Edited version of your written advice

Authorisation Number: 1051499898359

Date of advice: 1 April 2019

Ruling

Subject: Employee Share Scheme

Question 1

Will Company A be entitled to 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 Company A to the Trustee of the Employee Share Trust (EST) to fund the subscription for or acquisition on market of Company A Shares by the EST to satisfy Employee Share Scheme (ESS) interests issued pursuant to the Equity Plans?

Answer

Yes

Question 2

Will Company A be entitled to an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by Company A in relation to the operation and ongoing administration of the EST?

Answer

Yes

Question 3

Will irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A Shares by the EST, be deductible to Company A 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 by the ultimate beneficiaries?

Answer

Yes

Question 4

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee of the EST to fund the subscription for, or acquisition on-market of Company A’s shares by the Trustee of the EST pursuant to the Equity Plans?

Answer

No

Question 5

Is the provision of Options, Performance Rights and/or Shares by Company A to its employees under the Equity Plans a fringe benefit within the meaning of the subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No

Question 6

Will the irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for, or acquisition on-market of Company A Shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA 1986?

Answer

No

Question 7

Will the Commissioner make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to Company A by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A Shares?

Answer

No

Relevant facts and circumstances

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

Company A submitted an application for a private binding ruling on aspects of its employee equity plans (the Plans).

The application for a private binding ruling (the Application) stated that:

● Company A has two equity based compensation plans which are currently in use.

● Company A established an employee share trust (the EST) to facilitate the provision of shares in Company A for Australian employees and executives.

A summary of each of the Plans is as follows:

General Plan (GP)

GP allows all employees to share in Company A’s financial success by enabling them to invest in it on attractive terms. It provides all employees with the opportunity to subscribe for shares at a discount to the applicable market price, as follows:

● Employees receive dividend distributions and capital returns and are able to vote at Company A’s general meetings.

● If an employee’s employment is terminated, the employee will automatically be withdrawn from the GP. The entire balance of the employee’s contribution account at the time will be refunded at this time.

● The Board may apply a Holding Lock to some or all Shares acquired by an employee under the GP for the duration of the relevant Holding Lock Period.

● The GP uses the EST as outlined below for contributions by employees to acquire Shares.

Performance Plan (PR)

The PR has been established to provide Company A with a mechanism to attract key prospective employees, to retain them and to strengthen the link between employee performance and increases in shareholder value.

The PR broadly operates as follows:

● The Board may issue an invitation to eligible employees to acquire “Performance Rights” and “Performance Options” (together “Options”) with the absolute discretion to develop and amend any policies in relation to these Options.

● The invitation will specify various aspects of the Options such as performance hurdles and period, test dates, expiry date, exercise price, etc.

● Performance Rights granted by Company A under the Plan will be granted for no consideration payable by employees, unless otherwise determined by the Board. Performance Options will be granted with an exercise price based on market value of a Share at the time of the original invitation.

● Employees must achieve a minimum “good” rating under Company A’s performance appraisal system for each year from the grant date to the test date.

● Each Option can be converted into one ordinary Share in Company A on satisfaction of the vesting period and the performance hurdles.

● An Option does not confer on an employee the right to participate in new issues of Shares by Company A, including by way of bonus issue, rights issue or otherwise.

● Shares issued as a consequence of the exercise of Options will, from the date of allotment, rank equally with all other issued Shares, and will be entitled in full to those dividends which have a record date for determining entitlements after the date of issue.

● The PR uses the EST as outlined below (refer “Operation of the EST” section below).

● Employees are absolutely entitled to the shares as against the Trustee of the EST from when the Shares are allocated to them.

● Performance Rights may be settled in cash where Board has made a determination in relation to good leaver provisions or in cases of early testing on change of control events.

Operation of the EST

The EST broadly operates as follows:

● it was established as a sole purpose trust to acquire shares for Australian employees of Company A.

● it is funded by contributions from Company A and where applicable from employees.

● such funds will be used by the Trustee of the EST to acquire the shares in Company A either on-market or via a subscription for new shares.

● such Shares acquired by the Trustee will be immediately allocated to the relevant employees who will become absolutely entitled to those Shares at that point in time.

● the Trustee will be permitted to sell shares on behalf of an employee where directed by Company A or the employee to do so.

● The Trust Deed specifies that the Trust will be administered so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997 and be an “employee share trust” as defined in sub-section 995-1(1) of the ITAA 1997.

The EST will not provide loans to employees of Company A.

Relevant legislative provisions

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 Paragraph 177D(b)

Income Tax Assessment Act 1936 Subsection 177D(2)

Income Tax Assessment Act 1936 Section 177F

Income Tax Assessment Act 1936 Subsection 177F(1)

Fringe Benefits Tax Assessment Act 1986 Section 66

Fringe Benefits Tax Assessment Act 1986 Section 67

Fringe Benefits Tax Assessment Act 1986 Subsection 67(1)

Fringe Benefits Tax Assessment Act 1986 Section 136

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Paragraphs 136(1)(f)-(s)

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 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Section 83A-10

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

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

Income Tax Assessment Act 1997 Subsection 83A-20(2)

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Paragraph 83A-105(1)(a)

Income Tax Assessment Act 1997 Section 83A-210

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

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

Income Tax Assessment Act 1997 Paragraph 130-85(4)(b)

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

Income Tax Assessment Act 1997 Section 130-90

Income Tax Assessment Act 1997 Section 995-1

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

Reasons for decision

Question 1

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

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

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

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

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

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

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

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

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

To qualify for a deduction under section 8-1, a contribution to the trustee of an employee incentive trust must be irretrievable and non-refundable.

The Trust Deed specifies that the EST is funded by contributions from Company A. All funds provided by Company A to the Trustee will constitute accretions to the corpus of the Trust, will not be repaid to Company A and no Participant will be entitled to receive such funds. There is no Clause in the Trust Deed or in the Plan Rules that will allow Company A to retrieve any of the contributions it makes to the EST, apart from payment for the subscription of new shares in Company A. Shares acquired by the Trustee will be immediately allocated to the relevant employees who will become absolutely entitled to those Shares at that point in time.

The contributions made to the Trustee by Company A will be irretrievable and non-refundable to Company A because:

● All funds received by the Trustee from Company A in the form of irretrievable contributions will constitute accretions to the corpus of the Trust and no Participant will be entitled to receive a distribution of or from such funds; and

● Any funds Company A contributes to the Trust are only returned through the Trustee subscribing for Shares in Company A.

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

Necessarily incurred

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.

In regard to contributions satisfying the nexus of being necessarily incurred in carrying on a business, it is relevant that Company A:

● Company A links remuneration in the form of equity based compensation to the achievement of personal and corporate objectives,

● contributes irrevocable funds to the Trustee of the EST to acquire shares in Company A, either on-market or via a subscription for new Shares, to reward, motivate, attract and retain employees, including key personnel, and

● ensures Shares acquired by the Trustee will be immediately allocated to the relevant employees who will become absolutely entitled to them.

Accordingly, there is a sufficient nexus between the outgoings to the EST (that is, any direct contribution made by Company A or any contributions made by Company A 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 Company A will be recurring and made from time to time as and when shares are to be subscribed for or acquired pursuant to the Plans. The contributions are not capital in nature, but rather outgoings incurred by Company A in carrying on its business.

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. It should be noted that although the Court held that the payments were deductible under subsection 51(1) of the ITAA 1936, it found that subsection 177F(1) of Part IVA of the ITAA 1936 applied to cancel the tax benefit arising from the deduction.

Nothing in the facts suggest that the irretrievable contributions made by Company A to the EST 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 1936 or ITAA 1997.

Conclusion

The irretrievable contributions Company A makes to the Trustee of the EST to fund the acquisition of Shares in Company A, in accordance with the Trust Deed and the Plans are allowable deductions to Company A under section 8-1 of the ITAA 1997.

Question 2

Company A incurs various costs in relation to the implementation and on-going operation and administration of the EST. According to the Trust Deed, the Trustee is not entitled to receive from the EST any fees, commission or remuneration in respect of its performance of its obligations as trustee of the EST. Company A may pay to the Trustee from Company A’s 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. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement.

The costs incurred by Company A in relation to the implementation and on-going administration of the EST are deductible under section 8-1 of the ITAA 1997 as either:

● Costs incurred in gaining or producing the assessable income of Company A; or alternatively

● Costs necessarily incurred in carrying on Company A’s business for the purpose of gaining or producing its assessable income.

The above view 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.

Also, consistent with the analysis in Question 1 (above), 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 in relation to the operation and on-going administration of the EST.

Question 3

The deduction for the irretrievable cash contributions under section 8-1 of the ITAA 1997 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 of the ITAA 1997.

Section 83A-210 of the ITAA 1997 provides that if:

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

(i) under an arrangement; and

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

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

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

An arrangement

An ‘arrangement’ is defined in section 995-1 of the ITAA 1997 as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

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

ESS interest

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 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 Plans in the present case, Shares and Options granted to a Participant will be ESS interests as each of these represent either a beneficial interest in a share in Company A or a right to acquire a beneficial interest in a share in Company A.

Employee share scheme

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.

The Plans in the present case are employee share schemes for the purposes of Division 83A of the ITAA 1997 as each is an arrangement, which provides an ESS interest (i.e. either a beneficial interest in a share or a right to acquire a beneficial interest in a share) to a Participant in relation to their employment in Company A in accordance with the Trust Deed.

A share acquired by the Trustee to satisfy an equity incentive plan 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

Section 83A-210 of the ITAA 1997 only applies if there is a relevant connection between the irretrievable cash contribution made by Company A to the Trustee and the acquisition of an ‘ESS interest’ by an employee under an ‘employee share scheme’ (subparagraph 83A-210(a)(ii) of the ITAA 1997).

In the present case, the granting of ESS interests, the provision of the money to the Trustee under the arrangement, 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 Plans.

All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme can operate as intended. The provision of money to the Trustee necessarily allows the scheme to proceed. Consequently, the provision of money by Company A to the EST is considered to be for the purpose of enabling the participating employees, indirectly as part of the employee share scheme, to acquire the ESS interests.

Where Company A 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 irretrievable contribution will only be deductible to Company A in the income year when the relevant ESS interests in Company A are acquired by the Participants where this is a different income year from that in which Company A makes the irretrievable contribution.

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

Section 83A-340 of the ITAA 1997 provides that where you acquire a beneficial interest in a right that later becomes a right to acquire a beneficial interest in a share, Division 83A of the ITAA 1997 will apply as if the right had always been a right to acquire a beneficial interest in the share. In order for section 83A-340 of the ITAA 1997 to apply:

● The right acquired must be capable of becoming a right to acquire a beneficial interest in a share, and

● The right must in fact become a right to acquire a beneficial interest in a share.

Performance Rights acquired under the PR are indeterminate rights for the purposes of section 83A-340 of the ITAA 1997. This is because the possibility exists to either deliver a Company A share or make a payment of a cash equivalent to satisfy the Performance Right. Performance Rights may be settled in cash where Board has made a determination in relation to good leaver provisions or in cases of early testing on change of control events.

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

Once determined by the Board, section 83A-340 of the ITAA 1997 operates to treat these Performance Rights as though they had always been rights to acquire beneficial interests in shares.

If irretrievable contributions are provided to the Trustee before these Performance Rights are acquired (and the Performance Rights do subsequently become ESS interests), then section 83A-340 of the ITAA 1997 operates to deem the Performance Rights to always have been ESS interests.

Where this occurs, section 83A-210 of the ITAA 1997 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1 of the ITAA 1997. In such a case, a deduction to fund the exercise of the Performance Rights would be available to Company A in the income year in which Participants acquire the Performance Rights.

Note

Where the Rights 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 of the ITAA 1997 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 of the ITAA 1997 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Company A shares where the contribution is made after the acquisition of the relevant Rights. In such a situation, the irretrievable contributions by Company A to the Trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which the irretrievable contributions are made.

Question 4

Part IVA of the ITAA 1936 (Part IVA) contains a number of anti-avoidance provisions which give the Commissioner discretion to cancel a tax benefit, however before the Commissioner can exercise the discretion under subsection 177F(1) ITAA 1936, three requirements must be met, as follows:

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

● a tax benefit was obtained or would be obtained in connection with the scheme but for Part IVA of the ITAA 1936

● 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.

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

On the basis of an analysis of these three requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by Company A in relation to the irretrievable cash contributions made to the Trustee to fund the acquisition of the company’s shares under the Plans.

Question 5

An employer’s liability to fringe benefit tax (FBT) arises under section 66 of the FBTAA which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA 1986 by reference to the taxable value of each fringe benefit provided.

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

In general terms, ‘fringe benefit’ is defined in subsection 136(1) of the FBTAA 1986 as being a benefit provided to an employee or an associate of an employee ‘in respect of’ the employment of the employee. However, certain benefits are excluded from being a ‘fringe benefit’ by virtue of paragraphs (f) to (s) of the ‘fringe benefit’ definition.

Paragraph (h) of the definition of ‘fringe benefit’ in subsection 136(1) of the FBTAA 1986, states that a fringe benefit does not include:

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 83A-B or 83A-C of that Act applies; or ….

The Commissioner accepts that the Plans as described in this Application comprise an employee share scheme under which relevant ESS interests (being Performance Rights or Options) are acquired by employees of Company A (or 'associates of those employees’), and the acquisition of those ESS interests are in relation to those employees’ employment. The shares acquired by the Trustee to satisfy options to acquire shares are also provided to employees under that same employee share scheme.

Therefore, the granting of Performance Rights or Options under the Plans to employees will not be subject to FBT because they are specifically not included in the definition of fringe benefits.

Shares granted to employees under the Plans to satisfy Options to acquire shares are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 apply (see subsection 83A-20(2) of the ITAA 1997 and paragraph 83A-105(1)(a) of the ITAA 1997). Therefore the providing of these shares will not be specifically excluded from the definition of fringe benefits under paragraph (h) of the definition in subsection 136(1) of the FBTAA 1986.

As stated above, a fringe benefit will only arise under subsection 136(1) of the FBTAA 1986 where the benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee.

Under the Plans, the benefit (beneficial interest in a share) that arises upon the exercise of a Right or Option is considered to be provided as a result of the employee exercising rights (previously obtained). This issue is considered to be analogous to that stated in ATO Interpretative Decision ATO ID 2003/316 (ATO ID 2003/316) which refers to the case of FC of T v. McArdle 89 ATC 4051;(1988) 19ATR 1901. In that case an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The Court 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.

In the present circumstances, when an employee receives a Performance Right or Option under the Plans, they obtain a right to acquire a beneficial interest in a share in Company A. When these rights are subsequently exercised, any benefit received would be in respect of the exercise of these rights, and not in respect of employment (refer to 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 Options/Rights granted under the Plans (the provision of a share), does not give rise to a fringe benefit as no benefit has been provided to the employee ‘in respect of’ the employment relationship.

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:

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

An ‘employee share trust’ is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust for an ‘employee share scheme’ (having the meaning given by subsection 83A-10(2) of the ITAA 1997) is a trust whose sole activities are:

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

(b) ensuring 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).

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

● the EST acquires Shares in Company A,

● the EST ensures that ESS interests, as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, are provided under an employee share scheme, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the Trust Deed and Plan Rules.

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

For the purposes of paragraph 130-85(4)(c), ATO Interpretative Decision 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 (ATO ID 2010/108) sets out the Commissioner’s views on an employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities.

In particular, the Commissioner considers that activities that are a necessary function of managing an employee share scheme and administering a trust will satisfy the incidental activities test. Such activities include:

● the opening and 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.

In this case, 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 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. It is also provided in the Trust Deed that the Trust will be administered so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997 and be an “employee share trust” as defined in sub-section 995-1(1) 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 Participants in accordance with the Plans. 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 Plans.

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, Company A will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the EST to fund the acquisition of its shares in accordance with the Trust Deed.

Question 7

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 provide as follows:

145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

The Commissioner will only make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. In Miscellaneous Taxation Ruling MT 2021 (MT 2021) under the heading “Appendix, Question 18”, on the application of section 67, the Commissioner states:

…As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement...

Further, paragraph 151 of Law Administration Practice Statement 2005/24 provides:

151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

In the present case the benefits provided to the Trustee by way of irretrievable contributions to the EST, and to eligible employees by way of the provision of Options/Rights and shares under the relevant Plans are excluded from the definition of a fringe benefit for the reasons given in the response to Question 6 (above). Therefore, as these benefits have been excluded from the definition of a fringe benefit and there is also no FBT currently payable under the existing Plans, nor likely to be payable under future alternative plans, the FBT liability is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA 1986 applies to include an amount in the aggregate fringe benefits amount of Company A in relation to a tax benefit obtained under either of the current Plans from irretrievable cash contributions made by Company A to the Trustee of the EST to fund the acquisition of Company A shares in accordance with the Trust Deed.