Edited version of your written advice

Authorisation Number: 1012992387845

Date of advice: 7 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 (the Trustee), as trustee of the Company A Employee Share Trust (the Company A Share Trust) to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee?

Answer

Yes.

Question 2

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 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 Company A Share 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 (the SRP), the Former Share Rights Plans (the Former SRP) or the Employee Salary Sacrifice Share Plan (the Salary Sacrifice 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

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 ending 30 June 2016

Income tax year ending 30 June 2017

Income tax year ending 30 June 2018

Income tax year ending 30 June 2019

Income tax year ending 30 June 2020

Question 6

Will the provision of Share Rights under the SRP or the Former SRP, Salary Sacrifice Shares under the Salary Sacrifice Plan, or shares in Company A to employees of Company A 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 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 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

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

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

Company A's remuneration strategy seeks to build a performance orientated culture by attracting and retaining the best possible people to align with driving increased shareholder value. A key principle on which this strategy is based is providing employees with high levels of share ownership to support alignment to the long term goals of the organisation.

As part of its overall employee remuneration strategy, in addition to fixed remuneration, Company A offers certain employees and executives payments of both cash and shares upon satisfaction of certain performance conditions. This is implemented through the Share Rights Plans (the SRP) and the Former Share Rights Plans (the Former SRP).

Company A also allows eligible employees to participate in a salary sacrifice arrangement to obtain shares in Company A through the Company A Employee Salary Sacrifice Share Plan (the Salary Sacrifice Plan).

Share Rights Plans (the SRP)

Company A operates three Share Rights Plans. The Share Rights Plan Rules (SRP Rules) provide the terms and conditions under which each of the three performance rights plans is governed.

Broadly, the SRP Rules operate as follows:

Eligible employees are issued invitations by the Company A Board of Directors (the Board), to apply for a grant of Share Rights which vest according to performance criteria. The invitation will outline the number of Share Rights offered and the performance conditions (Rule A of the SRP Rules).

Once the eligible employee has received the invitation, they may accept the invitation in accordance with the instructions accompanying the invitation, unless the Board determines otherwise. The Board may also treat the conduct of an eligible employee in respect of an invitation as valid acceptance of that invitation (Rule B of the SRP Rules).

The Share Rights will be granted to eligible employees (who will then be Participants) for nil consideration (Rule C of the SRP Rules).

The satisfaction of the performance conditions shall determine the proportion of Share Rights which vest to the Participant. Satisfaction of the performance conditions will be determined by the Board at the end of the performance period (Rule D of the SRP Rules).

The Share Rights will vest at the end of the performance period, subject to the satisfaction of the performance conditions. If there is a Change of Control Event (Rule E of the SRP Rules), or upon retirement, retrenchment or death of the participant (Rule F of the SRP Rules) the Board has discretion as to how deal with the Participant's Share Rights, regardless of whether vesting and performance conditions have been met.

Share Rights can lapse in a number of ways. It can occur by lapsing of the Share Right in accordance with its terms, the receipt of a notice from the Participant to the effect that they have elected to surrender the Share Right or if the Board determines that the Participant has acted fraudulently, dishonestly or wilfully breached the Participant's duties. The Share Rights could also lapse according to another provision of the SRP Rules or in accordance with the terms of an invitation (Rule G of the SRP Rules).

Rule H of the SRP Rules ensures that all Company A shares issued on the exercise of a Share Right will rank equally with other Company A shares then on issue.

The Share Rights will vest at the end of the performance period, subject to the Participant satisfying the performance conditions. Once the Share Rights vest and are automatically exercised or following the exercise of a Vested Right, the participant will be entitled to shares in the company (one ordinary share for every right). The shares will be held in the Company A Share Trust on behalf of the Participant subject to conditions as specified in the SRP Rules. At the time these conditions are satisfied, the Participant will become eligible to withdraw the shares from the Company A Share Trust.

Participants are subject to transfer restrictions under the SRP Rules. A Participant may not deal with a Company A share acquired under the SRP until the end or any period specified by the Board in the invitation or the end of any other period determined by the Board in accordance with applicable law (Rule I of the SRP Rules).

The key provisions of the three Share Rights Plans are as follows:

Company A Executive Incentive Plan (the Executive Plan)

Participants in the Executive Plan are eligible executives and senior staff of Company A and its Employer Entities.

The key objectives of the Executive Plan are to:

• ensure the focus of executives on delivery of results that exceed performance expectations of the Board and shareholders;

• increase alignment of executive and shareholder interests through increased executive share ownership; and

• provide market competitive rewards if performance expectations are achieved.

The Executive Plan offer comprises 50 per cent cash and a minimum 50 per cent share rights (Share Rights) to ordinary Company A shares quoted on the ASX (Maximum Award). Participants may elect to increase the weighting applied to the Share Rights up to 100 per cent of their Maximum Award, which will proportionally decrease the cash component.

Upon acceptance of an Executive Plan offer, a Participant will be granted the number of Executive Plan Share Rights consistent with their elected weighting.

The Executive Plan performance period will commence on 1 July and will conclude on 30 June with the final determination of a Participant's Executive Plan award made in August. As soon as practicable following that determination, the Participant will be notified of the actual cash value and number of Executive Plan Share Rights that will vest.

On assessment of the performance measures, a Participant's Executive Plan Share Rights will become vested rights (Vested Rights) which can be exercised to acquire ordinary Company A shares quoted on the ASX at the Participant's discretion subject to the conditions set out in Company A's Securities Trading Policy. Any unvested Share Rights lapse where performance targets are not met.

The Executive Plan operates entirely at the discretion of the Board and may be terminated, suspended or amended at any time, in its entirety or in part, in relation to any or all Participants.

The Executive Plan offer and grant of Share Rights does not automatically entitle a Participant to an award. The actual cash value and number of Company A shares to which they may become entitled will depend on:

• the degree to which the Executive Plan performance measures are satisfied over the Executive Plan annual performance period (1 July to 30 June);

• satisfaction of the vesting conditions; and

• the operation of the SRP Rules.

Company A Long Term Incentive Plan (Current LTP)

Participants in the Current LTP are eligible executives and senior staff of Company A and its Employer Entities.

The key objectives are to:

• ensure alignment between executives and shareholders;

• reward performance and business decisions that drive long term growth and deliver shareholder value;

• provide appropriate long term measures that support a performance culture and stretch targets;

• be sustainable in the long term, withstanding the commodity cycle and volatility of a resources company; and

• provide a basis for the retention of executives; and

• be tax effective.

For the Current LTP, on assessment of the performance measures, a Participant's LTP Share Rights will become Vested Rights which can be exercised into ordinary Company A shares at their discretion, subject to the conditions set out in Company A's Securities Trading Policy. Any unvested Share Rights lapse where performance targets are not met.

The Current LTP performance period will commence on 1 July 2015 and will conclude on 30 June 2018 with the final determination of a Participant's Current LTP award made in August 2018. As soon as practicable following that determination, the Participant will be notified of the actual number of LTP Share Rights that will vest.

The Current LTP operates entirely at the discretion of the Board and may be terminated, suspended or amended at any time, in its entirety or in part, in relation to any or all Participants.

The Current LTP offer and grant of Share Rights does not automatically entitle a Participant to Company A shares. The actual number of Company A shares to which they may become entitled will depend on:

• the degree to which the Current LTP performance measures are satisfied over the Current LTP annual performance period (three years commencing 1 July 2015);

• satisfaction of the vesting conditions; and

• the operation of the SRP Rules.

Company A Staff Incentive Plan (the Staff Plan)

Participants in the Staff Plan are all permanent direct employees of Company A and its Employer Entities. The Staff Plan offer comprises of an offer of a combination of cash and / or Vested Rights to be provided to Participants of the Staff Plan.

Key objectives of the Staff Plan are to:

n focus employees on the delivery of Company A's annual objectives;

n drive a performance culture that delivers on stretch targets;

n provide competitive rewards if performance expectations are achieved; and

n enable employees to build a vested interest in Company A's longer term performance by providing an opportunity to acquire shares in Company A.

Participants must elect whether the Share Rights will be cash settled or Vested Right settled at the time the Staff Plan offer is accepted.

If a Participant elects to receive their vested Share Rights as Vested Rights, the value of their award will be increased by 50 per cent. Vested Rights are convertible to shares in Company A either at the time when the Vested Rights are awarded or at a later date within 15 years from the date of the award at the Participant's discretion. The Vested Rights or shares awarded in respect of the 50% uplift are subject to forfeiture if the Participant leaves Company A within 12 months of receiving them.

The Staff Plan performance period will commence on 1 July and will conclude on 30 June. The final determination of a Participant's Staff Plan award will be made in August. As soon as practicable following that determination, the Participant will be notified of the actual cash value or number of Staff Plan Vested Rights they will receive.

The Staff Plan operates entirely at the discretion of the Board and may be terminated, suspended or amended at any time in relation to any or all Participants.

The Staff Plan offer does not automatically entitle a Participant to an award. The actual cash value or Company A shares to which they may become entitled will depend on:

• the degree to which the Staff Plan performance measures are satisfied over the Staff Plan annual performance period (1 July to 30 June);

• satisfaction of the vesting conditions; and

• the operation of the SRP Rules.

Employee Salary Sacrifice Share Plan (the Salary Sacrifice Plan)

The Salary Sacrifice Plan aims to enable employees to build a vested interest in Company A's longer term performance by providing an opportunity to acquire shares in the company.

It allows employees to nominate an amount of their pre-tax salary to be sacrificed to acquire shares (Salary Sacrifice Shares) in Company A under the Salary Sacrifice Plan. Per annum, the minimum amount that can be nominated is $1,000 and the maximum amount is $5,000.

Participants in the Salary Sacrifice Plan are all permanent employees of the Employer Entities whose term of employment is greater than 12 months and who were employed at the commencement of the performance period.

The Salary Sacrifice Plan is governed by the Employee Salary Sacrifice Share Plan Rules (Salary Sacrifice Plan Rules). These are broadly as follows:

Eligible Participants are issued invitations by the Board, to participate in the Salary Sacrifice Plan as specified in the invitation. The invitation allows the employee to acquire shares in Company A on the terms and conditions the Board imposes (Rules A & B of the Salary Sacrifice Plan Rules).

Once an eligible Participant has received an invitation, they may accept in accordance with the instructions accompanying, unless otherwise determined by the Board (Rule C of the Salary Sacrifice Plan Rules).

Where an invitation is made, the number of shares to be issued, transferred or allocated to the Trustee to be held on behalf of a Participant will be the dollar amount of the salary sacrifice divided by the issue price per share outlined in the invitation. Such an invitation will be conditional on Company A and the Participant entering into an agreement setting out the terms and conditions of the salary sacrifice arrangement (Rule D of the Salary Sacrifice Plan Rules).

Each Participant must, in the discretion of the Board, elect to make their salary sacrifice contributions by way of regular deductions from the Participant's remuneration during the relevant year or a lump sum deduction from the Participant's remuneration in the first payroll period during the relevant year (Rule E of the Salary Sacrifice Plan Rules).

Subject to other applicable Salary Sacrifice Plan Rules, as soon as practicable after an application has been accepted and the relevant Participant's salary sacrifice contributions have been deducted from that Participant's remuneration, the Board will instruct the Trustee to subscribe for, acquire and/or allocate the number of shares applied for by the Participant pursuant to the application.

The Trustee will then hold those shares on behalf of that Participant in accordance with the terms of the Company A Employee Share Trust Deed (Company A Trust Deed) (Rule F of the Salary Sacrifice Plan Rules).

Subject to the Trustee receiving from Company A and its Employer Entities sufficient funds to subscribe for or acquire the shares, the Board may, in its absolute discretion instruct the Trustee to either subscribe for new shares or acquire shares on market to be held on a Participant's behalf, or instruct the Trustee to use a combination of both alternatives (Rule F of the Salary Sacrifice Plan Rules).

All shares issued will rank equally with other shares of the same class at the time on issue, except for any rights attaching to the shares by reference to a record date prior to the date of their allotment, transfer or allocation (Rule G of the Salary Sacrifice Plan Rules).

Participants are subject to transfer restrictions under the Salary Sacrifice Plan Rules. A Participant may not deal with an Company A share acquired under the Salary Sacrifice Plan until the end of a period of 7 years (or any other period specified determined by the Board) commencing on the date of the issue, transfer or allocation of that share (Rule H of the Salary Sacrifice Plan Rules).

A separate account or record will be opened and maintained by the Trustee in respect of the Salary Sacrifice Plan contributions, shares issued, shares transferred and any dividends, bonus shares, interest or other earnings (Rule I of the Salary Sacrifice Plan Rules).

The Former Share Rights Plans (the Former SRP)

The Share Rights issued under the Former Share Rights Plans are governed by the 2012 Share Rights Plans Rules (Former SRP Rules). The Former SRP Rules which apply to both the 2014 LTP and 2015 LTP Share Rights broadly operates as follows:

• Eligible Participants are issued invitations by the Board, to apply for a grant of Share Rights as specified in the invitation. The invitation will outline the number of Share Rights offered and the Performance Condition (Rule A of the Former SRP Rules);

• Once the Eligible Participant has received the invitation, they may apply to be issued with Share Rights by executing the Application attached to the invitation within the seven day time limit (Rule B of the Former SRP Rules).

• The Share Rights will be issued to Participants for nil consideration (Rule C of the Former SRP Rules).

• The satisfaction of the Performance Condition shall determine the proportion of Share Rights which vest to the Participant (Rule D of the Former SRP Rules). Satisfaction of the Performance Condition will be determined by the Board at the end of the Performance Period (Rule E of the Former SRP Rules).

• The Share Rights will vest at the end of the Performance Period, subject to the satisfaction of the Performance Condition. However, to the extent the Performance Condition has not been met, Share Rights will vest immediately if there is a Change of Control Event, or upon retirement / retrenchment of the Participant or death of the Participant (Rule F of the Former SRP Rules).

• Share Rights which do not vest at the end of the Performance Period or pursuant to Rule F above, will lapse (Rule G of the Former SRP Rules).

• Rule H of the Former SRP Rules ensures that all shares issued on the vesting of a Share Right will rank equally with other shares then on issue.

• At the time the Share Rights vest, Company A must direct the Trustee to subscribe for, acquire or allocate to the Participant one share for each Share Right vested and hold those shares in the Company A Share Trust on behalf of the Participant (clause 1 of the Company A Trust Deed).

• clause 2 of the Company A Trust Deed directs Company A to provide funds to the Trustee in order to allow the Trustee to subscribe for / and or acquire shares to be held on behalf of the Participants under the Former SRP.

• clause 3 of the Company A Trust Deed allows the Trustee to sell the shares on behalf of the Participant and provide the proceeds of sale less brokerage costs to the Participant when specified in a Withdrawal Notice.

• On assessment of the performance measures, a Participant's LTP Share Rights are automatically exercised into ordinary shares on vesting, rather than into Vested Rights.

The Company A Employee Share Trust (Company A Share Trust)

Company A established the Company A Share Trust for the sole purpose of obtaining Company A shares for the benefit of employees of Company A under employee equity plans such as the SRP, the Former SRP and the Salary Sacrifice Plan (clause 1 of Recitals of the Company A Trust Deed). The Trustee of the Company A Share Trust is Company B (the Trustee), an external trustee acting in an independent capacity on behalf of the beneficiaries of the Company A Share Trust.

Company A and the Trustee agree that the Company A Share Trust will be managed and administered so that it satisfies the definition of an 'employee share trust' (clause 4 of the Company A Trust Deed).

The Company A Share Trust operates as follows:

The Trustee has the full power to do all things a trustee is permitted to do by law in respect of the Trust, the Trust Shares and the Trust Assets (clause 5 of the Company A Trust Deed).

The Company A Share Trust will be funded by contributions from Company A and Employer Entities (i.e. for the purchase of Company A shares in accordance with the SRP, the Former SRP and the Salary Sacrifice Plan) as specified in clause 2 of the Company A Trust Deed.

Company A and the Employer Entities are likely to contribute funds to the Company A Share Trust when the Share Rights vest to the Participant and are exercised or when Share Rights vest and are converted into Vested Rights. In accordance with the intended operation of the Salary Sacrifice Plan, contributions are likely to be regular deductions from the Participant's remuneration during the relevant year.

These funds will be used by the Trustee of the Company A Share Trust to acquire the Company A shares either on-market or via a subscription for new shares in Company A (refer clause 6 and 7 of the Company A Trust Deed), based on written instructions from Company A (clause 1 of the Company A Trust Deed).

The Trustee will, in accordance with instructions received by Company A pursuant to the SRP Rules as soon as reasonably practicable, acquire, allocate and deliver Company A shares for the benefit of a Participant provided that the Trustee receives sufficient payment to subscribe for, or purchase Company A shares or has sufficient Unallocated Trust Shares available (clause 8 of the Company A Trust Deed).

Company A shares acquired by the Trustee will be immediately allocated to the relevant employees and held on their behalf as Trust Shares (clause 3 of the Company A Trust Deed).

Company A may direct the Trustee to allocate Unallocated Trust Shares to a Participant from time to time (clause 9 of the Company A Trust Deed).

If Company A makes a Bonus Issue in respect of Trust Shares held by the Trustee on behalf of a Participant, the Trustee must hold the bonus shares issued as Trust Shares for that Participant and are they deemed for the purposes of the Company A Trust Deed to have been credited to the Participant at the same time as the Trust Shares (clause 10 of the Company A Trust Deed).

The structure of the Trust and the SRP, the Former SRP and the Salary Sacrifice Plan are such that shares may be dealt with at any time after the Restrictive Period lapses, in the following manner:

• Trust Shares allocated to each Participant will generally be transferred into the name of the Participant (i.e. legal title) upon a Withdrawal Notice being lodged with and approved by the Board (clause 11 of the Company A Trust Deed); or

• the Trustee can sell shares on behalf of the Participant, where permitted to do so by the Participant, resulting in a cashless exercise for them. That is, the Participant receives proceeds on sale of shares by the Trustee less the exercise price (if any) and any brokerage costs (clause 3 of the Company A Trust Deed).

The Trustee is not entitled to receive from the Trust any fee, commission or remuneration in respect of its performance of its obligations as trustee of the Company A Share Trust (clause 12 of the Company A Trust Deed).

The Trustee will distribute any remaining Trust Assets in accordance with clause 13 of the Company A Trust Deed prior to the termination of the Company A Share Trust. The Trustee must not pay any balance under clause 14 to Company A (clause 15 of the Company A Trust Deed).

Clawback Policy

Company A operates a 'clawback policy' under the SRP. Clawback will be initiated where in the opinion of the Board, a Participant:

• has acted fraudulently or dishonestly;

• has engaged in gross misconduct;

• has done an act which has brought Company A, or any member of the Company A Group into disrepute;

• has breached his or her duties or obligations to the Company A Group or a member of that group; or

• is convicted of an offence or has a judgment entered against them in connection with the affairs of the Company A Group.

Clawback will also be initiated where in the opinion of the Board; there is a financial misstatement event.

In the event of clawback, the Board may determine that any Share Rights held by the Participant will lapse or be deemed to be forfeited (Rule J of the SRP Rules).

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 67(1)

Fringe Benefits Tax Assessment Act 1986 subsection 67(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

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

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

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 subsection 177F(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

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

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

Income Tax Assessment Act 1997 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 subsection 20-20(3)

Income Tax Assessment Act 1997 subsection 20-25(1)

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-210

Income Tax Assessment Act 1997 paragraph 83A-210(a)(i)

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 104-155(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)(b)

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 701-1

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

The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997. As a consequence, the actions and transactions of the subsidiary members of the Company A tax consolidated group are treated for income tax purposes as having been undertaken by 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 tax consolidated group in relation to questions 6 to 8.

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

Question 1

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

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

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

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


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

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

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

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

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

Losses or outgoings

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

The Trustee must, on direction by the Company A Board (clause 1 of the Company A Trust Deed), acquire Company A shares to enable Company A to satisfy its obligations under the terms of the relevant Rules (clause 6 of the Company A Trust Deed). Company A must provide the Trustee with all the funds required to enable it to subscribe for, or acquire those Company A shares (clause 2 of the Company A Trust Deed). The Trustee is not required to acquire, allocate and deliver Company A shares if it does not receive sufficient payment from Company A to subscribe for or purchase Company A shares or if it does not have sufficient Unallocated Trust Shares available in the Company A Share Trust (clause 8 of the Company A Trust Deed).

The Trustee will hold Unallocated Trust Shares on trust for the benefit of Participants generally (clause 1 of the Company A Trust Deed). The Trustee may allocate or transfer Unallocated Trust Shares to particular Participants from time to time in accordance with the Company A Trust Deed (clause 9 of the Company A Trust Deed).

If Company A makes a Bonus Issue in respect of Trust Shares held by the Trustee on behalf of a Participant, the Trustee must hold the bonus shares issued as Trust Shares for that Participant and are deemed for the purposes of the Company A Trust Deed to have been credited to the Participant at the same time as the Trust Shares (clause 10 of the Company A Trust Deed).

The contributions made to the Trustee by Company A will be irretrievable and non-refundable to Company A in accordance with the Company A Trust Deed as:

• all funds received by the Trustee from Company A will constitute Accretions to the corpus of the Trust and will not be repaid to Company A and no Participant shall be entitled to receive such funds (clause 2 of the Company A Trust Deed).

• on termination of the Company A Share Trust the Trustee must not pay any balance of the Trust under clause 14 to Company A (clause 15 of the Company A Trust Deed).

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

Sufficient nexus

In order for a loss or outgoing to be deductible under subsection 8-1(1) it must be either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. A line of authorities have established that there will be a link between a loss or outgoing and the derivation of income where there is a sufficient nexus (The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169, Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288, W. Nevill And Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin No Liability v The Federal Commissioner of Taxation (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147).

Company A established the Company A Share Trust for the sole purpose of facilitating the SRP, the Former SRP and the Salary Sacrifice Plan (refer Recital A in the Company A Trust Deed).

The contributions made by Company A to the Trustee are part of the overall employee remuneration costs of Company A. The benefits provided to employees under the SRP, the Former SRP and the Salary Sacrifice Plan are designed to align the interests of Eligible Employees and Shareholders, attract, retain and motivate key employees and to support a culture of share ownership (refer, Rule K of the SRP Rules).

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

Capital or Revenue

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

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

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

Apportionment

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

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

Where a contribution from an employer is ultimately, and in substance, used 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.

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 contributions to the Trustee in order to carry on its business are either not capital in nature or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction.

Private or domestic in nature

Finally, nothing in the facts suggests that the contributions made by Company A to the Trustee are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936.

Conclusion

Therefore, when Company A or any subsidiary member of the Company A tax consolidated group makes irretrievable contributions to the Trustee to fund the acquisition of Company A shares in accordance with the Company A Trust Deed and the Plans, those contributions will be an allowable deduction to Company A under section 8-1.

Question 2

Company A will incur costs in relation to the establishment and implementation of the Company A Share 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 Company A Share Trust in respect of the on-going administration and management of the Company A Share Trust, including, but not limited to:

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

• 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

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

In accordance with clause 12 of the Company A Trust Deed, the Trustee is not entitled to receive from the Trust any fees, commission or remuneration in respect of its performance of its obligations as trustee of the Trust. The Company may pay to the Trustee from the Company's own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as the Company and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement. (clause 12 of the Company A Trust Deed).

The costs incurred by Company A in relation to the implementation and on-going administration of the Company A Share Trust are deductible under section 8-1 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 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 analysis 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). Accordingly Company A is entitled to an income tax deduction, pursuant to section 8-1, 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 Company A Share Trust.

Question 3

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

Section 83A-210 provides that if:

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

(i) under an arrangement; and

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

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

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

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

Arrangement

The implementation of the relevant Plans, establishment of the Company A Share 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).

ESS interest

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

Under the SRP and the Former SRP, the rights granted to a Participant are ESS interests as they are rights to acquire beneficial interests in shares in Company A.

Under the Salary Sacrifice Plan, the Company A shares provided to a Participant are ESS interests as they are beneficial interests in shares in Company A.

Employee share scheme

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

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

(a) the company; or

(b) subsidiaries of the company;

in relation to the employees' employment.

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

(a) any arrangement; or

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

Each of the SRP, Former SRP and Salary Sacrifice Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest is provided to a Participant in relation to their employment in Company A in accordance with the Company A Trust Deed.

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

Relevant connection

The granting of Share Rights under the SRP and the Former SRP, the provision of Company A shares under the Salary Sacrifice Plan, 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 relevant 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 considered to be for the purpose of enabling Participants, indirectly as part of the SRP and Former SRP, to acquire Share Rights or directly as part of the Salary Sacrifice Plan to acquire Company A shares (that is ESS interests).

Accordingly, if the irretrievable contributions are provided before the Share Rights under the SRP and Former SRP, or Company A shares under the Salary Sacrifice Plan 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. In this instance the contribution will only be deductible to Company A in the income year when the relevant ESS interests are granted to Participants. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

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

Accordingly, section 83A-210 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Company A shares where the contribution is made after the acquisition of the relevant ESS interests.

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

Question 4

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. The definition of 'income' was considered by Jordan CJ 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, where the trustee subscribes to the company for an issue of shares and pays the full subscription price for the shares, the company receives a contribution of share capital from the trustee.

The character of the contribution of share capital received by Company A from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. 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 also of a capital nature. This view is supported by 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.

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

Section 20-20

Subsection 20-20(2) 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 Company A Share Trust. There is no insurance contract in this case, so the amount is not received 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) 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.

Subsection 20-25(1) 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 that section 8-1 allows a deduction for bad debts or rates or taxes, section 20-30 will apply such that if there was 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 Company A Share Trust, not as a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes that could be subject to section 20-30.

The subscription proceeds will therefore not be an assessable recoupment under section 20-20.

Capital Gains Tax (CGT)

Under section 102-20, 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 event D1 (creating a contractual or other rights) and CGT event 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 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.

As Company A is issuing shares, being equity interests as defined in section 974-75, to the Trustee of the Company A Share Trust neither CGT event D1 nor CGT H2 will happen.

Conclusion

When the Trustee of the Company A Share Trust satisfies its obligations under the Company A Share Trust 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 or section 20-20 and will also not trigger a CGT event under Division 104.

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 (dominant purpose).

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 in full, any deduction claimed by Company A for the irretrievable 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 Company A Share Trust.

Question 6

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA, which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided.

No amount will be subject to FBT unless a 'fringe benefit' is provided.

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

However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

The provision of Share Rights and the provision of Company A shares under the Salary Sacrifice Plan

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 SRP, the Former SRP and the Salary Sacrifice Plan are employee share schemes, that the Share Rights provided under the SRP and the Former SRP and the Company A shares provided under the Salary Sacrifice Plan are ESS interests, and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of Share Rights under the SRP and the Former SRP and the provision of Company A shares under the Salary Sacrifice Plan will not be subject to fringe benefits tax on the basis that they are acquired by Participants under an employee share scheme (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

The provision of Company A shares under the SRP and the Former SRP

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

Therefore, the benefit that arises to an employee upon the exercise of a vested Share Right (being the provision of a share 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) states that the expression an 'employee share trust' has the same meaning given by subsection 130-85(4).

Subsection 130-85(4)states:

An employee share trust, for an employee share scheme, is a trust whose sole activities are:

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

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

(i) the company; or

(ii) a subsidiary of the company; and

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

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

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

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

Subsection 83A-10(2)defines an employee share scheme as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. The SRP, Former SRP and Salary Sacrifice Plan are employee share schemes within the meaning of subsection 83A-10(2) because they are a schemes under which Share Rights are provided under the SRP and the Former SRP and Company A shares are provided under the Salary Sacrifice Plan to employees in relation to the employee's employment.

Company A has established the Company A Share Trust to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests acquired by those employees under the SRP, the Former SRP and the Salary Sacrifice Plan. 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 Share Rights and the Company A shares (under the Salary Sacrifice Plan) are provided to employees in relation to their employment.

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

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

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

Paragraph 130-85(4)(c)

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

• the opening and operation of a bank account to facilitate the receipt and payment of money;

• the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee;

• the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme;

• dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme;

• the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares;

• the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and

• receiving and immediately distributing shares under a demerger.

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental.

The Trustee has, subject to the Company A Trust Deed, all of the powers in respect of the Company A Share Trust it is legally possible for a Trustee to have as though it were the absolute owner of the assets of the Company A Share Trust (clause 5 of the Company A Trust Deed). However, Company A and the Trustee have agreed that the Company A Share Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purpose of section 130-85(4)(clause 4 of the Company A Trust Deed).

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

Conclusion

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

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

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

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

Consequently, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions 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 be treated as a fringe benefit within the meaning of subsection 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. 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 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 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 of the FBTAA, 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 Practice Statement 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.

In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the Company A Share Trust, and to Participants by way of the provision of Share Rights under the SRP and the Former SRP (and the Company A shares received on their vesting) and Company A shares under the Salary Sacrifice Plan are excluded from the definition of a fringe benefit for the reasons given above in questions 6 and 7. 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 by Company A to the Trustee of the Company A Share Trust to fund the subscription for, or acquisition on-market of, shares in Company A.