Edited version of your written advice

Authorisation Number: 1051353675758

Date of advice: 27 April 2018

Ruling

Subject: Employee Share Scheme

Question 1

Will the Company obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition on-market or off-market of the Company's shares by the Trustee to satisfy the Incentive Securities issued under the Plan?

Answer 1

Yes

Question 2

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

Answer 2

Yes

Question 3

Is the deduction for the Company in respect of the irretrievable contributions to the Trust allowed in the year of income when the contribution is made to the Trust, provided it is in respect of Incentive Securities to acquire shares that have previously been granted to employee?

Answer 3

Yes

Question 4

Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by the Company in respect of the·

a. Irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition on-market or off-market of the Company's shares by the Trustee to satisfy the Incentive Securities; or

b. costs incurred by the Company in relation to the on-going administration of the Plan and the Trust?

Answer 4

No

Question 5

Is the provision of Rights and/or Shares in satisfaction of those Incentive Securities to employees under the Plan a ‘fringe benefit’ within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer 5

No

Question 6

Will the contribution of funds by the Company to the Trust in order to:

a. subscribe for, or acquire on-market or off-market, the Company's shares; and/or

b. fund the ongoing administration of the Trust

be a fringe benefit within the meaning of that term in subsection 136(1) of the FBTAA?

Answer 6

No

This ruling applies for Questions 1-4 for the following period(s)

Income tax year ended 30 June 2018

Income tax year ended 30 June 2019

Income tax year ended 30 June 2020

Income tax year ended 30 June 2021

Income tax year ended 30 June 2022

Income tax year ended 30 June 2023

This ruling applies for Questions 5-6 for the following period(s)

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

Fringe Benefits Tax year ended 31 March 2022

Fringe Benefits Tax year ended 31 March 2023

The scheme commences on

1 July 2017

Relevant facts and circumstances

The Company established the Plan in order to provide eligible employees with equity based compensation in the form of Incentive Securities. These Incentive Securities are performance Rights, Options and Restricted Shares.

The Company established the Trust to assist with meeting its obligations regarding the Incentive Securities. Its purpose is to administer the Plan.

The Trustee is an independent company that is not related to the Company.

The Plan

The purpose of the Plan is to establish an Employee Share Scheme as defined by Division 83A.

The Plan is intended to provide employees of the Company who participate in the Plan (Participants) with incentives that aligns the interests of Participants with the interests of the Company and encourages their mutual interdependence.

Participants of the Plan are encouraged, by the nature of their Incentive Securities, to improve the performance of the Company through the price of its shares and the return to shareholders.

The Incentive Securities offered under the Plan are intended to attract and retain employees.

Participants in the Plan will be Australian resident employees, including but not limited to senior executives, who directly generate assessable Australian income for the Company through the operation and management of the Company’s business activity.

The Plan will be funded by the Company through a nominal initial settlement amount and periodic irretrievable contributions made as necessary.

The amount of funds transferred will be determined by an estimated forecast which will review the number of Incentive Securities issued to Participants, and the likelihood of those Incentive Securities vesting and ultimately requiring the Trust to acquire and hold Shares on behalf of a Participant.

Management of the Company will review forecasts and make recommendations to the Board periodically to ensure the Trust remains properly funded.

The Board will provide guidance to the Trustee on how the Trustee should acquire the Shares.

The Trustee will consider the instructions from the Board of the Company as well as its obligations under the Deed and the law and will act accordingly.

The Trust

The Trust was established by the Company for the purpose of obtaining and administering Shares for the benefit of Participants in the Plan.

Contributions to the Trust will be made by the Company.

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

The Trust can acquire Shares on-market, off-market or by subscribing for new Shares.

The Trust enables the acquisition of Shares in accordance with the preferred timeline of the Company.

The Company can manage its costs and share capital position by having the Trust acquire Shares before the Participants meet the vesting criteria and become entitled to the Shares. If Participants do not meet the vesting criteria, the Trust can utilise those Unallocated Shares to facilitate future grants.

The Trust provides the opportunity to improve cash flow planning, as the Company can make contributions to the Trust periodically throughout the vesting period. This provides flexibility to determine the most appropriate time to make contributions.

Any income the Trust receives through its acquisition and holding of Unallocated Shares will be used to assist the Company to buy further Shares to be held for the purposes of the Trust.

The Trustee has fiduciary duty to the Participants of the Plan and is obligated to act in the interests of those Participants (beneficiaries).

The Trustee’s actions to purchase Shares on market, or subscribe for new Shares in the Company will take into consideration the requirements of the Corporations Act and the Trustee Act 1925 (NSW) and at all times will make decisions in accordance with the terms of the Deed, the Plan Rules (Rules) and in fulfilment of the Trustee’s fiduciary duty to Participants (beneficiaries).

Upon termination of the Trust, the Trustee must distribute any balance of either capital or income to Discretionary Beneficiaries as defined under the Deed to mean a Participant in any Company Plan or any charity nominated by the Trustee.

Operations of the Plan

The Rules and the Deed set out the requirements and circumstances under which the Company can issue Incentive Securities to Participants, as well as the Trustee’s rights and obligations in administering the Trust in execution of the Plan.

Key Attributes

The Trust funds (both the initial settlement and any additional contributions made) cannot be refunded, repaid or returned to the Company (or any member of the Group, defined as meaning the Company and its Related Bodies Corporate) other than by way of the Trustee paying the issue price where it subscribes for Shares in the Company.

Incentive Securities are granted to Participants by the Board in its absolute discretion and upon such additional terms and vesting conditions as the Board determines. The Board may determine that vesting of the right or exercise of the option will be satisfied by the Company making a cash payment instead of an allocation of Shares.

For eligible Participants, vesting of their Incentive Securities is generally subject to financial and/or non-financial performance conditions as well as requirements to remain employed with the Company for a specified period of time.

The amount payable upon vesting and conversion of an Incentive Security under the Plan is nil.

After the vesting of the relative Incentive Securities, the Trustee will transfer ownership of the requisite number of Shares to the Participant.

Participants will not be restricted in relation to their shareholding once the transfer has occurred other than in accordance with the share trading policy of the Company.

The Trustee has the authority to acquire Shares as instructed by the Company, for the purpose of satisfying grants made pursuant to the Rules of the Plan by way of an on-market or off-market purchase of Shares in the Company, subscription for Shares in the Company, or through a combination of these.

The Company will not have any legal or beneficial entitlement to any of the Shares forming part of the Trust at any time, and may not acquire such an interest.

The Trustee can, if required, acquire and hold Shares in the Company as Unallocated Shares, i.e. Shares which are not allocated to a Trust participant and to which no participant has a beneficial entitlement to 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 Shares to allocate to Participants, or to distribute to beneficiaries of the Trust prior to final allocation of those Shares.

To the extent that there is no one presently entitled to the income of the Trust, the Trustee will pay tax on this income.

Shares held in the Trust are registered in the name of the Trustee. This will continue until either transfer of legal title to a participant in accordance with the Deed, or disposal on behalf of the Participant in accordance with the Deed.

Transfer of the legal title to a Share held by the Trust can only occur upon the date when either transfer of legal title is required or permitted under the Rules or the Trust is terminated.

The Trustee does not have the power to do anything that may cause the Trust to fail to meet the definition of an Employee Share Trust in subsection 130-85(4).

Lapsing of the Rights

A Right will lapse on the earlier of:

● The Right lapsing in accordance with a provision of the Rules;

● Failure to meet a vesting condition or any other condition applicable to the Right within the Vesting period; or

● The receipt by the Company of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Right.

Lapsing of the Options

An Option will lapse on the earlier of:

● five years after vesting or any other date nominated as the expiry date in the offer;

● The Option lapsing in accordance with a provision of the Rules (including in accordance with a term of an offer);

● Failure to meet a vesting condition or any other condition applicable to the Option within the vesting period; or

● The receipt by the Company of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Option.

Residency

● All entities referred to are residents of Australia for income tax purposes.

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 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 8-1

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

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 subsection 995-1(1)

Reasons for decision

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

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 the Company must be irretrievable and non-refundable.

The Trustee must, on direction by the Board of the Company pursuant to the Trust Deed (Deed), acquire Company shares to enable the Company to satisfy its obligations under the terms of the Plan. The Company must provide the Trustee with all the funds required to enable it to subscribe for, or acquire Company shares.

The contributions made to the Trustee by the Company will be irretrievable and non-refundable to the Company in accordance with the Deed as all funds received by the Trustee from the Company will constitute Accretions (as defined in the Deed) to the corpus of the Trust and will not be repaid to the Company.

The Deed stipulates that upon termination of the Trust, the Trustee must distribute any balance of either capital or income to Discretionary Beneficiaries as defined under the Deed to mean a Participant in any Company Plan or any charity nominated by the Trustee.

The Deed stipulates that any balance must not be paid to a member of the Group, which is defined by the Deed to mean the Company and its Related Bodies Corporate.

The terms of the Deed when read together demonstrate that contributions made by the Company to the Trustee will be irretrievable and non-refundable and made only for the purposes of the Deed. 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), it must be either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

A line of authorities has established that there will be a link between a loss or outgoing and the derivation of income where there is a sufficient nexus. (The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169, Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288, W. Nevill And Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin No Liability v The Federal Commissioner of Taxation (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147).

The Company established the Trust for the purpose of holding Shares for the benefit of Participants who are, or will become, the beneficial owners of Shares pursuant to a Company Plan.

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

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

Capital or revenue?

The Company will make periodic contributions to the Trustee of the Trust for the purpose of acquiring and subscribing for ordinary shares in the Company 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 by the Company to the Trustee for the administration of the Plans to subscribe for shares in the Company.

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

Private or domestic in nature

Nothing in the facts suggest that the irretrievable contributions made by the Company 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 the Company makes to the Trustee of the Trust to fund the acquisition of ordinary Company shares in accordance with the Deed and the Plan will be an allowable deduction to the Company under section 8-1.

Question 2

The Company 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.

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

● 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 Trust.

In accordance with 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.

The Company may pay to the Trustee from its 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.

The costs incurred by the Company 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 the Company; or

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

The view that the costs incurred by the Company 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, the Company is entitled to an income tax deduction, pursuant to section 8-1, in respect of costs incurred by the Company or any subsidiary member of the Group 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 the Company 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 the Company 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 Incentive Security (being a Right, Option or Restricted Share) 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 (the Company).

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 each is 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 the Company in accordance with the Deed.

A Company share acquired by the Trustee to satisfy an Incentive Security 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 Incentive Securities under the Plan, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the Company shares by the Trustee and the allocation of the Company 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. The provision of money to the Trustee to acquire the Company shares is for the purpose of enabling Participants, indirectly as part of the Plan, to acquire the relevant Incentive Security (that is ESS interests).

If the Company 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 the Company in the income year when the relevant Incentive Securities (ESS interests) are provided to Participants.

This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

Indeterminate rights

Incentive Securities provided under the Plan are indeterminate rights for the purposes of section 83A-340. This is because the option exists to either deliver a Company share or make a payment of a cash equivalent to satisfy the Incentive Security, at the discretion of the Board.

In this circumstance the Incentive Security is not a right to acquire a beneficial interest in a share unless and until the time when the Board determines the Incentive Security will be satisfied by the provision of Company shares.

Once determined by the Board, section 83A-340 operates to treat these Incentive Securities as though they had always been rights to acquire beneficial interests in shares.

If irretrievable contributions are provided to the Trustee before these Incentive Securities are acquired (and the Incentive Securities do subsequently become ESS interests), then section 83A-340 operates to deem the Incentive Security to always have been ESS interests.

Where this occurs, section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1.

In such a case, a deduction to fund the exercise of the Incentive Security would be available to the Company in the income year in which Participants acquire the Incentive Security.

Note

Where the Incentive Securities do not become ESS interests because they are ultimately satisfied in cash, the outgoing should not flow through the Trust.

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 the Company makes irretrievable contributions to the Trustee to fund the acquisition of the Company shares where the contribution is made after the acquisition of the relevant Incentive Security.

In such a situation, the irretrievable contributions by the Company 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 the Company for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market or off-market of, shares in the Company.

Further, 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 the Company for the irretrievable cash contributions made to the Trustee of the Trust in respect of the costs incurred by the Company in relation to the on-going administration of the Plan and 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 Incentive Securities provided under it are, or may later become in the case of indeterminate rights, ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of rights pursuant to the Plan will not be subject to FBT 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. For completeness, in the case of rights which are ultimately satisfied with cash, they are also excluded from the definition of fringe benefit by paragraph 136(1)(f) of the FBTAA as a payment of salary or wages (refer to ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax - Employee share scheme: indeterminate rights not fringe benefits).

The provision of the Company’s 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 the Company participates in the Plan, they obtain a right (being a right to acquire a beneficial interest in a share in the Company) 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 the Plan (being the provision of a share in the Company) 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

(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 the Company is provided to them under the terms of the 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 schemes within the meaning of subsection 83A-10(2) because the Plan is a scheme under which rights to acquire ordinary shares in the Company (being ESS interests) are provided to employees in relation to the employees’ employment.

The Company has established the Trust to acquire ordinary shares in the Company 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’s 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 the Company; and

● the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of the Company), 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 the 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.

Under the Deed, the Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of “employee share trust” for the purpose of section 130-85(4).

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

Conclusion

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

● the Trust acquires shares in the Company;

● the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in a share in the Company or rights 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 the Plan; and

● the Deed provides that the Trust will be managed and administered so that it satisfies the definition of ‘employee share trust’ for the purpose of subsection 130-85(4).

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 the Company to the Trustee to fund the subscription for, or acquisition on-market or off-market of, the Company’s shares or ongoing administration of the Trust will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA.