Edited version of your written advice

Authorisation Number: 1012991711718

Date of advice: 6 April 2016

Ruling

Subject: Employee Share Scheme

Question 1

Will Company A, as head entity of the Company A 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 any subsidiary member of the Company A tax consolidated group to Company B (Trustee), as trustee of the Company A Employee Share Trust (the Trust), to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee to satisfy ESS interests issued pursuant to the Share Rights Plans?

Answer

Yes.

Question 2

Will Company A as head entity of the tax consolidated group be entitled to deduct an amount under section 8-1 of the ITAA 1997, in respect of costs incurred by Company A or any subsidiary member of the Company A tax consolidated group in relation to the implementation and on-going administration of the Trust?

Answer

Yes.

Question 3

Will irretrievable cash contributions made by Company A or any subsidiary member of the Company A tax consolidated group to the Trustee, to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee, be deductible to Company A under section 8-1 of the ITAA 1997 at a 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 Trustee satisfies its obligations under the Share Rights Plans 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

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 as head entity of the Company A tax consolidated group for the irretrievable cash contributions made by Company A or any subsidiary member of the Company A tax consolidated group to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee?

Answer

No.

The rulings for questions 1 to 5 inclusive each apply for the following periods:

Income tax year ended 30 June 2016

Income tax year ended 30 June 2017

Income tax year ended 30 June 2018

Income tax year ended 30 June 2019

Income tax year ended 30 June 2020

Question 6

Will the provision of rights under the STIP, Performance Rights under the LTIP, Conditional Rights under the PIP, or Company A shares to employees of Company A under the Share Rights Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 7

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

Answer

No.

Question 8

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

Answer

No.

The rulings for questions 6 to 8 inclusive each 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

Background

Company A, is the head entity of the Company A tax consolidated group. Company A provides a range of engineering and construction services.

In addition to wages and salaries, Company A's offers its employees share rights to acknowledge and encourage employees to reach short-term and long-term performance goals. Company A considers that this remuneration strategy aligns executive remuneration with shareholders' interests.

Company A operates a Short Term Incentive Plan (STIP), Long Term Incentive Plan (LTIP) and Performance Incentive Plan (PIP), in this document collectively referred to as the Share Rights Plans.

The Share Rights Plans are administered by the Company A Employee Share Trust (the Trust). The Company A Employee Share Trust Deed (the Deed) dated 20YY (and amended pursuant to a deed of variation dated 20XX) established the Trust.

Company A Short Term Incentive Plan (STIP)

Company A operates the STIP. The Short Term Incentive Plan Rules (STIP Rules) govern the STIP.

Clause 24 of the STIP Rules, relevantly defines the following terms:

Performance Measurement Period: The financial year ending 30 June each year, unless otherwise determined by the Board.

Under Clause 5 of the STIP Rules, Company A can make an offer to Eligible Employees to participate in the STIP. The offer is to specify the Performance Measurement Period, Performance Criteria and the weighting for each Performance Criteria.

Clause 7 of the STIP Rules, defines the Financial and Safety Performance Hurdles the STIP Participants are aiming to achieve. The achievement of these hurdles is determinative of the extent to which Participants are able to claim the short term incentive (STI) award under the offer made by Company A.

Clause 12 of the STIP Rules states, that unless otherwise determined by the Board the STI award will consist of cash to the extent that a Participant meets their target. An additional STI award is available for achieving a benchmark over and above the target. The Rules refers to this benchmark as the 'stretch'. To the extent that a Participant meets the stretch component, the STI award is to be paid 50% in cash and 50% in Company A shares.

Clause 12 further states that the Trust holds shares awarded upon the achievement of performance hurdles for the benefit of the Participant, subject to a two-year restriction period (Restriction Period) in which the Participant cannot dispose of the Company A shares.

Further, forfeiture of the Company A shares will occur if before the end of the Restriction Period:

• there is a material misstatement in, or omission from, the financial statements of Company A; or

• the Participant resigns or the Participant's employment is terminated for cause.

Clause 12 also stipulates that at the discretion of the Board other terms may attach to restricted shares.

The Board has exercised its power to attach additional terms to restricted shares. These are contained within the Terms of STI Restricted Shares (the STI Terms).

Relevantly the STI Terms state:

• upon expiration of the Restriction Period shareholders will be free to deal with their STI Restricted Shares in accordance with the Company A securities Trading Policy.

• STI Restricted Shares will rank equally, aside from the Restriction Period and forfeiture conditions, with other Company A ordinary fully paid shares with the same voting rights and dividend entitlements.

Company A Long Term Incentive Plan (LTIP)

The Long Term Incentive Plan Rules (LTIP Rules) govern the LTIP. LTIP covers the discretionary allocation of Performance Rights by the Board to selected Executive Directors employed by Company A.

Clause 7 of the LTIP Rules relevantly states, that offers to participate in the LTIP will specify:

• the number of performance rights the Participant is invited to accept

• the performance criteria (performance hurdles) and vesting date of each performance right

Clause 12 states that at the discretion of the Board performance hurdles are set and the extent to which the Participant achieves the performance hurdles determines the number of Performance Rights that ultimately vest.

Under Clause 13, the extent to which performance hurdles are not met results in the lapse of the proportionate number of Performance Rights.

Under Clause 15(a), upon satisfying the vesting conditions, eligible employees are entitled to be issued or transferred Company A shares.

Under Clause 15(b), the LTIP Rules permit Company A to satisfy its obligations on the vesting of each Performance Right by paying a cash amount equal to the market value of an Company A share.

Under Clause 17, termination of employment results in the forfeiture of unvested Performance Rights, subject to their absolute discretion of the Board to do otherwise. In the event of termination of employment due to death, a pro-rata number of Performance Rights will lapse, determined by the length of time remaining in the performance period, subject to the discretion of the Board to act otherwise.

Under Clause 18, the Board may exercise its discretion to determine that a Restriction Period, limiting the ability of a Participant to dispose of or otherwise deal with the Company A shares, will apply to some or all of the Company A shares issued after the vesting date.

Under Clause 24, forfeiture of unvested Performance Rights will occur if Company A dismisses an employee for committing any act or fraud, theft or serious misconduct in relation to the affairs of any group company.

The Company A Performance Incentive Plan (PIP)

Company A has implemented the PIP with offers made to employees from late November 20XX. The PIP will replace the STIP and the LTIP. In the future Company A will make both long-term and short-term incentive awards under the PIP. The Performance Incentive Plan Rules (PIP Rules) govern the PIP.

Clause 13.1 of the PIP Rules relevantly defines the following terms:

Conditions means one or more conditions contingent on performance, service, or time elapsed since grant that must be satisfied before a Conditional Right vests, as determined by the Board;

Conditional Right means a right to receive Shares that is subject to the Conditions determined by the Board, calculated on the basis set out in the terms of an offer, which may include a formula for calculating the relevant number of Shares and includes a Performance Right; Share Appreciation Right, Deferred Share Right and Option.

Deferred Share Rights means, subject to the Conditions determined by the Board, a right to receive a Share as part of a short term incentive arrangement;

Option means, subject to the Conditions determined by the Board, a right to receive a Share and any further amounts specified in the offer following payment of any required Exercise Price.

Performance Right means, subject to the Conditions determined by the Board, a right to receive a Share plus any further amounts specified in the offer;

Share Appreciation Right means, subject to the Conditions determined by the Board, a right to receive a reward value based on the increase in the Share price any further amounts specified in the offer, with this value to be converted into Shares at the end of the Period in accordance with the formula specified in the relevant offer letter;

Under Clause 3.1 of the PIP Rules, the Board at its absolute discretion may extend an invitation to grant Conditional Rights to eligible employees.

Clause 3.3 of the PIP Rules stipulates that any vesting conditions attached to Conditional Rights need to be stated at the time the invitation is made to employees to participate. Further, the Board must stipulate when the Conditional Rights will vest and become exercisable.

Under Clause 4.1 Conditional Rights will not vest until the Board waves or the employee meets the vesting conditions attached to the Conditional Rights.

Under Clause 4.2, lapse of unvested Conditional Rights occurs where there is failure to satisfy Conditions as outlined in the terms of the grant or invitation.

Under Clause 4.3, the Conditional Rights will entitle the Participant to a number of fully paid ordinary shares in Company A (which may be subject to a formula outlined in the terms of the grant, offer or invitation) subject to the terms attaching to the Conditional Rights. The Board may at its discretion award a cash amount equivalent to the Market Price of a Company A share on the vesting date.

Under Clause 4.4, the Participant can exercise a vested Conditional Right at any time up to and including the Expiry Date defined in Schedule 1 of the Offer Letter by delivering an Exercise Notice and paying the Exercise Price.

Under Clause 7, forfeiture of unvested Conditional Rights occurs if there is a cessation of employment.

Under Clause 8, forfeiture, lapse of Conditional Rights and potential clawback of Company A shares and other cash awards granted in exchange for Conditional Rights occurs if a Participant commits an act that is fraudulent, dishonest, in breach of their obligations to the group or makes a material misstatement in a financial statement.

Company A Employee Share Trust Deed (the Deed)

Company A established the Company A Employee Share Trust (the Trust) in accordance with the Deed dated late June 20YY and amended pursuant to a deed of variation dated mid December 20XX.

Clause 1.1 relevantly defines the terms:

Employee Share means a Share issued to or acquired by and held by the Trustee (who holds legal title only to the Share) in accordance with the Rules and this document, and includes:

(a) where applicable, each Bonus Share and each Rights Issue Share; and

(b) any security issued to the Trustee on acceptance of an offer made under a takeover bid in respect of that Share.

Participant means, in the case of a Plan, an Eligible Employee who accepts an Invitation.

Rules means, in respect of an Employee Share, the rules of the Plan that governs the issue to, or acquisition by, the Trustee of that Employee Share, and the relevant Participant's rights to that Employee Share (as amended from time to time, if such amendment is contemplated by the rules of that Plan), as amended by any rules set out in the Invitation in respect of that Employee Share.

Clause 2.6(a) of the Deed states:

(a) The Trustee declares that:

(i) the Fund is held by the Trustee for and on behalf of the Participants on the

terms and conditions of this document;

(ii) in respect of each Participant:

(A) the Employee Shares held by the Trustee on behalf of that

Participant;

(B) prior to their distribution in accordance with clause 9.4, the proceeds

of sales arising from the sale by the Trustee of Rights Issue Shares

on behalf of that Participant; and

(C) all other benefits and privileges related to or arising from Employee

Shares held by the Trustee on behalf of that Participant,

will at all times be held by the Trustee on trust for and on behalf of that Participant on the terms of this document and subject to the relevant Rules and relevant Terms of Participation.

Under clause 2.7 of the Deed, it is impermissible for any member of the Company A tax consolidated group to have a beneficial interest in the Trust.

The purpose of the Trust as established by the Deed is to acquire shares in Company A, on market or subscribe for new shares, for Australian employees of Company A pursuant to the Share Rights Plans and other Company A incentive plans that may be in place from time to time.

Clause 2.10 of the Deed, states the objectives of the trust:

(a) The intention of the Trust is to:

(i) obtain and hold Shares as Employee Shares for the Participants;

(ii) deal with Employee Shares and the Fund in respect of Employee Shares; and

(iii) deliver Employee Shares as Shares to the Participants, in accordance with the directions of the Company and subject to:

(i) the directions of the relevant Participant;

(ii) the relevant Rules;

(iii) the relevant Terms of Participation; and

(iv) the terms of this document, except where it would be required to incur a cost, expense or liability in so doing for which it is not fully indemnified.

(b) Without limiting any other provision of this document, it is intended that the activities of the Trustee will include:

(i) receiving funds and holding those funds on trust on the terms and conditions

of this document;

(ii) subscribing for or acquiring Shares on the terms and conditions of this

document;

(iii) allocating and re-allocating Employee Shares on the terms and conditions

of this document;

(iv) holding Employee Shares on the terms and conditions of this document;

(v) delivering Employee Shares and Shares (together with all rights in respect

of the Employee Shares or Shares, as the case may be and if any) on the

terms and conditions of this document;

(vi) administering the Plan in a manner agreed with the Company; and

(vii) any ancillary activities relating to (i) to (vi).

Under Clause 3.1(b) of the Deed, Company A will issue Company A shares to the Trustee or direct the Trustee to acquire Company A shares. The Trustee holds these Company A shares as Employee Shares on behalf of the Participants for the purposes of the Rules of the relevant Share Rights Plan.

Clause 3.2 of the Deed states that the Trustee is required to subscribe in Shares and hold those Shares as Employee Shares under the terms of the Deed.

Under Clause 3.3 of the Deed, the Trustee allocates the Company A shares acquired to the relevant Participant after receiving notification to do so from Company A.

Under Clause 4 of the Deed, the Trustee can sell shares, subject to any restrictions in either the Deed or the relevant Share Right Plan Rules, to which a Participant is entitled where that Participant has instructed the Trustee to do so.

Under Clause 8(a), Company A must provide the Trustee with all funds required by the Trustee to enable it to subscribe for or acquire Company A shares that it is directed to subscribe for or acquire. Company A must also provide sufficient funds to pay any tax, fees or other associated expenses of the acquisition, allocation, surrender or delivery of Employee Shares.

Under Clause 8(b), Funds received by the Trustee from Company A constitute accretions to the corpus of the Trust and the Trustee cannot repay the funds to Company A except to subscribe for Company A shares in accordance with the Deed and the Rules of the relevant Share Rights Plan or Terms of Participation as defined. No Participant is entitled to receive such funds.

Under Clause 13, upon termination of the Trust, the Trustee must distribute any consideration or Shares that the Trustee has been directed to provide to Participants. The Trustee must liquidate any remaining assets held and proceed to pay all outstanding debts and liabilities of the Trust. Any surplus that remains must be either distributed to another share or option trust maintained for the benefit of Company A employees or any charity nominated by the Trustee. The Trustee is prohibited from distributing this surplus to any Company A Group Company.

Under Clause 14, the Trustee is not entitled to levy any fees or charges from the funds of the Trust for the operation and administration of the Trust. Company A must pay from its own resources any commission or remuneration and reimbursement for any expenses incurred by the Trustee. The Trustee is entitled to retain for its own benefit any such fee or reimbursement.

Under Clause 2.10(c) of the Deed, Company A and the Trustee agree that the Trust will be managed and administered in a way that satisfies the requirements of subsection 130-85(4) of the ITAA 1997.

Reasons for establishing the Trust

Company A established the Trust in accordance with the Deed to provide greater flexibility to accommodate its existing and future long term incentive arrangements. The Trust was established as a sole purpose trust to acquire shares for Australian employees of Company A pursuant to the STIP, the LTIP and other Company A incentive plans that may be in place from time to time. It is intended that the Trust will be used to acquire shares for Australian employees of Company A pursuant to the PIP. The Trust provides capital management flexibility for Company A, in that it has the ability to use the contributions made by Company A either to acquire shares in Company A on market, or alternatively to subscribe for new shares in Company A.

The Trust provides an arm's-length vehicle through which shares in Company A can be acquired and held on behalf of employees. This allows Company A to satisfy corporate law requirements relating to companies dealing in their own shares.

The Trustee, Company B is an independent third party.

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 177A(1)

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 subsection 177CB(2)

Income Tax Assessment Act 1936 subsection 177CB(3)

Income Tax Assessment Act 1936 subsection 177CB(4)

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F

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 paragraph 8-1(2)(a)

Income Tax Assessment Act 1997 Division 20

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 subsection 20-20(2)

Income Tax Assessment Act 1997 section 20-30

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-205

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 paragraph 104-35(5)(c)

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 section 974-75

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

Reasons for decision

Questions 1 to 5 - application of the single entity rule in section 701-1of the ITAA 1997

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 Company A as the Australian head company of the Company A tax consolidated group.

Questions 6 to 8

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 6 to 8.

Question 1

The general deduction provision is section 8-1 of the ITAA 1997 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.


(1) 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

To claim a deduction under subsection 8-1(1) of the ITAA 1997 contributions made to the Trustee by Company A must be irretrievable and non-refundable.

Under Clause 3.1(b) of the Deed, Company A will issue Company A shares to the Trustee or direct the Trustee to acquire Company A shares on market. The Trustee holds these Company A shares as Employee Shares on behalf of the Participants for the purposes of the relevant Rules.

Under Clause 8(a), Company A must provide the Trustee with all funds required by the Trustee to enable it to subscribe for or acquire Company A shares that it is directed to subscribe for or acquire. Company A must also provide sufficient funds to pay any tax, fees or other associated expenses of the acquisition, allocation, surrender or delivery of Employee Shares.

Under Clause 8(b), the Trustee cannot repay funds received by the Trustee from the company. The Trustee must apply the funds received in the acquisition or subscription of Company A shares under the Deed and the relevant Rules or Terms of Participation. No Participant is entitled to receive such funds from the Trustee.

Under Clause 8(c), Funds in excess of those required to undertake the acquisition or subscription of Company A shares in accordance with Clause 3 are either utilised to subscribe for or acquire additional shares or deposited in a bank account to be applied at a future date in subscribing for or acquiring Company A shares.

Under Clause 13, upon termination of the Trust the Trustee must distribute any consideration or Company A shares that the Trust has been directed to provide to Participants. The Trustee must liquidate any remaining assets held by the Fund and proceed to pay all outstanding debts and liabilities of the Trust. Any surplus that remains must be distributed to either another share or option trust, maintained for the benefit of Company A employees, or any charity nominated by the trustee. The Deed prohibits the Trustee distributing this surplus to any Company A Group Company.

The terms of the Deed when read together demonstrate that contributions made by Company A to the Trustee will be irretrievable and non-refundable and therefore these contributions are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997.

Sufficient nexus

In order for a loss or outgoing to be deductible under subsection 8-1(1) of the ITAA 1997 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 has 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).

The contributions made by Company A to the Trustee of the Trust are part of the overall employee remuneration costs of Company A. The benefits provided to employees under the Share Rights Plans intend to reward, retain and motivate employees and to encourage participation by employees of Company A through share ownership.

A sufficient nexus exists between the outgoings (being the irretrievable contributions made by Company A to the Trustee of the Trust) and the derivation of assessable income for the purposes of subsection 8-1(1) of the ITAA 1997.

Capital or revenue?

Company A will make periodic contributions to the Trustee of the Trust for the purpose of acquiring and subscribing for ordinary shares in Company A pursuant to the Share Rights Plans.

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 of the ITAA 1997.

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 payments by an employer company to an employee share trust, established to provide incentive payments to employees, were held to be 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) of the ITAA 1997 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 the Trustee of the Trust uses contributions made by Company A to the Trustee for the administration of the Share Rights Plans to subscribe for shares in Company A.

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 the year to year benefits that the employer derives from a loyal and contented workforce.

Where the trustee of an employee share trust, ultimately and in substance, uses a contribution from the employer 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 secures for the employer advantages of both a revenue and capital nature, but the expected advantages of a capital nature are very small or trifling by comparison, apportionment may not be required.

In this case, the outgoings incurred by Company A by way of the irretrievable contributions it makes to the Trustee of the Trust in order to carry on its business are either not capital in nature or any capital component is considered to be sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction.

Private or domestic in nature

Nothing in the facts suggest that the irretrievable contributions made by Company A to the Trustee of the Trust 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 1936 or ITAA 1997.

Conclusion

The irretrievable contributions Company A makes to the Trustee of the Trust to fund the acquisition of ordinary Company A shares in accordance with the Deed and the Share Rights Plans will be an allowable deduction to Company A under section 8-1 of the ITAA 1997.

Question 2

Company A will incur costs in relation to the establishment and implementation of the Trust, including the costs that are associated with applying for this private ruling.

Company A will also incur further costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust, including, but not limited to:

• employee plan record keeping;

• production and dispatch of holding statements to employees;

• provision of annual income tax return information to employees;

• management of employee termination; and

• costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to Participants);

• other Trustee expenses, including the annual audit of the financial statements and annual income tax return of the Trust.

Under Clause 14, the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration in respect of its office. Company A may pay to the Trustee from Company A's own resources any such fees and reimburse such expenses incurred by the Trustee as agreed between Company A and the Trustee. The Trustee is entitled to retain for its own benefit any such fee or reimbursement.

The costs incurred by Company A in relation to the implementation and on-going administration of the Trust are deductible under section 8-1 of the ITAA 1997 as either:

• costs incurred in gaining or producing the assessable income of Company A; or

• costs necessarily incurred in carrying on the business of Company A for the purpose of gaining or producing the assessable income of Company A.

The view that the costs incurred by Company A are deductible under section 8-1 of the ITAA 1997 is consistent with ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer.

Consistent with the detailed reasoning above in question 1, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. The costs are therefore not excluded from being deductible under paragraph 8-1(2)(a) of the ITAA 1997. Accordingly, Company A is entitled to an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the Trust.

Question 3

The deduction for the irretrievable cash contributions under section 8-1 of the ITAA 1997 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 of the ITAA 1997.

Section 83A-210 of the ITAA 1997 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 of the ITAA 1997 applies under an arrangement where 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

The implementation of the Share Rights Plans, establishment of the Trust and provision of money by Company A to the Trustee, are considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i) of the ITAA 1997.

ESS interest

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

Under the Share Rights Plans, each of a right provided to a Participant when an offer is made under the STIP, a Performance Right provided under the LTIP and a Conditional Right provided under the PIP is an ESS interests as it is (or may later become) a right to acquire a beneficial interest in a share in a company (Company A).

Employee share scheme

Subsection 83A-10(2) of the ITAA 1997 defines 'employee share scheme' 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) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 defines the term 'scheme' as follows:

(a) any arrangement; or

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

The Share Rights Plans are employee share schemes for the purposes of Division 83A of the ITAA 1997 as they are arrangements, which provide an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a share), to a Participant in relation to their employment in Company A in accordance with the Deed.

A Company A share acquired by the Trustee to satisfy a right provided 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 making of offers under the STIP, the providing of Performance Rights under the LTIP and Conditional Rights under the PIP, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the Company A shares by the Trustee and the allocation of Company A shares to Participants are all interrelated components of the Share Rights Plans. 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 Company A shares is for the purpose of enabling Participants, indirectly as part of the Share Rights Plans, to acquire relevant rights (that is ESS interests).

If Company A provides irretrievable contributions before a Participant acquires the relevant ESS interests, then section 83A-210 of the ITAA 1997 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1 of the ITAA 1997. In this instance, the contribution will only be deductible to Company A in the income year when the relevant rights (ESS interests) are provided 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

Performance Rights provided under the LTIP and Conditional Rights provided under the PIP are indeterminate rights for the purposes of section 83A-340 of the ITAA 1997. That is because either delivery of a Company A share or payment of a cash equivalent satisfies the right, at the discretion of the Board. They are not a right to acquire a beneficial interest in a share unless and until the time when the Board determines the proportion of the Performance Rights and Conditional Rights that will be satisfied by the provision of Company A shares.

Once this proportion is determined, section 83A-340 of the ITAA 1997 operates to treat these Performance Rights and Conditional Rights as though they had always been rights to acquire beneficial interests in shares.

If irretrievable contributions are provided to the Trustee before these Performance Rights and Conditional Rights are acquired (and the Performance Rights and Conditional Rights do subsequently become ESS interests), then section 83A-340 of the ITAA 1997 operates to deem the Performance Rights and Conditional Rights to always have been ESS interests. Where this occurs, section 83A-210 of the ITAA 1997 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1 of the ITAA 1997. In such a case, a deduction to fund the exercise of the Performance Rights and Conditional Rights would be available to Company A in the income year in which Participants acquire the Performance Rights and Conditional Rights.

Note

Where the Performance Rights and Conditional Rights do not become ESS interests because they are ultimately satisfied in cash, the outgoing should not flow through the Trust. This is because the Trust would not be satisfying the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997.

As discussed in the analysis above, section 83A-210 of the ITAA 1997 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 of the ITAA 1997 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Company A shares where the contribution is made after the acquisition of the relevant rights.

In such a situation, the irretrievable contributions by Company A to the Trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which the irretrievable contributions are made where relevant rights are ultimately satisfied with Company A shares.

Question 4

Ordinary Income

Section 6-5 of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. Jordan CJ considered the definition of 'income' in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219; 3 ATD 142 at 144-145 where his Honour said:

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…

A 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 G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (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, 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 right or thing disposed of in exchange for the receipt can determine the character of the contribution of share capital received by Company A from the Trustee. Under this arrangement, Company A is issuing the Trustee with a new share in itself. The character of the newly issued share is one of capital. Therefore, the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is of a capital nature. The reasoning in ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee, supports this view

Accordingly, when Company A receives subscription proceeds from the Trustee of the Trust where the Trustee has subscribed for new shares in Company A to satisfy obligations to Participants of the Share Rights Plans, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account, and it will not be ordinary income under section 6-5 of the ITAA 1997.

Section 20-20 of the ITAA 1997

Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year.

Company A will receive an amount for the subscription of shares by the Trustee of the Trust. There is no insurance contract in this case, so the amount received is not by way of insurance.

Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation.

Subsection 20-20(3) of the ITAA 1997 makes assessable a recoupment of a loss or outgoing that is deductible in the current income year, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30 of the ITAA 1997.

Subsection 20-25(1) of the ITAA 1997 defines a recoupment as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing.

The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing.

To the extent section 8-1 of the ITAA 1997 allows a deduction for bad debts or rates or taxes, section 20-30 of the ITAA 1997 will apply such that if there were a recoupment of that deduction, that amount would be assessable. The receipt by Company A is in return for issuing shares to the Trustee of the Trust, not as a recoupment of previously deducted expenditure under section 8-1 of the ITAA 1997 regarding bad debts or rates and taxes that could be subject to section 20-30 of the ITAA 1997.

The subscription proceeds will therefore not be an assessable recoupment under section 20-20 of the ITAA 1997.

Capital Gains Tax (CGT)

Under section 102-20 of the ITAA 1997, 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 Company A 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) of the ITAA 1997 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, Company A is issuing shares, being equity interests as defined in section 974-75 of the ITAA 1997, to the Trustee of the Trust and therefore CGT event D1 does not happen.

In relation to CGT event H2, paragraph 104-155(5)(c) of the ITAA 1997 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 does not occur.

As no CGT event occurs, there is no amount assessable as a capital gain to Company A.

Therefore, when the Trustee of the Trust satisfies its obligations under the Deed by subscribing for new shares in Company A, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 of the ITAA 1997 or section 20-20 of the ITAA 1997, and nor will it trigger a CGT event under Division 104 of the ITAA 1997.

Question 5

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.

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

Question 6

The liability of an employer to fringe benefits tax (FBT) arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. Under the FBTAA, the calculation of the fringe benefits taxable amount is made by reference to the taxable value of each fringe benefit provided.

Without the provision of a 'fringe benefit', no amount will be subject to FBT.

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 provision of rights

Certain benefits however are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA.

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

(f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936; or

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 Share Rights Plans are employee share schemes, that the rights provided under the STIP, LTIP and PIP are, or may later become in the case of indeterminate rights, ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of rights pursuant to the Share Rights Plans will not be subject to fringe benefits tax either 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 or on the basis that they are a payment of salary or wages (in the case of rights which are ultimately satisfied with cash) and are thereby excluded from the definition of fringe benefit by paragraph 136(1)(f) of the FBTAA (refer to ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits).

The provision of Company A shares

As mentioned above, 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 participates in one of the Share Rights Plans, they obtain a right (being a right to acquire a beneficial interest in a share in Company A) and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received would be in respect of the exercise of the 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 right under one of the Share Rights Plans (being the provision of a share in Company A) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee.

Question 7

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) of the ITAA 1997 states that the expression an 'employee share trust' has the same meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 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

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

Paragraphs 130-85(4)(a) and (b) of the ITAA 1997

The beneficial interest in a share received by a Participant when an ordinary share in Company A is provided to them under the terms of the Deed is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997.

Subsection 83A-10(2) of the ITAA 1997 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 Share Rights Plans are employee share schemes within the meaning of subsection 83A-10(2) of the ITAA 1997 because they are schemes under which rights to acquire ordinary shares in Company A (being ESS interests) are provided to employees in relation to the employee's employment.

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

Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are therefore satisfied because:

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

• the Trust ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the Deed and Share Rights Plans.

Paragraph 130-85(4)(c) of the ITAA 1997

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will also require that the Trustee undertake incidental activities that are a function of managing the Share Rights Plans.

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) of the ITAA 1997:

• 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.

Under Clause 2.10(c) of the Deed:

…the Company and the Plan Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purpose of section 130-85(4) of the ITAA.

Paragraph 130-85(4)(c) of the ITAA 1997 is satisfied as all other activities undertaken by the Trustee are merely incidental to managing the Share Rights Plans.

Conclusion

The Trust satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 as:

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

• the Trust ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the Deed and Share Rights Plans; and

• the 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 Trust.

Paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA therefore excludes the contributions to the Trustee from being a fringe benefit.

Accordingly, the irretrievable cash contributions made by Company A or any subsidiary member of the Company A tax consolidated group to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares, will not constitute a fringe benefit within the meaning of section 136(1) of the FBTAA.

Question 8

As mentioned in the answer to question 5, PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains the operation of section 67 of the FBTAA. Notably, paragraphs 145 - 148 provide as follows:

145. Section 67 is the general anti-avoidance provision in the FBTAA 1986. 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 1986 is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA 1986 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 another 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 1986 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 or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

The Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 Fringe Benefits Tax-Response to questions by major rural organisation under the heading "Appendix, Question 18" where, 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...

Further, paragraph 151 of PS LA 2005/24 states:

151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA 1986.

The provision of benefits to the Trustee as irretrievable contributions to the Trust, and to Participants as rights under the STIP, Performance Rights under the LTIP and Conditional Rights under the PIP (and the Company A shares received on their vesting) are excluded from the definition of a fringe benefit for the reasons given in questions 6 and 7 above. As these benefits have been excluded from the definition of a fringe benefit, no fringe benefit arises and no fringe benefits tax will be payable by using the Trust arrangement. As there would be no fringe benefits tax payable without the use of the Trust (and nor likely would fringe benefits tax be payable under alternative remuneration plans), the fringe benefits tax liability is not any less than it would have been but for the arrangement.

The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A, or any subsidiary member of the Company A tax consolidated group, by the amount of the tax benefit gained from the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, shares in Company A.