Edited version of your written advice

Authorisation Number: 1051357002435

Date of advice: 1 May 2018

Ruling

Subject: Employee Incentive Plan - Employee Share Trust

Question 1

Will each of the Taxpayer and Companies A to F obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions that they respectively make (which in the case of the Taxpayer includes contributions made by subsidiary members of the Taxpayer’s income tax consolidated group) to the Trustee of the Taxpayer Incentive Plan Trust (EST) to fund the subscription for, or acquisition on-market (or off-market) of, the Taxpayer’s shares?

Answer

Yes.

Question 2

Are irretrievable contributions made by the Taxpayer (including contributions made by subsidiary members of the Taxpayer’s income tax consolidated group) and Companies A to F to the Trustee of the EST, to fund the subscription for or acquisition on-market (or off-market) of shares in the Taxpayer by the EST to satisfy ESS interests, deductible respectively to the Taxpayer and Companies A to F at a time determined by section 83A-210 of the ITAA 1997, in respect of those ESS interests which are subject to Division 83A of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes.

Question 3

Are irretrievable contributions made by the Taxpayer (including contributions made by subsidiary members of the Taxpayer’s income tax consolidated group) and Companies A to F to the Trustee of the EST, to fund the subscription for or acquisition on-market (or off-market) of shares in the Taxpayer by the EST to satisfy ESS interests, deductible respectively to the Taxpayer and Companies A to F under section 8-1 of the ITAA 1997 in the income year when the contributions are made, where the contribution is made after 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, any deduction claimed by the Taxpayer and Companies A to F in respect of the irretrievable contributions they respectively make (which in the case of the Taxpayer includes contributions made by subsidiary members of the Taxpayer’s income tax consolidated group) to the Trustee of the EST to fund the subscription for or acquisition on-market (or off-market) of shares in the Taxpayer by the Trustee?

Answer

No.

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

1 January 2018 to 31 December 20XX

1 January 2019 to 31 December 20XX

1 January 2020 to 31 December 20XX

1 January 2021 to 31 December 20XX

1 January 2022 to 31 December 20XX

Question 5

Is the provision of Performance Rights, Options or shares in the Taxpayer under the Executive Incentive Plan (EIP) by the Taxpayer to its employees, employees of any subsidiary member of the Taxpayer’s income tax consolidated group, employees of Companies A to F, a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 6

Will the irretrievable contributions made by the Taxpayer, any subsidiary member of the Taxpayer’s income tax consolidated group, Companies A to F to the Trustee of the EST, to fund the subscription for or acquisition on-market (or off-market) of shares in the Taxpayer, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA?

Answer

No.

The rulings for questions 5 to 6 each apply for the following periods:

1 April 2017 to 31 March 20XX

1 April 2018 to 31 March 20XX

1 April 2019 to 31 March 20XX

1 April 2020 to 31 March 20XX

1 April 2021 to 31 March 20XX

Relevant facts and circumstances

The Taxpayer

The Taxpayer is an Australian public company limited by shares and is listed on the Australian Securities Exchange.

The Taxpayer is the head company of an Australian income tax consolidated group (Tax Group). It is also the parent entity of an economic group which, in addition to the members of the Tax Group, includes Companies A to F (Economic Group).

The Taxpayer has established an Executive Incentive Plan (EIP).

The EIP operates in accordance with Division 83A of ITAA 1997.

The EIP allows the Taxpayer to grant Options or Performance Rights (as defined in the Executive Incentive Plan Rules (Plan Rules) over fully paid ordinary shares in the Taxpayer (Shares) to employees of all subsidiaries in the Economic Group. The Trust Deed allows the Trustee to acquire, hold and allocate ordinary shares in the Taxpayer to Participants (who are defined in the Plan)

The Taxpayer has established a single employee share trust known as the Taxpayer Incentive Plan Trust (EST) to facilitate, pursuant to the EIP, the provision of Shares to employees of entities in the Economic Group. The Trustee is an external trustee acting in an independent capacity on behalf of the beneficiaries of the EST in accordance with the Trust Deed.

The EST was established to assist the Taxpayer with capital management for the EIP and to facilitate the acquisition of newly issued or market purchased shares to satisfy Options or Performance Rights granted under the EIP.

The Taxpayer makes irretrievable cash contributions to the EST and the Trustee has agreed to use this money in accordance with the terms of the Trust Deed and the Plan Rules, and in particular, to acquire Shares to be held in the Trust for Participants under the EIP.

The Taxpayer will make contributions on behalf of non-tax-consolidated entities in order to manage the Employee Share Scheme obligations of the non-tax-consolidated entities.

Operation of the EIP

The EIP allows APE to grant two types of Awards to its employees;

● Options and

● Performance Rights

The EIP is governed by the Plan Rules. The objective of the EIP as stated in the Plan Rules is to encourage employees to share in the ownership of the Taxpayer and to promote the long-term success of the Taxpayer as a goal shared by all employees.

The Board of Directors of the Taxpayer (Board), at their absolute discretion, may from time to time make an offer in writing to an employee of the Economic Group inviting them to take up an award of Options or Performance Rights.

An Option represents a right to be issued one fully paid ordinary share in the Taxpayer upon payment of an Exercise Price (as defined in the Plan Rules) and satisfaction of specified Vesting Conditions.

A Performance Right represents a right to be issued one fully paid ordinary share in the Taxpayer for a nil Exercise Price upon the satisfaction of specified Vesting Conditions (as defined in the Plan Rules)

Options and Performance Rights are collectively referred to as Awards

Grant and acceptance of Awards under the EIP

Pursuant to the Plan Rules, Awards may be granted without the need for acceptance, or may be offered with a requirement that they be accepted before grant. If acceptance is required, the Employee becomes a Plan Participant (Participant) by completing the relevant application form provided, and if required, making or directing payment of the total amount payable for the Awards.

Awards will lapse on the expiry date as set out in the offer.

Vesting and Exercise of Awards

The Taxpayer has applied the following Vesting Conditions to Awards granted under the EIP. The Vesting Conditions must be satisfied in order for the Awards to vest /be exercised:

● Retention: the Participant must remain employed with the Economic Group until the vesting date. This continued employment vesting condition applies to all Awards.

● Earnings Per Share: Awards vest only if the Taxpayer’s annual compound EPS growth equals or exceeds a pre-determined EPS target for the relevant performance period.

● Return on Sales: Awards granted to one Participant vest to the extent that Return on Sales for the Participant’s particular business unit equals or exceeds a pre-determined target for the relevant performance period. In addition, the Participant is required to remain the ‘Managing Director’ of the business until the vesting date.

● Awards granted during a particular period of time: a specified interest cover ratio must be satisfied for Awards to vest.

Vesting of Performance Rights

Performance Rights vest on the Vesting Date, provided the Vesting Conditions have been satisfied (or waived).

In addition to not being required to pay any consideration on the grant of Performance Rights a Participant is not required to pay any consideration on vesting of the Performance Rights.

Exercise of Options

Options become exercisable to the extent the Vesting Conditions are satisfied. Unless otherwise provided for a Participant has until the seventh anniversary of the grant date to exercise their Options.

Options that are not exercised within this timeframe automatically lapse.

Options may be exercised by providing the Taxpayer with a notice of exercise specifying the number of Options which the Participant wishes to exercise, and payment for the Exercise Price.

Allocation of Shares under the EIP

Performance Rights vest and Options become exercisable when all the Vesting Conditions are satisfied. The Board must allocate Shares to Participants when Performance Rights vest and when vested Options are exercised.

The Plan Rules allow the Board to either new issue Shares, or cause existing Shares to be transferred to Participants, or a combination of both alternatives, to satisfy Taxpayer’s obligation under the Plan Rules.

The Taxpayer intends to use the EST to facilitate the acquisition of Shares on behalf of Participants for all future vested Performance Rights and exercised Options under the EIP.

Restrictions on Shares after vesting/exercise

Any Shares allocated to Participants upon vesting of Performance Rights or when vested Options are exercised are restricted from sale under the Plan. This rule prohibits Participants from trading their Shares until 7 years from the date of the Award, unless:

● the Participant ceases to be an employee;

● the Participant makes an application requesting release of the restrictions and this is approved by the Board. It is envisaged that such approval will only be granted in certain limited circumstances; or

● the Board otherwise agrees to end the restriction period.

EST

Acquiring Shares on-market or off-market to satisfy Awards, and specifically, acquiring Shares before they are to be allocated to employees (i.e. before the Performance Rights vest or Options are exercised) would (without the EST) create administrative difficulties for the Taxpayer as it is legally unable to acquire its own Shares. One of the main reasons why the Taxpayer has decided to establish the EST for use with the EIP is that it allows the Trustee to procure the acquisition of Shares to satisfy Awards before Performance Rights vest and Options are exercised

Contributions to the EST

Trust Deed allows the Taxpayer to make contributions to the EST to allow the Trustee to acquire Shares for the EIP. In relation to the timing of contributions to the EST:

● where Shares are to be acquired on-market (or off-market), contributions may be made to the EST at any time to satisfy existing or future grants;

● where Shares are to be newly issued, contributions will typically be made around the time Performance Rights vest, or are expected to vest, and Options are exercised.

The taxpayer (and any entity it controls) cannot be a beneficiary of the trust.

Allocating Shares for the EIP

Under the terms of the Trust Deed, the Taxpayer will notify the Trustee of the number of Shares that must be acquired by the Trustee following vesting of Performance Rights or exercise of Options under the EIP. Pursuant to the Trust Deed the Trustee must then acquire (on provision of funding by the Taxpayer) Shares (via subscription or by purchase on-market, or off-market) and then allocate the Shares from the EST to the Participant.

By way of Deed of Variation, the Taxpayer and the Trustee amended the Trust Deed to remove any possibility of cash contributions made to the EST being repaid to any entity in the Economic Group.

Residency

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 83A-10

Income Tax Assessment Act 1997 Section 83A-35

Income Tax Assessment Act 1997 Section 83A-205

Income Tax Assessment Act 1997 Section 83A-210

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

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Section 139E

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

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Question 1

Subsection 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) is a general deduction provision. Broadly, the provision provides an entitlement to a deduction from assessable income for any loss or outgoing, to the extent that it is incurred in gaining or producing your assessable income or 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 prevents such a deduction to the extent that it is a loss or outgoing of capital, or of a capital nature, is a loss or outgoing of a private or a domestic nature, is incurred in gaining or producing exempt income, or is prevented from being deductible under a specific provision of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936).

Losses or outgoing

Pursuant to the Trust Deed, the Taxpayer must provide the Trustee with all the funds (contributions) required to enable the Trustee to subscribe for, or acquire Shares in accordance with the Trust Deed. (NB: as stated in the facts, The Taxpayer will make contributions on behalf of the non-consolidated entities in order to manage the ESS obligations of the non-consolidated entities.)

These contributions made to the Trustee by the Taxpayer will be irretrievable and non-refundable to the Taxpayer as:

● Income that no beneficiary is presently entitled under the Trust Deed will be accumulated by the Trustee as an accretion to the Trust Property; and

● On termination of the EST, the Trustee must not pay any Trust Property to the Taxpayer (Deed of Variation between the Taxpayer and the Trustee where the Trust Deed was amended to remove the possibility of cash contributions made to the EST being repaid to the Taxpayer).

On this basis, these irretrievable contributions are losses or outgoings for the purpose of subsection 8-1(1) of the ITAA 1997.

Relevant nexus

The purpose of establishing and making irretrievable contributions to the Trustee of the EST for the purposes of the EIP is to provide benefits to employees in the form of Shares.

The Taxpayer makes irrevocable cash contributions to the Trustee as part of the overall employee remuneration costs of the Taxpayer and its related subsidiaries. The benefits provided to employees under the EIP are designed to motivate employees of the Taxpayer’s economic group in contributing to the success of the Taxpayer through share ownership.

Accordingly, there is a sufficient nexus between the outgoings to the Trustee of the EST (that is, any direct contribution made by the Taxpayer or any charge (i.e. contribution) made by a non-consolidated entity to the Taxpayer in respect of any contributions made by the Taxpayer to the Trustee on the non-consolidated entities behalf) and the derivation of their assessable income (Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay's) Ltd v FCT (1935) 54 CLR 295;(1935) 3 ATD 288, W Nevill & Co Ltd v FC of T (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin NL v FCT (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147).

Capital or Revenue

The contributions by either the Taxpayer or Companies A to F (or a subsidiary member of the Tax Group) will be recurring and made from time to time as and when Shares are to be subscribed for or acquired pursuant to the EIP. The contributions are not capital in nature, but rather outgoings incurred by either the Taxpayer (as head entity of the Tax Group), Companies A to F in carrying on their respective businesses.

In support of this conclusion, the Court held in Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745 that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature.

This confirms the view expressed 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 that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made to the trustee of its employee share scheme.

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

Therefore, when an irretrievable contribution is made by either the Taxpayer (including a subsidiary member of the Tax Group) or Companies A to F to the Trustee of the EST to fund the acquisition of Shares in accordance with the Trust Deed, those contributions will be an allowable deduction respectively to either the Taxpayer (as head entity of the Tax Group) or Companies A to F under section 8-1 of the ITAA 1997.

Question 2

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 purposes 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.

Under an arrangement

The implementation of the EIP, establishment of the associated EST and provision of contributions by the Taxpayer to the Trustee constitute an arrangement for the purposes of paragraph 83A-210(a)(i) of the ITAA 1997.

Acquiring an ESS interest ‘…directly or indirectly...’

An employee share scheme is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2) of the ITAA 1997).

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

Awards

Awards granted to an employee under the EIP will be ESS interests as each of these rights represents a right to acquire a beneficial interest in a share in a company. These ESS interests will also be granted under an employee share scheme as they are granted in relation to the employee’s employment. A Share acquired by the Trustee to satisfy a right to acquire a Share, granted under the employee share scheme to an employee in relation to the employee’s employment, is itself provided under the same scheme.

The granting of the beneficial interests in the Awards, the provision of the money to the Trustee under the arrangement (the EIP), the acquisition and holding of the Shares by the Trustee and the allocation of shares to the participating employees are all interrelated components of the EIP. 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 money to the Trustee necessarily allows the scheme to proceed.

Accordingly, the provision of money to the Trustee to acquire Shares is considered to be for the purpose of enabling the participating employees employed by entities of the Economic Group or Tax Group, to acquire ESS interests.

Timing – acquisition time

The deductibility of money provided to employee share trusts is considered in ATO ID 2010/103 Income tax – Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust. The facts described in ATO ID 2010/103 are comparable to the present EIP and therefore, the reasoning in it is relevant as explained immediately below.

Contribution to Trustee made in an income year prior to the income year that Awards are acquired by Participant

The acquisition time for the purposes of paragraph 83A-210(b) of the ITAA 1997 will occur when the Awards are granted to Participants. Accordingly, when the Taxpayer (including a subsidiary member of the Tax Group), makes a cash contribution to the Trustee to acquire Shares in an income year before the income year in which the Awards are acquired by the Participant, the timing of the deduction allowable respectively to either the Taxpayer as head entity of the Tax Group, or its other non-tax-consolidated subsidiary under section 8-1 of the ITAA 1997, will be determined by section 83A-210 of the ITAA 1997 as being the later income year in which these ESS interests (Awards) are granted to the Participant.

Question 3

Section 83A-210 of the ITAA 1997 will not apply if a cash contribution is made by the Taxpayer (including a subsidiary of the Tax Group) or Companies A to F in an income year that is later than the income year in which the Awards are granted. In this case, the cash contribution will be deductible respectively to either the Taxpayer (as head entity of the Tax Group) or Companies A to F under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is incurred, being the later income year.

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 Taxpayer or Companies A to F for the irretrievable cash contributions they respectively make (which in the case of the Taxpayer include contributions made by the subsidiary members of the Tax Group) to the Trustee of the EST to fund the subscription for, or acquisition on-market or off-market of, shares in the Taxpayer.

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.

Section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), defines a fringe benefit 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 Options or Performance 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 (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 EIP is an employee share scheme, the Awards provided under the EIP are ESS interests and that Division 83A of the ITAA 1997 applies to those ESS interests.

Accordingly, the provision of Options or Performance Rights pursuant to the EIP will not be subject to FBT 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 excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

The provision of the shares in the Taxpayer

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 Tax Group or the Economic Group, accepts to participate in the EIP, they obtain a right to acquire a beneficial interest in a Share. 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 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 Option or upon vesting of the Performance Right under the EIP (that is, the provision of a Share) 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).

Employee share trust (EST)

Subsection 130-85(4) of the ITAA 1997 states:

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

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

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

(i) the company; or

(ii) a subsidiary of the company; and

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

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

● the EST acquires Shares in the Taxpayer; and

● the Awards are ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of the Taxpayer), 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 the EIP.

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

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental, as set out in 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, include:

● 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 EST 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

● 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 merely incidental.

For the purpose of the EST the powers of the Trustee are set out under the Trust Deed. The Trust Deed specifically states that…the Company and the Trustee agree that the EST will be managed and administered so that it satisfies the definition of ‘employee share trust’ for the purpose of subsection 130-85(4) of the ITAA 1997. These terms collectively make it clear that the Trustee can only use the contributions received exclusively for the acquisition of Shares for eligible employees in accordance with the EIP. To this end, all other duties or general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the Shares for the sole benefit of Participants in accordance with the EIP.

Therefore, the EST is an employee share trust as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 as concluded above, and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997.

Accordingly, as paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 excludes the contributions to the Trustee of the EST from being a fringe benefit, the Taxpayer, a subsidiary member of the Tax Group or Companies A to F will not be required to pay FBT in respect of irretrievable cash contributions made to the Trustee of the EST to fund the acquisition of Shares in accordance with the Trust Deed.