Edited version of your written advice

Authorisation Number: 1013076172818

Date of advice: 1 September 2016

Ruling

Subject: Company A Group Limited

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 Company B to Trust Co (Trustee), as trustee of the Company A Performance Share Plan Trust (Trust) to fund the subscription for, or acquisition on-market of, Company A ordinary shares (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 Company B 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 Company B 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

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

Answer

No.

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

• 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

• Income tax year ending 30 June 2021

Question 5

Will the provision of Performance Rights or Performance Shares to employees of Company B be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 6

Will the irretrievable cash contributions made by Company A or Company B to fund the subscription for or acquisition on-market of Company A shares, or to fund the administration of the Trust, constitute a fringe benefit within the meaning of section 136(1) of the FBTAA?

Answer

No.

The rulings for questions 6 to 8 each apply for the following periods:

• 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

• Fringe benefits tax year ended 31 March 2021

Relevant facts and circumstances

Company A is the parent company of an economic group of companies that carry on business in Australia and overseas (Company A Group). For Australian taxation purposes, Company A only acts as the head entity of a tax consolidated group (Company A tax consolidated group) and has no employees. Company B is a member of the Company A Group by virtue of being a wholly owned subsidiary of Company A and it is also a member of the Company A tax consolidated group.

Company A has settled and established an employee share trust, the Company A Group Performance Share Plan Trust (Trust), for the purposes of administering the Company A Group Performance Share Plan (Plan). The Plan is operated pursuant to the Company A Performance Rights Plan Rules (Plan Rules).

The Trust was established pursuant to the Company A Group Performance Share Plan Trust Trust Deed and entered into between Company A and Trustee Company dated 14 April 2009 (Trust Deed). Trust Co, an independent company, is the current trustee of the Company A Trust (Trustee) and has replaced Trustee Company.

The Plan

The Company A Group established the as part of its reward and retention policy for certain executives. The Plan has been implemented as part of Company A's long-term strategy of creating shareholder wealth by:

• rewarding the hard work of senior executives and selected employees in a way that is competitive, market related and cost-effective;

• motivating senior executives and selected employees through direct alignment of the Company A Group's success and personal financial interests;

• promoting the long-term retention, reflecting the importance of senior executives and selected employees to the future success of the Company A Group; and

• attracting new executive talent to achieve the Company A Group's strategy.

Employees of Company B, who are Eligible Executives as defined in clause 1.1 of the Plan Rules and who choose to participate in the Plan by accepting an offer of Performance Rights, become and are referred to as Participants under the Plan. A Performance Right represents a right to acquire one Performance Share, which is defined in the Plan Rules as being a fully paid ordinary share in the capital of Company A (Company A share) that has been allocated to the Participant pursuant to the terms of the Plan.

An Unallocated Share is defined in the Trust Deed as a Company A share held by the Trustee pursuant to the Trust Deed which has not been allocated to a Participant.

Ultimately Participants, through the Company A Group's business operation, directly generate assessable Australian income for the Company A tax consolidated group.

The Plan was funded by a notional initial settlement amount from Company A to the Trust, and has since been funded by periodic irretrievable contributions made to the Trust by Company A and Company B, as and when required.

It is proposed that contributions will be made to the Trust in the 2017 income year and subsequent income years as follows:

• funds transferred to the Trust by Company A or Company B must only be used to acquire Company A shares for the purposes of administering the Plan;

• the amount of funds transferred to the Trust will be determined based on an estimated forecast following a review of the quantum of outstanding unvested Performance Rights, together with consideration of the likelihood of rights vesting to determine if the Trust holds sufficient Company A shares to satisfy future potential vesting;

• management will review these forecasts and periodically provide recommendations to the Board (as defined in the Plan Rules) to ensure the Trust is properly funded;

• the Board will provide guidance to the Trustee on how the Trustee should acquire the Company A shares whether by way of on-market purchase or subscription; and

• The Trustee will then consider the Board's instructions and having regard to its broader obligations under the Trust Deed and under trust law will then act accordingly.

The amount of the contributions made to the Trust will depend on:

• the estimated forecast of the Performance Rights vesting; and

• the number of Company A shares held at that time by the Trustee.

The Trust

The Trust was established for the purpose of obtaining and administering Performance Shares for the benefit of employees participating in the Plan.

It is also intended that the Trust will be available to facilitate the requirements of any future equity plans that the Company A Group may implement.

The Company A Group's reasons for implementing the Plan via the Trust include:

• the Trust assures Participants that the Performance Shares and any incidental dividend income or associated rights are held independently of the Company A Group and the Trustee has a fiduciary obligation to act in the interest of its beneficiaries, that is, employees of the Company A Group;

• the Trust enables the acquisition of Performance Shares, either on-market or by subscribing in accordance with the Company A Group's preferred timeline;

• The Company A Group can manage its costs and share capital position by having the Trust acquire Performance Shares before the vesting criteria has been tested and satisfied and the Participants become entitled to the shares. If the vesting criteria following testing is not met, the Trust can reallocate the Performance Shares to future grants;

• the Trust provides the opportunity to improve cash flow planning as either Company A or Company B can, if desired, make contributions to the Trust periodically throughout the vesting period. This provides the Company A Group with the flexibility to determine the most appropriate time to make contributions;

• the Trust is the most appropriate vehicle to acquire Performance Shares and accumulate dividend income during the vesting period, thus assisting the Company A Group to meet the costs of the Plan;

• the Trust enables easier administration of the Plan.

Contributions to the Trust will be made by either Company A or Company B depending on the commercial position of the Company A Group at the time.

The Trustee's actions to purchase Company A shares on market, or subscribe for new Company A shares in Company A, will take into consideration the Corporations Act 2001 requirements and the Trustee Act 1925 (NSW) requirements (clause 4.1 of the Trust Deed) and at all times the Trustee will make decisions in accordance with the terms of the Trust Deed and the rules of the Plan (clauses 2.2 and 2.3 of the Trust Deed) and in fulfilment of the Trustee's fiduciary duties to the beneficiaries.

The Plan Rules

The Plan Rules, together with the Trust Deed, set out the requirements and circumstances under which Company A can issue Performance Rights to Participants, as well as the Trustee's rights and obligations in administering the Company A Trust in execution of the Plan. The key attributes of the Plan are as follows:

• no member of the Company A Group will have any legal or beneficial entitlement to any of the Company A shares forming part of the Company A Trust fund at any time, and may not acquire such an interest (clause 3.6 of the Trust Deed);

• the Trust funds ( both the initial settlement and any additional contributions made) cannot be refunded, repaid or returned to any Company A Group company, other than by way of the Trustee paying the issue price where it subscribes for Company A shares (clause 3.6 of the Trust Deed);

• Performance Rights are granted to Participants by the Board in its absolute discretion and upon such terms and Performance Conditions, as defined in the Plan Rules, as the Board determines (clause 2.1 of the Plan Rules);

• all Performance Rights are subject to the satisfaction of vesting conditions (i.e. the Performance Conditions as defined in the Plan Rules), which can include time-based and/or financials-based requirements. It is noted that the time-based conditions used by the Company A Group includes a vesting period that exceeds 12 months from the date the Performance Rights are granted;

• the Trustee has the authority to acquire Company A shares, as instructed by Company A, for the purpose of satisfying grants made pursuant to the Plan Rules by way of an on-market purchase or subscription, or through a combination of both (clause 5.2 of the Trust Deed);

• the Trustee can, if required, acquire and hold Company A shares as Unallocated Shares i.e. shares which are not allocated to a Participant and to which that Participant has no beneficial entitlement at the time of purchase;

• the Trustee has the discretion to use any capital receipts, dividends, distributions or other entitlements received in respect of any Unallocated Shares to acquire more Company A shares to allocate to Participants, or to distribute the entitlements to beneficiaries of the Company A Trust prior to final allocation of those shares (clause 4.6 of the Trusts Deed);

• to the extent that there is no one presently entitled to the income of the Company A Trust the Trustee will pay tax on this income;

• once the Performance Conditions have been met, Participants have 30 days to exercise their Performance Rights i.e. convert those rights into Performance Shares, otherwise the rights will automatically lapse unless determined otherwise by the Board (clause 5.2);

• the amount payable upon vesting and exercise of a Performance Right is nil;

• upon exercise of a Performance Right a Participant becomes absolutely entitled to the ownership of that Performance Share and all other benefits or privileges attaching to it, including dividends (clause 3.5 of the Trust Deed);

• upon exercise of Performance Rights the Trustee transfers ownership of the requisite number of Performance Shares to the Participants 'as soon as reasonably practicable' (clause 6.1 of the Trust Deed);

• Participants are prevented from disposing of Performance Shares in accordance with the disposal restrictions listed below, and this is achieved by way of ASX trading lock placed on the relevant shares;

• Performance Shares held in the Trust on behalf of a Participant i.e. before transfer of those shares to the Participant following exercise, are registered in the name of the Trustee. This will continue until either transfer of legal title to the Participant in accordance with the Trust Deed (clause 6.1 and 6.2) or disposal on behalf of the Participant in accordance with clause 6.3;

• Transfer of legal title to a Performance Share (i.e. to the Participant or his or her personal representative (as the case may be) - see clause 5.1 of the Plan Rules), can only occur upon the date when one of the following events occurs:

• transfer of legal title is required or permitted under the Plan Rules

• the Trust is terminated

• the Board exercises its discretion to transfer legal title to the Participant

• the Participant terminates employment or

• the Participant instructs the Trustee to sell the Performance Shares as allowed under the Plan Rules; and

• The Trustee does not have power to do anything that may cause the Trust to fail the definition of an employee share trust in section 130-85(4) of the ITAA 1997.

Pursuant to clause 5.5 of the Plan Rules a trading lock applies to the Performance Shares in that a Participant is not entitled to trade in Performance Shares without the prior written consent of the Board until the earlier of:

• 3 years after the date from which the Performance Share is issued or transferred to the Participant or held by the Trustee on behalf of the Participant;

• 12 months after the date the Participant ceases to be employed by a Company A Group company; or

• such another date as the Board determines.

The applicant states that other than in the event of cessation of employment referred to above, where the disposal restriction is 12 months after the date of cessation of employment, the Board will only provide written consent for the disposal of Performance Shares prior to completion of the 2 year (or 3 year, depending on the date of grant) period in exceptional circumstances, such as when a Participant has severe and unforseen medical or financial related issues, and not on a routine basis.

Lapsing of Performance Rights

Each unvested Performance Right will lapse on the earlier of:

• the expiry of the exercise period (unless otherwise determined by the Board);

• the date the Participant ceases employment with a Company A Group company (unless otherwise determined by the Board);

• the date specified by the Board that they will lapse;

• the date a Participant purports to transfer the Performance Right without the written consent of the Board;

• failure to meet the performance condition in the prescribed period;

• the 10th year anniversary of the date of grant of the Performance Right; and

• the Board determining that a participant acted fraudulently or dishonestly or in breach of their obligations to an Company A Group company.

Where the Board has discretion in relation to the lapsing of unvested Performance Rights it will only exercise that discretion in exceptional circumstances, and not on a routine basis.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

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

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

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1936 subsection 177F(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

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

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

Income Tax Assessment Act 1997 paragraph 8-1(2)(a)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

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

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

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 section 83A-210

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

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

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

Income Tax Assessment Act 1997 section 701-1

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

Reasons for decision

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

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

The consolidation provisions 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 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 5 to 6

The SER in section 701-1 has no application to the Fringe Benefits Tax Assessment Act 1986 (FBTAA). Accordingly, the Commissioner has provided a ruling to Company A and the relevant entity of the Company A tax consolidated group, namely Company B, in relation to questions 5 and 6.

Question 1

The general deduction provision in section 8-1 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 and Company B must be irretrievable and non-refundable.

The Trustee must acquire Company A shares to enable Company A to satisfy its obligations under the terms of the Plan. Company A must provide, or procure for the Trustee, all the funds required to enable it to subscribe for, or acquire those Company A shares (clause 5.1 of the Trust Deed).

The Trust funds (both the initial settlement and any additional contributions made) cannot be refunded, repaid or returned to any company in the Company A Group, other than by way of the Trustee paying the issue price where it subscribes for Company A shares. In addition, clause 3.6 of the Trust Deed provides that no company in the Company A Group can benefit from the Trust Fund (as defined in the Trust Deed). Clause 3.6 of the Trust Deed is broad and pursuant to it no member of the Company A Group will have any legal or beneficial entitlement to any of the Company A shares forming part of the Company A Trust fund at any time and may not acquire such an interest and nor will they be entitled to any contributions received by the Trustee.

Under clause 13.3 of the Deed, upon termination of the Trust the Trustee must transfer any Performance Shares and any other benefits or rights attached thereto to Participants. Any residual that remains must be distributed to another equity or incentive plan or trust established or maintained for employees of the Company A Group, a provident, benefit, superannuation or retirement fund established and maintained by the Company A Group or a charity nominated by Company A (see clause 13.4).

The terms of the Trust Deed when read together demonstrate that the contributions made by Company A and Company B to the Trustee will be irretrievable and non-refundable and made only for the purposes of the Trust Deed and therefore these contributions are considered to be 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) of the ITAA 1997 it must be either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. A line of authorities has established that there will be a link between a loss or outgoing and the derivation of income where there is a sufficient nexus. (The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169, Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288, W. Nevill And Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin No Liability v The Federal Commissioner of Taxation (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147).

Clauses 3.3 and 3.5 of the Trust Deed make it clear that the Trust Fund will only be applied by the Trustee for the purposes of the Plan Rules, that is, for the sole purpose of facilitating the Plan.

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

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

Capital or revenue?

Contributions will be made to the Trustee of the Trust periodically for the purpose of acquiring and subscribing for ordinary shares in Company A pursuant to the 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 payments by an employer company to an employee share trust, established to provide incentive payments to employees, were held to be on revenue account and were not capital or of a capital nature.

Apportionment

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

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

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

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

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

Private or domestic in nature

Nothing in the facts suggest that the irretrievable contributions made to the Trustee of the Trust are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997.

Conclusion

The irretrievable contributions made by Company A or Company B to the Trustee of the Trust to fund the acquisition of ordinary Company A shares in accordance with the Trust Deed and the Plan will be an allowable deduction to Company A Group Limited under section 8-1.

Question 2

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

Company A and Company B will also incur further costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust.

In accordance with clause 3.7 of the 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 because the clause makes it clear that '..the Trustee is not entitled to any benefit from the Trust Fund at any time and is prohibited from being or becoming a Trust Participant.' Company A may however pay to the Trustee from its own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as Company A and the Trustee may agree from time to time - in this instance the Trustee is entitled to retain for its own benefit any such remuneration or reimbursement (see clauses 6.2 (b) and 6.3 of the Plan Rules)

The costs incurred by Company A and Company B in relation to the implementation and on-going administration of the 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 the Company A Group for the purpose of gaining or producing the assessable income of Company A.

The view that the costs incurred by Company A and Company B 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 and Company B in relation to the implementation and on-going administration of the Trust.

Question 3

The deduction for the irretrievable cash contributions under section 8-1 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 states 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 applies under an arrangement where there is a relevant connection between the irretrievable cash contributions, provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme, in relation to the employee's employment and the contributions are made before the acquisition of the ESS interests.

Arrangement

The implementation of the Plan, establishment of the Trust and provision of money by Company A or Company B 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 Plan, each Performance Right provided to a Participant when an offer is made under the Plan is an ESS interest as it is (or may later become) a right to acquire a beneficial interest in a share in a company (Company A).

Employee share scheme

Subsection 83A-10(2) defines 'employee share scheme' as:

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

(a) the company; or

(b) subsidiaries of the company;

in relation to the employees' employment.

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

(a) any arrangement; or

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

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

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

Relevant connection

The making of an offer under the Plan, the providing of Performance Rights under the 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 Plan. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed. Accordingly, the provision of money to the Trustee to acquire Company A shares is for the purpose of enabling Participants, indirectly as part of the Plan, to acquire relevant rights (that is ESS interests).

If Company A or Company B provides irretrievable contributions before a Participant acquires the relevant ESS interests, 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 Performance Rights (ESS interests) are provided to Participants. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

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 employee's employment and the contributions are made before the acquisition of the ESS interests.

Accordingly, section 83A-210 will not apply where Company A or Company B 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 Performance Rights.

In such a situation, the irretrievable contributions by Company A or Company B to the Trustee will be deductible under section 8-1 in the income year in which the irretrievable contributions are made.

Question 4

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

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

2. a tax benefit must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out, and

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

On the basis of an analysis of these three requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by Company A:

• for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for or acquisition on-market of shares in Company A; or

• for the costs incurred in relation to the ongoing administration of the Trust.

Question 5

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

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

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

The provision of rights

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

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

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

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

(h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83AB or 83AC of that Act applies.

The Commissioner accepts that the Plan is an employee share scheme, that the rights provided under them are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of rights pursuant to the Plan will not be subject to fringe benefits tax either on the basis that they are acquired by Participants under an employee share scheme (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA or on the basis that they are a payment of salary or wages (in the case of rights which are ultimately satisfied with cash) and are thereby excluded from the definition of fringe benefit by paragraph 136(1)(f) of the FBTAA (refer to ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits).

The provision of Performance Shares

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

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

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

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

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

Therefore, the benefit that arises to an employee upon the exercise of a vested right under one of the Plans (being the provision of a Performance Shares) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee.

Question 6

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

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

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

Subsection 130-85(4) states:

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

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

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

(i) the company; or

(ii) a subsidiary of the company; and

(a) 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 provided to them under the terms of the Trust Deed is an ESS interest within the meaning of subsection 83A-10(1).

Subsection 83A-10(2) defines an employee share scheme as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment.

The Plan is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which rights to acquire ordinary shares in Company A (being ESS interests) are provided to employees in relation to the employee's employment.

Company A has established the Trust to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests acquired by those employees under the 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 rights are provided to employees in relation to their employment.

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

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

• the Trust ensures that ESS interests (as defined in subsection 83A-10(1), 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 Trust Deed and 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 Plan.

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.

Clause 3.3 of the Trust Deed states that the '..Trustee acknowledges, declares and agrees with the Company that it will hold the Trust Fund on trust for Trust Participant's in accordance with this Deed and the Rules of the Plan.'.

Clause 4.2(m) further states that Trustee has power to '…generally do all other acts and things which the Trustee considers necessary or expedient for the administration, maintenance and preservation of the Trust and in performance of the Trustee's obligations under this Deed and the Rules of the Plan.'.

Paragraph 130-85(4)(c) is satisfied as any activities undertaken by the Trustee other than the acquisition of Company A shares and the allocation of those shares to the employees in accordance with the Trust Deed and Plan Rules are merely incidental to operation of the Plan.

Conclusion

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

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

• the 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 Deed and Plan, and

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

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

Accordingly, the irretrievable cash contributions made by Company A or Company B to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares, and on-going administration of the Trust, will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA.