Edited version of your written advice

Authorisation Number: 1013074728738

Date of advice: 26 August 2016

Ruling

Subject: Employee Share Scheme - irretrievable contributions paid by employer

Question 1

Are the contributions made by the Company to the Trustee of the Employee Share Trust to fund the acquisition of shares in the Company pursuant to the Company's Employee Share Plan (Plan) be an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the deduction for contributions by the Company allowed in the same year of income when the contribution is made to the Employee Share Trust provided it is in respect of shares that have been granted to employees or rights to acquire shares that have previously been granted to Participants under the Plan, pursuant to section 83A-210 of the ITAA 1997?

Answer

Yes.

Question 3

Are the contributions by the Company to the Employee Share Trust constitute a fringe benefit pursuant to subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No.

Question 4

Will the Commissioner make a determination under section 177F of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the arrangement where contributions are made by the Company to the Employee Share Trust to fund the acquisition of shares and allocation to Participants under the Plan?

Answer

No.

Question 5

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of costs incurred in relation to the implementation and on-going administration of the Employee Share Trust?

Answer

Yes.

This ruling applies for the following periods:

Income Tax Years: 1 July 20XX - 30 June 20XX

Fringe Benefits Tax Years: 1 April 20XX to 31 March 20XX

The scheme commences on:

1 July 20XX

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.

The Company is an Australian listed company and the head company of income tax consolidated group.

The Company is carrying on an income producing business.

Operation of the Plan

The Company has established an Employee Share Plan (Plan) as part of its key employee remuneration strategy.

The purpose of the Plan is to reward, retain and motivate eligible employees and align their interests with shareholders by providing them an opportunity to receive an equity interest in the Company in the form of shares.

The operation of the Plan is governed by the Plan Rules and Terms of Invitation.

The Board, at its sole discretion, may determine an eligible employee and make an invitation to the eligible employee to participate in the Plan.

On acceptance of the invitation, the Board may grant Rights to the eligible employee subject to the terms and conditions set out in the Invitation and Plan Rules. Upon the grant of Rights the eligible employee becomes a Participant in the Plan.

Each Right entitles the Participant to acquire one share in the Company for nil consideration when the Right vest and is exercised.

The Rights will vest when the vesting conditions are achieved by the relevant vesting period.

If the vesting conditions are not satisfied by the relevant time, the Rights will lapse.

Prior to Rights being exercised, Participants are not entitled to vote or receive any dividends.

When the Rights vest and the Participant exercises its Rights, the Trustee will allocate Company shares to the Participant and the Participant becomes the beneficial owner of their allocated shares.

Operation of the Trust

An Employee Share Trust (Trust) was established by the Company under the Trust Deed for the purpose of implementing and administrating the operation of the Plan.

An independent third party was appointed by the Company as the Trustee of the Trust (Trustee).

The Trust will be managed and administered by the Trustee pursuant to the sole activities test so that it satisfies the definition of 'employee share trust' for the purposes of section 130-85(4) of the ITAA 1997.

The Company has incurred various costs associated with the implementation, an on-going administration of the Trust and the services provided by the Trustee. The Trustee is not entitled to any remuneration for its services.

The Rights granted will vest in 3 stages over a 3 year period.

Pursuant to the Trust Deed, the Company made contributions to the Trustee in respect of shares issued to Participants following the vesting of Rights under Stage 2 and Stage 3.

The cash contributions are non-refundable and not retrievable by the Company pursuant to the terms of the Trust Deed. The Company has not right or beneficial interest in the property or income of the Trust.

Administration and reasons for using the Trust

The Company incurred various costs associated with the implementation and the on-going administration of the Trust. Under the Trust Deed, the Trustee is not entitled to any remuneration for its services however the Company may pay any fees, commission or other remuneration and may reimburse any expenses incurred by the Trustee.

The key reasons for the use of the Trust were to restrict dealings by the Participants in shares in contravention of the Company's share trading policy and to provide flexibility in the Company's capital management strategy.

In relation to the use of the Trust to manage the operation of the Plan, the Company states:

• Employee share trusts are common commercial vehicles which have been used by Taxpayers for many years to provide remunerations benefits to employees. Their usage is wide spread amongst private and public companies in Australia and overseas.

• All dealings between the parties have been and will continue to be conducted according to the legal documentation which is consistent with the way employee share schemes operate in practice, particularly for listed companies.

• An employee share trust provides an arm's length vehicle for acquiring and holding shares in a company, either by way of acquiring shares on market or by way of a new issue of shares, and assists a company with meeting Corporations Act 2001 requirements in relation to dealing in its own shares.

• An employee share trust assists with managing the risk of insider trading as the Trustee, as an independent party, is acquiring shares in accordance with a settled Trust Deed and continues to hold these shares unless approved to dispose of them in accordance with the Company's Share Trading Policy.

• An employee share trust provides an efficient structure for giving effect to disposal restrictions, forfeiture conditions and other conditions in relation to the shares. As the Trustee is the legal owner, employees as beneficial owner have no ability to deal in the sharers without appropriate approval.

• An employee share trust reduces the administrative burden given it is not necessary for a company to transfer sharers to employees on vesting. The shares may continue to be held by the Trustee until they are disposed of.

• An employee share trust provides the company with capital management flexibility by allowing the company to decide whether the Trustee should purchase shares on market or subscribe for shares to hold on behalf of employees, and also when such shares should be acquired.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1,

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

Income Tax Assessment Act 1997 section 83A-20,

Income Tax Assessment Act 1997 section 83A-210,

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

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

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F, and

Fringe Benefit Tax Assessment Act 1986 subsection 136(1).

Reasons for decision

Question 1

Summary

The contributions by the Company to the Trustee of the Trust to fund the acquisition of shares in the Company are an allowable deduction under section 8-1 of the Income Tax Assessment Act (1997) (ITAA 1997).

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 states that 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.

However, subsection 8-1(2) of the ITAA 1997 states that 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 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;

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

Draft Taxation Ruling TR 2014/D1 Income tax: employee remuneration trust arrangements (TR 2014/D1) provides the Commissioner's current view on a broad scope of taxation consequences for employers, trustees and employees who participate in an employee remuneration trust arrangement (ERT). It explains how the taxation laws apply when a contribution is made by an employer to the trustee of an ERT and benefits are paid or provided by the trustee of the ERT to employees.

TR 2014/D1 applies to employers, their employees and trustees who participate in an ERT as described at paragraph 9 of TR 2014/D1. On the facts, the way in which the Trust has been established and operates is consistent with the essential elements of an ERT as set out in paragraph 9 of TR 2014/D1.

Accordingly, an employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an ERT that is either:

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

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

to the extent the contribution is not private or domestic in nature, is not of capital or of a capital nature, does not relate to the earning of exempt income or non-assessable non-exempt income and deductibility is not precluded by another provision of the ITAA 1997 or ITAA 1936.

The contribution must be incurred

To qualify for a deduction under section 8-1 of the ITAA 1997 a contribution to the trustee of an ERT must be incurred.

As a broad guide, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance (TR 94/26).

Paragraph 169 of TR 2014/D1 provides that a contribution made to the trustee of an ERT is incurred only when the ownership of that contribution passes from an employer to the trustee of the trust and there is no circumstances in which the employer can retrieve any of the contribution - Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339 (Pridecraft); Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650 (Spotlight).

The Company has established a Trust for the purpose of managing the operation of the Plan.

Under the Trust Deed, the Company provides sufficient funds to the Trustee to acquire the Company shares for the benefit of Participants. The Company has no interest or beneficial interest in the Trust assets. The contributions are non-refundable and not retrievable by the Company.

Accordingly, the contributions made by the Company to the Trust will be irretrievable and non-refundable to the Company. Therefore, it is considered that the irretrievable contributions made by the Company to the Trustee of the Trust will be incurred for the purposes of section 8-1(1) of the ITAA 1997.

The contribution must be incurred in gaining or producing assessable income or necessarily incurred in carrying on a relevant business

Further, to be deductible under section 8-1 of the ITAA 1997, a contribution must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

In order to satisfy the second limb of section 8-1 of the ITAA 1997, there must be a relevant connection between the outgoing and the business. An expense will have the relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' (Ronpibon Tin NL and Tongkah Compound NL v. FC of T (1949) 78 CLR 47 (Ronpibon); Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation (1980) FCA 150 (Magna Alloys).

Paragraph 14 of TR 2014/D1 provides where an employer:

• carries on a business for the purpose of gaining or producing assessable income and engages employees in the ordinary course of carrying on that business,

• makes a contribution to the trustee of an EST, and

• at the time the contribution is made, the primary purpose of the contribution is for it to be applied, within a relatively short period of time, to the direct provision of remuneration of employees (who are employed in that business),

then, such a contribution would ordinarily satisfy the nexus of being necessarily incurred in carrying on that business.

The Company is carrying on an income producing business and engaged employees in the ordinary course of its business. The Company makes contributions to the Trustee of the Trust for the primary purpose of enabling the Trustee to acquire the Company's shares which will, in accordance with the Trust Deed, be allocated to and held for Participants upon exercise of their Rights.

Paragraph 178 of TR 2014/D1 provides that the Commissioner will generally accept a relatively short period of time for the trustee of an ERT to diminish a contribution for the direct provision of remuneration to employees to be up to five years from the date the contribution was made by an employer to the trustee of an ERT. However, where the contribution has been made to facilitate an employee having an interest in the ERT corresponding to a particular number of shares (or rights to acquire shares) in the employer or in its subsidiaries to which Subdivision 83A-C of the ITAA 1997 applies, the statutory scheme is such that a relatively short period of time for these arrangements will generally be accepted as being up to seven years from the date the contribution is made.

Pursuant to the Trust Deed and Plan Rules, the purpose of the contributions made by the Company to the Trustee is to be applied to the direct remuneration of Participants in the form of shares in the Company. Under the Plan, the Rights vest in 3 stages over a 3 year period and therefore the contributions made by the Company are considered to be applied within a relatively short period of time to the direct provision of remuneration of Participants.

Accordingly, the irretrievable contributions made by the Company to the Trustee of Trust for remunerating its employees under the Plan is an outgoing incurred in carrying on the Company's business for the purpose of gaining or producing assessable income.

The contribution must not be capital or of a capital nature

Even where a contribution satisfies either limb of subsection 8-1(1) of the ITAA 1997, it may still be capital or of a capital nature. Pursuant to subsection 8-1(2) of the ITAA 1997, the contribution will not be deductible to an employer under section 8-1 to the extent to which it is capital or of a capital nature (paragraph 183 of TR 2014/D1).

Paragraph 184 of TR 2014/D1 states that whether an outgoing is capital or revenue in nature can generally be determined by reference to the test articulated by Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337; [1938] HCA 73 (Sun Newspapers):

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay...

A contribution to the trustee of an ERT is of capital or of a capital nature, where the contribution secures for an employer an asset or advantage of an enduring or lasting nature that is independent of year to year benefits that the employer derives from a loyal and contented workforce: Pridecraft at FCAFC [97]-[99]; ATC 4010-4011; ATR 233-234 (paragraph186 of TR 2014/D1).

The contribution made by the Company to the Trustee to acquire the Company's shares is considered to be an asset of advantage of an enduring nature. The asset or advantage, obtained by the Company, is the advantage that flows from enlarging its own equity structure. The advantage obtained by Company, in effect, is a movement of value out of profit or capitalised profit to share capital and therefore a maintenance or enhancement of the capital value of the Company. As this advantage is structural and enduring, it would be of a capital nature (Paragraph 190 of TR 2014/D1).

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 differing nature.

However, where a contribution is made for the purposes of securing advantages of both capital and revenue nature, no apportionment is required where the advantages of a capital nature are only expected to be very small or trifling by comparison (paragraph 198 of TR 2014/D1).

Paragraph 202 of TR 2014/D1 relevantly provides that where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period of the contribution being made, it is considered that any amount of the contribution attributable to securing a capital structure advantage will only be very small or trifling where the employer:

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

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

In such cases it might reasonably be considered that the funds contributed by the employer are designed to be applied to remunerate employees in the form of any equity interest in the employer and provide a further incentive to secure the ongoing provision of effective services by employees.

On weighing up the facts in this case we consider:

• the contributions made by the Company to the Trustee of the Trust are for the purposes of acquiring shares in the Company to satisfy the Company's commitments arising under the Plan. They are primarily outgoings incurred in the ordinary course of carrying on its business;

• the contributions will be applied within a relatively short period of time to acquire shares in the Company for the benefit of Participants after the vesting conditions are satisfied.

• the amount of the contribution are provided sufficiently by the Company as required by the Trustee to acquire the requisite number of shares in the Company under the terms of the Trust Deed;

• Participants will receive absolute entitlement to shares in the Company upon the exercise of Rights within the relevant vesting period;

• the Plan provides Participants with an opportunity to receive an equity interest in the Company because the vesting conditions are linked to performance and retention of Participants.

Therefore, the contributions made by the Company are not considered capital in nature, or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction.

No other provision of the ITAA 1936 or ITAA 1997 prevents the Company from deduction of the contribution.

Accordingly, the irretrievable cash contributions made by the Company to the Trustee of the

Trust to fund the acquisition shares in the Company will be an allowable deductible to the Company under section 8-1 of the ITAA 1997.

Question 2

Summary

The contributions made by the Company to the Trust will be an allowable deduction under section 8-1 of the ITAA 1997 in the year of income the contributions are made provided the contribution is made in respect of Rights that were previously granted to Participants under the Plan. Section 83A-210 of the Income Tax Assessment Act 1997 (ITAA 1997) will not apply.

Detail reasoning

In Question 1 of this Ruling, it was determined that the contributions made by the Company to the Trust for purpose of remunerating its employees under an employee share scheme is an allowable deduction under section 8-1 of the ITAA 1997.

The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the Company incurred the loss or outgoing, but 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 states:

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 purposes 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 only applies if there is a relevant connection between the money provided to the Trustee and the acquisition of an ESS interest (directly or indirectly) by a Participant under the Plan in relation to the Participant's employment.

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

Right granted under the Plan is an ESS interest as it is a right to acquire a beneficial interest in a share in the Company.

An 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interest in a company are provided to employees, or associates of employees, (including past or prospective employees) of the company or subsidiaries of the company in relation to the employees' employment.

The Plan is an employee share scheme under which Rights are granted to Participants in relation to their employment with the Company (subsection 83A-10(2) of the ITAA 1997). Rights are granted by the Company to Participants upon their acceptance of the Invitation to participate in the Plan.

It is the Commissioner's view that at the time that Participants accept the offer to participate in the Plan, the Participants (as ultimate beneficiaries of the Trust) actually acquire Rights which are rights to acquire beneficial interests in the Company's shares. This concurs with the 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' (ATO ID 2010/103).

The granting of the rights to acquire beneficial interests in the Company's shares, the provision of the money to the Trustee under the Plan, the acquisition and holding of the shares by the Trustee and the allocation of the Company's shares to the Participants are all interrelated components of the employee share scheme. All the components of the scheme must be carried out so that the scheme can operate as intended.

As one of those components, the provision of contributions to the Trustee necessarily allows the scheme to proceed.

The Company provides irretrievable cash contributions to the Trust to enable the Trustee to acquire shares in the Company for the purpose of satisfying the exercise of Rights previously granted to Participants under the Plan. Accordingly, the Company provides another entity (the Trustee) with money (the irretrievable cash contributions) under an arrangement (within the meaning of that term in subsection 995-1(1) of the ITAA 1997), as required in subparagraph 83A-210(a)(i) of the ITAA 1997.

The relevant acquisition time of the ESS interests, for purposes of section 83A-210 of the ITAA 1997, is when the Rights were granted to the Participants in the relevant income year.

The Company will then make contributions to the Trust in respect of the vesting of the Rights previously granted under the Plan.

As the contributions are made by the Company to the Trustee of the Trust after the time when Participants acquired their Rights under the Plan, section 83A-210 of the ITAA 1997 will not apply.

Accordingly, the Company is entitled to a deduction for the contributions it makes to the Trust under section 8-1 of the ITAA 1997 in the year of income in which the contributions are made.

For completeness, if any amount of money that is used by the Trustee of the Trust to purchase excess shares in the Company intended to meet a future obligation arising from a future grant of Rights under the Plan, the excess payment will occur before the employees acquire the relevant ESS interests under the employee share scheme. Section 83A-210 will apply in these circumstances and the excess payment will only be deductible to the Company in the year of income when the relevant Rights are subsequently granted to Participants.

Question 3

Summary

The irretrievable cash contributions by the Company to the Trust will not be a fringe benefit pursuant to subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA 1986).

A benefit constituted by the cash contributions made by the Company to fund the acquisition of shares in the Company by the Trustee is specifically excluded from the definition "fringe benefit" under paragraph 136(1)(ha) of the FBTAA 1986.

Detail reasoning

A 'fringe benefit' will only arise under subsection 136(1) of the FBTAA where benefits are provided by employers to employees or associates of employees.

Under the definition of 'fringe benefit', a benefit must also be provided 'in respect of the employment of the employee'.

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

Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include:

a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997)

An 'employee share trust' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2) of the ITAA 1997) is a trust whose sole activities are:

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

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

(i) the company; or

(ii) a subsidiary of the company; and

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

A contribution made by the Company to the Trust will not be subject to FBT provided that the sole activities of the Trust are to obtain shares or rights to acquire shares in the Company.

As discussed in Question 2 above, Rights granted under the Plan are ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997. The Plan is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997.

For the purposes of paragraph 130-85(4)(c) of the ITAA1997, the Commissioner considers that activities that are a necessary function of managing an employee share scheme and administering a trust will satisfy the incidental activities test. Such activities include:

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

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

• 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 shares) are not considered merely incidental.

In this case, the Company established the Trust for the sole purpose of managing the operation of the Plan, which includes acquiring, holding and allocating shares in the Company arising from the exercise of a Right previously granted under the Plan on behalf of Participants. Undertaking activities to manage the operation of an employee share scheme necessarily requires the Trustee to undertake activities that are incidental to managing and administering the Plan. The Trustee is limited by the activities under the terms of the Trust Deed.

On this basis, it is considered that the Trust is an employee share trust as defined in subsection 995-1(1) of the ITAA 1997. The activities of the Trustee in acquiring, holding and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997. Other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Accordingly, paragraph 136(1)(ha) of the FBTAA 1986 of the definition of fringe benefit applies to exclude the cash contributions by the Company to the Trust from being a fringe benefit.

Question 4

Summary

Having regard to the factors in subsection 177D(2) of the ITAA 1936, the scheme described in the relevant facts and circumstances of this Ruling is not one to which Part IVA applies. The Commissioner will not make a determination under section 177F of the ITAA 1936 to deny a deduction claimed by the Company in respect of the irretrievable contributions made to the Trustee to acquire Company shares in accordance with the Plan.

Detail reasoning

Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision.

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-avoidance Rules (PSLA 2005/24) provides guidance on the application of the Part IVA and other general anti-avoidance rules.

Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1) of the ITAA 1936.

Before the Commissioner can exercise the discretion in subsection 177F(1) of the ITAA 1936, the following requirements of Part IVA must be satisfied:

• there must be a 'scheme' as defined in subsection 177A (1) of the ITAA 1936;

• a 'tax benefit', as identified in section 177C of the ITAA 1936, was or would have been obtained in connection with the scheme but for subsection 177F(1) of the ITAA 1936; and

• having regard to the section 177D of the ITAA 1936, the scheme is one to which Part IVA applies.

Regard must be had to the individual circumstances of each case in making a determination under section 177F to cancel a tax benefit.

Scheme

A scheme is defined in subsection 177A(1) of the ITAA 1936 which states:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

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

The Plan is a scheme within the meaning in subsection 177A(1) of the ITAA 1936.

Tax Benefit

'Tax benefit' is identified in subsection 177C(1) of the ITAA 1936 of which the relevant paragraph is:

Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or …

In order to determine the tax benefit that would be derived by the Company from the scheme it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the Company might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration.

The counterfactual(s) also forms the background against which an objective conclusion as to purpose of a person occurs in accordance with section 177D of the ITAA 1936.

Section 177D - Objective Purpose

Section 177D of the ITAA 1936 provides that Part IVA applies to a scheme if it would be concluded, having regard to the matters in subsection (2), that a person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling the taxpayer to obtain the tax benefit.

The matters contained in paragraphs (a) to (h) under subsection 177D(2) of the ITAA 1936 are:

(a) the manner in which the scheme was entered into or carried out;

(b) the form and substance of the scheme;

(c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(g) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (f), of the scheme having been entered into or carried out

(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (f).

Subsection 177A(5) of the ITAA 1936 clarified that the 'purpose' includes the dominant purpose where there are two or more purposes.

It is possible for Part IVA to apply notwithstanding that the dominant purpose of obtaining the tax benefit was consistent with the pursuit of commercial gain. The key issue under Part IVA is whether the particular scheme, or any part of it, was entered into or carried out by any person for the relevant purpose having regard to the eight matters specified in subsection 177D(2) of the ITAA 1936 ('the eight factors').

The consideration of purpose or dominant purpose under subsection 177D(2) of the ITAA 1936 requires an objective conclusion to be drawn. The conclusion required is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the eight factors.

While the eight factors will not be equally relevant in every case, each of the eight factors are taken into account and weighed together in arriving at a conclusion as to dominant purpose. Consideration of the factors will involve a comparison of the scheme with the counterfactual(s). Provided the eight factors are each taken into account, it is possible to arrive at the conclusion as to purpose by making a global assessment of purpose.

The manner, form and substance of the scheme that is carried out by the Company is consistent with the commercial objectives it seeks to achieve, namely establishing an independent party to acquire, hold and allocate shares in itself to Participants in satisfaction of Rights granted under the Plan in direct remuneration of its employees. The length of the scheme is not intended for a short period and is intended to remain in place into the future provided that the commercial benefits are met.

Overall, a consideration of all the matters referred to in subsection 177D(2) of the ITAA 1936 leads to the conclusion that the dominant purpose of the Plan is to provide remuneration to eligible employees who participate in the scheme in a form that promotes the Company's business objectives, rather than to obtain a tax benefit. The manner, form and substance of the scheme that is carried out by the Company is consistent with the commercial objectives it seeks to achieve, namely establishing an independent party to acquire, hold and allocate shares in itself to Participants in satisfaction of Rights granted under the Plan in direct remuneration of its employees. The length of the scheme is not intended for a short period and is intended to remain in place into the future provided that the commercial benefits are met.

Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable contributions made to the Trustee to acquire shares in the Company in accordance with the Plan.

Question 5

Summary

The costs incurred by the Company in implementing and on-going administration of the Trust will be deductible under section 8-1 of the ITAA 1997.

Detail reasoning

As discussed in Question 1, the Company is entitled to a deduction under section 8-1 of the ITAA 1997 for any loss or outgoing necessarily incurred in carrying on its business for the purpose of gaining or producing it assessable income to the extent they are not capital or are capital in nature.

The Company has implemented the Plan, an employee share scheme, for the purpose of remunerating eligible employees in a form that motivates employees to achieve the business goals of the Company. In relation to the Plan, the Company established the Trust for the sole purpose of managing the operation of the Plan.

Pursuant to the Trust Deed, the Trustee is not entitled to receive any fees, commission of other remuneration for performing its obligations. The Company may reimburse any expenses incurred by the Trustee from its own account.

Accordingly, the Company has incurred various implementation costs in relation to implementing the Plan and will incur costs in relation to the on-going administration of the Trust.

The Trust was established to facilitate the operation of the Plan which is an integral component of the Company's key employee remuneration strategy. The operating costs incurred for the purpose of implementing and administering the Trust form part of the ordinary employee remuneration costs. They are costs necessarily incurred by the Company in carrying on its business for the purpose of gaining or producing its assessable income. The costs are revenue and not capital or capital in nature on the basis that they are regular and recurrent employment expenses.

This view is consistent with ATO Interpretative Decision, ATO ID 2014/42 Income: employer costs for the purpose of administering its employee share scheme are deductible.

Accordingly, the costs incurred in relation to the implementation and on-going administration of the Trust are deductible under section 8-1 of the ITAA 1997.