, to be held by the Trustee as Trust Shares in respect of an identified Participant or Participants;

• If the Trustee has received the abovementioned notice, then subject to the Trustee receiving sufficient payment or having sufficient capital, the Trustee must within seven days (or period as the Board determines) purchase the requisite number of Shares on or off market, subscribe for the requisite number of Shares or allocate Shares that are Trust Assets, or effect a combination of these alternatives;

• The subscription price for each Share must be the market values of the Shares on the date on which the Shares are issued to the Trustee;

• The Company must provide the Trustee any funds required by the Trustee in order to comply with its abovementioned obligations;

• All funds received by the Trustee from the Company will constitute accretions to the corpus of the Trust and will not be repaid to the Company and no Participant will be entitled to receive the funds;

• Funds received by the Trustee from the Company may be paid to the Company where the Trustee subscribes for Shares in accordance with this Deed, the relevant Plan Rules or relevant Terms of Participation.

The Trustee must maintain a separate share account or record for each Participant, notify each Participant of Shares acquired, allocated and held on their behalf and maintain adequate books and records of the Trust.

A Participant will have an absolutely vested and indefeasible entitlement to receive from the Trustee all dividends actually paid by the Company on all Trust Shares held by the Trustee in respect of the Participant and the Trustee agrees to pay any such dividends to the Participant as soon as reasonably practicable after those dividends are paid by the Company to the Trustee.

Any time after the Restrictive Period, being the period during which there are restrictions on dealing with or transferring the relevant Trust Shares, the Participant may give the Trustee a Withdrawal Notice and following approval of the Board, the Trustee must transfer legal title in those Trust Shares or sell those Trust Shares in accordance with the Withdrawal Notice and transfer rules in the Deed.

The Trustee may at the direction of the Participant, sell any of the Trust Shares to which the Participant is entitled and apply the proceeds of sale in payment of the brokerage fees and other expenses incurred by the Trustee and then pay the balance to the Participant.

The Trustee must do all things necessary to transfer legal title in Trust Shares to a Participant, or third party as directed by the Participant, where required to do so by the Plan Rules, if the Trust is terminated, or otherwise, where the Board in its discretion determines.

The Deed deals with the termination of the Trust and provides for the distribution of the Trust Assets and states that the Trustee must not pay any balance to any member of the Group.

The Company will make cash contributions to the Trust equal to the fair market value of Shares to be acquired by the Trust.

The Company will only make contributions to the Trust once the relevant performance rights have vested and once it is certain that the Trust will either be issued Shares or will be required to acquire Shares on-market on the Participant's behalf within a short period of time.

6. Costs of administering the Trust

The Company incurs and will continue to incur various costs in relation to the on-going administration of the Trust.

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 136(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 20

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 104-35

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

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

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997, unless specified.

Question 1

Under section 8-1, a loss or outgoing can be deducted from assessable income if it is:

• incurred in gaining or producing assessable income ('first limb') or

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

and is not capital or of a capital nature.

As a broad guide, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape.

A contribution made to the trustee of an employee share trust is incurred only when the ownership of that contribution passes from an employer to the trustee of the employee share trust and there is no circumstance in which the employer can retrieve any of the contribution - Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650 2004 ATC 4674; 55 ATR 745.

The Company established a Trust under the terms of the Trust Deed. The Trust's sole purpose is of obtaining Shares for the benefit of Participants, including subscribing for or acquiring, allocating, holding, and delivering Shares under the Plan for the benefit of Participants.

The Deed provides that the Trustee will, in accordance with instructions received from the Company pursuant to the Plan Rules, acquire, allocate and deliver Shares for the benefit of a Participant provided the Trustee receives sufficient payment to subscribe for or purchase Shares and/or has sufficient Unallocated Trust Shares available.

The Company will make contributions to the Trust to allow the Trustee to purchase Shares on market or off market or to subscribe for new Shares to allow performance rights under the Plan to be satisfied.

All funds received by the Trustee from the Company will constitute accretions to the corpus of the Trust and will not be repaid to the Company and no Participant will be entitled to receive the funds. The Deed does not confer on the Company any charge, lien or any other proprietary right or interest in the Shares acquired by the Trustee in accordance with the Deed.

Further, on termination of the Trustee cannot pay any remaining Trust Assets to any member of the Company A Group.

Given these facts, it is considered that the contributions made to the Trustee of the Trust by the Company are irretrievable and will be losses or outgoings incurred at the time the contributions are made.

Further, to be deductible under section 8-1, 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.

In order to satisfy the second limb of section 8-1 there must be a relevant 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. FC of T (1949) 78 CLR 47; [1949] HCA 15; Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation [1980] FCA 150; 80 ATC 4542; (1980) 11 ATR 27).

It is considered that the Company is carrying on a business and when the Company makes a contribution to the Trustee of the Trust, its primary purpose is for the contribution to be applied to the direct provision of remuneration of its employees in the form of Shares in the Company.

The contribution to the Trust will only be made after the relevant performance rights have vested. The cash contributions for the acquisition of Shares, either on-market or by subscriptions will be equal to the market value of the Shares to be acquired by the Trustee. Currently, the performance period during which the vesting conditions must be satisfied is 3 years in respect of all performance rights on issue by the Company to eligible employees under the Plan.

Where the Trustee has a received a notice from the Board of the Company, the Trustee must, on receipt of funds, purchase or subscribe for the requisite number of Shares within seven days.

Consequently, we consider that the contributions to the Trustee of the Trust by the Company for the purpose of remunerating its employees under the Plan is an outgoing in carrying on the Company's business for the purpose of gaining or producing assessable income.

Where a contribution satisfies either limb of subsection 8-1 (1), it may still be capital or of a capital nature. Pursuant to subsection 8-1(2), the contribution will not be deductible under section 8-1 to the extent to which it is capital or of 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 Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337; 5 ATD 23; (1938) 1 AITR 403:

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...

A contribution to the trustee of an employee share trust is of capital or of a capital nature, where 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.

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

The combined operation of subsections 8-1(1) and 8-1(2) may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a differing nature.

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.

Where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period 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 it is intended that:

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

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

The Company will only make contributions to the Trust once the relevant performance rights have vested and once it is certain that the Trustee will either be issued shares or will be required to acquire shares on-market on the employee's behalf within a very short period of time. That is, the period of time between making a contribution and the purchase or subscription for shares by the Trustee on behalf of the employees is expected to be very short.

On weighing up the facts in this case we consider the capital structure advantage will only be very small or trifling and apportionment for the capital structure advantage will not be required.

Accordingly, the irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, the Company Shares will be deductible under section 8-1.

Question 2

As discussed in question 1 above, section 8-1 provides that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

The Company will incur on-going costs associated with the administration of the Trust. These administration costs are part of the ordinary recurring cost to the Company of implementing the Plan and remunerating its employees and are therefore deductible under section 8-1.

Question 3

The deduction under section 8-1 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210.

Section 83A-210 provides that if:

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

(i) under an arrangement; and

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

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

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

Section 83A-210 will only apply if there is a relevant connection between the irretrievable cash contributions provided to the trustee for the purpose of enabling an employee in acquire (directly or indirectly) an ESS interest under an employee share scheme and the contributions are made before the income year in which the employee acquires the ESS interest.

Arrangement

The implementation of Plan, the establishment of the Trust under the Deed and the provision of money by the Company to the Trustee of the Trust to acquire and hold Shares on behalf of Participants, 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.

At the time the Award is granted, the performance right would not meet the definition of an ESS interest and would be considered an indeterminate right for the purposes of section 83A-340. This is because an Award granted to a Participant under the Plan may be satisfied by the allocation of a Share or the payment of a cash equivalent, at the discretion of the Board. The performance right is not considered to be a right to acquire a beneficial interest in a Share unless, and until the time when, the Board determines the performance right will be satisfied by the provision of Shares rather than as a cash settlement.

Once the Board resolves, upon the vesting of the Award, to allocate Shares to satisfy the performance right, section 83A-340 applies and the performance right is treated as always having been a right to acquire a beneficial interest in a share of the company. That is, the performance right would be deemed to have been an ESS interest from the time the Award was granted to the Participant.

ESS scheme

An employee share scheme is a scheme under which ESS interests in a 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)).

Subsection 995-1(1) defines the term 'scheme' to include any arrangement, or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

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

Relevant connection

The granting of Awards, the provision of the irretrievable contributions to the Trustee under the arrangement for the purpose of acquiring Shares and the allocation of Shares to the Participants to satisfy the Award are all interrelated components of the Plan. All the components of the scheme must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee is necessary to allow the scheme to proceed. Accordingly, the provision of money by the Company to the Trustee to acquire Shares is considered to be for the purpose of enabling the Participants, indirectly as part of the employee share scheme, to acquire the relevant ESS interests (the performance rights).

If the irretrievable contributions are provided to the Trustee before the ESS interests are acquired by a Participant, then section 83A-210 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1.

Where section 83A-340 operates to deem the performance rights that were indeterminate rights to have always been ESS interests and the irretrievable contributions are made to the Trustee before the performance rights are acquired by the Participants, section 83A-210 will apply (retrospectively) to modify the timing of the deduction for the irretrievable contributions claimed under section 8-1. In such a case the irretrievable contributions to fund the acquisition of Shares to satisfy the performance rights will only be deductible in the income year in which the ESS interests (performance rights) were acquired by the Participants.

However, as stated in the facts, the Company will only make contributions to the Trustee for the acquisition of Shares once an Award has vested and therefore after the ESS interest is acquired by the Participant. Where this occurs, section 83A-210 will not apply and the irretrievable contributions made by the Company to the Trustee of the Trust to acquire Shares to satisfy the performance rights granted under the Award will be deductible under section 8-1 in the income year in which they are incurred.

Note

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

Question 4

Ordinary Income

Section 6-5 provides that assessable income includes income according to ordinary concepts which is called ordinary income. The classic definition in Australian law was given by Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215. Chief Justice Jordan considered that:

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts.

The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that:

The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description.

In GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

In an employee share scheme, if the trustee subscribes to the company for an issue of shares, it pays the full subscription price for the shares and the company receives a contribution of share capital from the trustee.

The character of the contribution of share capital received by the Company from the Trustee of the Trust can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, the Company is issuing the Trustee with new shares in itself. The character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature.

Accordingly, when the Company receives subscription proceeds from the Trustee of the Trust for new shares in the Company to satisfy the obligations to Participants under the Plan, the subscription proceeds received by the Company are a capital receipt. That is, the subscription proceeds will not be on revenue account, and not ordinary income under section 6-5.

Section 20-20 Assessable recoupments

Under Subdivision 20-A, certain amounts received by way of insurance, indemnity or other recoupment are assessable income if the amounts are not income under ordinary concepts or otherwise assessable.

Specifically, under subsection 20-20(2), an amount you have received as recoupment of a loss or outgoing is an assessable recoupment if:

(a) you received the amount by way of insurance or indemnity; and

(b) you can deduct an amount for the loss or outgoing for the *current year, or you have deducted or can deduct an amount for the loss or outgoing for an earlier income year under any provision of this Act.

The subscription proceeds received by the Company from the Trustee of the Trust are for the issuing of new shares to satisfy the settlement of Awards in accordance with the Plan. The character of the subscriptions paid to the Company for shares is not one of insurance, indemnity or other recoupment of a previously deducted loss or outgoing.

Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20.

Capital gains tax

Section 102-20 states that you make a capital gain or loss, if and only if a CGT event happens.

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

However, paragraph 104-35(5)(c) states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, the Company will issue shares, being equity interests as defined in section 974-75, to the Trustee of the Trust, therefore CGT event D1 does not happen.

In relation to CGT event H2, paragraph 104-155(5)(c) also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Therefore, CGT event H2 will not occur.

Since no CGT event occurs, there will be no amount that will be assessable as a capital gain to the Company.

Therefore, when the Trustee of the Trust satisfies the obligations under the Plan by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under section 6-5 or section 20-20, nor trigger a CGT event under Division.

Question 5

Performance rights

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'. The definition of benefit in subsection 136(1) of the FBTAA includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility.

As discussed in question 3, at the time the Award is granted to the employee, the performance rights are indeterminate rights as they may be satisfied by the allocation of a Share or the payment of a cash equivalent, at the discretion of the Board.

The performance rights granted to the employee come within the definition of a 'benefit'. However, the definition of 'fringe benefit' does not include:

• a payment of 'salary or wages' (paragraph (f) of the definition); or

• 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 (ITAA 1997) to which Subdivision 83A-B or 83A-C of that Act applies (paragraph (h) of the definition).

At the time the performance rights are granted it may be considered unclear if paragraph (f) or (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA applies because:

• at that time, the employee has not acquired rights that are ESS interests within the meaning of subsection 83A-10(1); and

• if they are rights to shares or cash, it is also unclear if the employee will ultimately receive cash that would on payment be considered salary or wages.

Although the performance rights are not ESS interests within the meaning of subsection 83A-10(1) at the time they are granted, where they are ultimately satisfied with shares instead of cash:

• the performance rights will, pursuant to section 83A-340, be treated as if they had always been ESS interests; and

• as they will constitute the acquisition of ESS interests acquired under an employee share scheme (within the meaning of the ITAA 1997) to which Subdivision 83A-B or Subdivision 83A-C applies, they will be excluded from the definition of fringe benefit by paragraph 136(1)(h) of the FBTAA.

Alternatively, where an employee's performance rights are ultimately satisfied with cash instead of shares, the granting of the rights:

• will be viewed as one of a series of steps in the payment of salary or wages; and

• will not be viewed as a separate benefit to the payment of salary or wages which are excluded from the definition of fringe benefit by paragraph 136(1)(f) of the FBTAA.

Therefore, the provision of performance rights by the Company to Participants under the Plan will be excluded from the definition of fringe benefit by either paragraph 136(1)(f) or (h) of the FBTAA and therefore, will not be subject to FBT.

Shares

As stated above, a fringe benefit is 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. The Court ruled 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 rights granted under an employee share scheme are exercised, and shares are allocated by the employer, it is considered that the benefit that arises comes as a consequence of the employee exercising the rights previously obtained under the scheme, and not in respect of employment.

Therefore, the benefit that arises to an employee upon the vesting of an Award (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 a fringe benefit in subsection 136(1) 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) as having the meaning given by subsection 130-85(4).

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

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

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

(i) the company; or

(ii) a subsidiary of the company; and

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

The terms 'ESS interest' and 'employee share scheme' as defined in section 83A-10 were considered in question 3 and it is accepted the Plan will be an employee share scheme under which the ESS interests (performance rights) are provided to employees, or associates of employees, of the company.

The Company has established the Trust under the Deed and the Trust's sole purpose is to obtain and allocate Shares to satisfy the ESS interests (performance rights) of Participants acquired under the Plan. There are some incidental activities undertaken by the Trustee to manage and administer the Trust, such as the operation of bank accounts and maintenance of adequate books and records, as provided in clause 4.1 of the Deed.

Therefore, the Trust is an employee share trust, as defined in subsection 995-1(1), as the activities of the Trust meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). 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 Trust from being a fringe benefit.

Accordingly, the irretrievable cash contributions the Company makes to the Trustee of the Trust, to fund the subscription for, or acquisition on-market of, the Company Shares in accordance with the Deed are not a fringe benefit under subsection 136(1) of the FBTAA.

Question 7

Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are:

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

• a tax benefit arises that was obtained or would be obtained in connection with the scheme but for Part IVA of the ITAA 1936, and

• having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies.

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 made to the Trustee of the Trust to fund the subscription for, or acquisition on-market, of the Company's Shares by the Trust.

Question 8

Section 67 of the FBTAA is the general anti-avoidance provision in the FBTAA. Practice Statement Law Administration PSLA 2005/24 provides guidance on the application of section 67 of the FBTAA 1986. Paragraphs 145-148 state:

145. Section 67 is the general anti avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and any other employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148 Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included and or could reasonably be expected to be included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

The Commissioner will only make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. In Miscellaneous Taxation Ruling MT 2021, at Appendix 1 Question 18, on the application of section 67, the Commissioner states:

…As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement…

Under the Plan, benefits provided to the Trustee by way of irretrievable cash contributions to the Trust and to Participants by way of the provision of performance rights and Shares will not be subject to FBT. Consequently, no amount could reasonably be expected to be included in the aggregate fringe benefits amount, attributable to the Plan, if the arrangement had not been entered into. Therefore, the fringe benefits tax liability is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to the Company, by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee of the Trust, to fund the subscription for or acquisition on-market of the Company Shares.