Edited version of private advice

Authorisation Number: 1051607150264

Date of advice: 9 December 2019

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 to fund the subscription for or acquisition on-market of the Company shares by the Company Employee Share Trust (the Trust)?

Answer

Yes

Question 2

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

Answer

Yes

Question 3

Will irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of the Company shares by the Trust be deductible to the Company at a time determined by section 83A-210 of the ITAA 1997?

Answer

Yes

Question 4

If the Trust satisfies its obligation under the employee share plan (the Plan) by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997?

Answer

No

Question 5

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 Company in respect of the irretrievable cash contributions made by the Company to the Trustee to fund the subscription for or acquisition on-market of the Company shares by the Trust?

Answer

No

Question 6

Will the provision of shares by the Company to employees be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

Question 7

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

Answer

No

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to the Company and other employer entities within the Company group by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee, to fund the subscription for or acquisition on-market of the Company shares?

Answer

No

This ruling applies for the following periods:

For Income tax years

Income tax year end 20XX - Income tax year end 20XX

For Fringe Benefits Tax years

1 April 20XX - 31 March 20XX

The scheme commenced on:

DD/MM/YEAR

Relevant facts and circumstances

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

Employee share plan

The Company Employee Share Option Plan (ESOP) and the Company New Plan (New Plan) (together referred to as Plans) form part of the remuneration strategy and aim to recognise long-term performance by rewarding participants with equity incentive awards which allow them to share in the growth and in the value of the business.

The Company will continue to operate ESOP as there are a number of outstanding awards which were granted under the ESOP. However, since adopting the New Plan all equity awards to employee are made under the New Plan.

ESOP

The ESOP broadly operates as follows in accordance with the ESOP Rules:

·        It is at the Board's discretion to extend an invitation to certain employees to apply, at no consideration, for a number of Options specified on the invitation.

·        The Vesting Conditions for the Options are conditional upon Participants achieving specific performance targets, as detailed in the Terms of Offer and will remain at the absolute discretion of the Executive Chairman.

·        The exercise price of the Option will be specified in the invitation and may reflect a discount to the weighted average sale price of the Company's shares sold during the 10 days immediately prior to the grant date.

·        The Options may be exercised on the Exercise Date provided that any Exercise Condition is met, and Options must be exercised by the Expiry Date.

·        The Options will lapse, if the Option holder ceases to be an employee by reason of dismissal or resignation.

·        Options are not transferable without the permission of the Board.

·        A share issued pursuant to the exercise of any Options will rank equally in all respects with existing shares.

·        Unless the Board determines otherwise, shares under the ESOP will be registered in the name of the Trustee on issue by the Company or acquisition by the Trustee.

·        Where any shares are held by the Trustee in the Trust for the benefit of a holder pursuant to the ESOP, a holder must not dispose of or direct the Trustee to dispose of or to grant a Security Interest over any of the shares held by the Trustee on behalf of the holder.

·        The Company may enter into any arrangements and take any steps necessary to enforce and give effect to the restrictions imposed under the ESOP Rules, including the Company or the Trustee applying or having applied a Trading Lock to the shares.

New Plan

New Plan is governed by the New Plan Rules and involves the grant of Awards (Shares, Options and Rights) to employees, contractors or consultant designated by the Board as Eligible Participants (Participants).

The Awards (excluding the award of Shares) will vest on the relevant vesting date subject to the vesting conditions specified in the Offer.

A Participant does not have dividends or voting rights in respect to Awards until Shares are issued, transferred or allocated by the Trustee, including on the exercise of an Option, or after Vesting of the Rights. Awards will vest subject to the vesting conditions.

An Option issued will entitle the Participant to acquire a share, provided that any exercise conditions is met.

Unless the Board decides otherwise or as otherwise specified in the Offer, an Option that has not been exercised on or before the Expiry Date, lapses.

Vested Options held by a Participant will have the relevant expiry date adjusted to the date specified in the Offer or a later dated decided by the Board if the following occurs during the exercise period:

·        Lawful termination of employment or consultancy arrangement with the Group

·        Resignation or vacation from the Board, employment or consultancy with the Group

·        Redundancy

·        Death or disability (no adjustment, representative of Participant's estate may exercise before the expiry date)

·        Loss of control of permitted nominee (Options will lapse immediately).

Performance Rights

Each Performance Right entitles the Participant to be issued, transferred or allocated by the Trust, one Share after the Vesting Date, subject to the satisfaction of the Vesting Conditions and any other requirement contained in the Offer.

Performance Rights will lapse immediately (unless specified otherwise) if on or before the vesting date (i.e. between grant and vesting date) the following occurs:

·        Lawful termination of employment or consultancy arrangement with the Group

·        Resignation or vacation from the Board, employment or consultancy with the Group

·        Redundancy

·        Death or disability (Options will lapse 90 days after the date of death or disability, Performance Rights or Share Appreciation Rights do not lapse)

Share Appreciation Right

A Participant granted a Share Appreciation Right is entitled to be issued, transferred or allocated the number of shares calculated under New Plan Rule after the relevant Vesting Date, subject to satisfaction of the Vesting Conditions and any other requirement contained in the Offer.

The number of Shares which a Participant is entitled to in respect of the Share Appreciation Rights is calculated in accordance with the following formula:

(Vesting Market Value - Grant Market Value X Number of Share Appreciation Rights

Vesting Market Value

Share Appreciation Rights will lapse immediately (unless specified otherwise) if on or before the vesting date (i.e. between grant and vesting date) the following occurs:

·        Lawful termination of employment or consultancy arrangement with the Group

·        Resignation or vacation from the Board, employment or consultancy with the Group

·        Redundancy

·        Death or disability (Options will lapse 90 days after the date of death or disability, Performance Rights or Share Appreciation Rights do not lapse)

Shares

The Board may, from time to time, in its absolute discretion, invite a Participant to apply for a grant of; or grant to a Participant, Shares (including under a Free Grant or a Salary Contribution Arrangement) in accordance with the terms of the Plan and upon such additional terms and conditions as the Board determines.

All shares allocated in the Trust to Participants under the New Plan will rank equally in all respects with other shares for the time on issue by the Company subject to the terms of the Trust.

The Trust

Pursuant to the Recitals of the Trust Deed, the Trust has been established for the sole purpose of subscribing for or acquiring, allocating, holding and delivering the Company's shares under the Plans for the benefit of the Participants.

The Trust is funded by irretrievable cash contributions from the Company for purchase of shares in accordance with the Trust Deed.

Pursuant to the Trust Deed the Trustee is not permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the Trust. In addition, it is not permitted to carry out activities which result in the Participants in the Plans being provided with additional benefits other than the benefits that arise from the relevant plans.

Pursuant to the Trust Deed the Trustee of the Trust is empowered to acquire the shares in the Company either on-market or via subscription for new shares in the Company.

Pursuant to the Trust Deed the Board, on behalf of a Participant, will instruct the Trustee, by way of notice in writing, to subscribe for, purchase and/or allocate the requisite number of the Company shares in the Company specified in the notice.

Pursuant to the Trust Deed, the Company must provide the necessary funds to the Trustee for the purpose of enabling it to acquire the Company shares as specified in the notice in accordance with the Trust Deed.

The Trustee will, in accordance with instructions received pursuant to the rules of the Plans, acquire, deliver and allocate the Company shares for the benefit of Participants provided that the Trustee receives, when required and necessary, sufficient payment from the Company to subscribe for or purchase such shares and/or has sufficient unallocated trust shares available.

The Trustee will establish and maintain a separate Trust Share Account or record in respect of each Participant in accordance with the Trust Deed.

While shares in the Company are held in trust, the Participant will be entitled to dividend and voting rights. By written notice, Participants can apply for legal title to the appropriate Company shares held in the Trust to be transferred to them.

All funds received by the Trustee from the Company will constitute accretions to the corpus of the trust and no Participant will be entitled to receive such funds. The contributions will not be repaid to the Company unless they are used to subscribe for Company shares.

Where an amount paid by the Company to the Trustee in respect of the acquisition of the Company shares for the benefit of a Participant is in excess of the amount required by the Trustee to acquire those shares, the Company may require the Trustee to apply such amount to acquire, deliver or allocate the shares in accordance with the Trust Deed, the relevant plan rules or the relevant terms of participation or deposit the funds into any account opened and operated by the Trustee.

Reasons for decision

Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.

Question 1

Section 8-1 allows a deduction for a loss or outgoing that satisfies one of the positive limbs in subsection 8-1(1) to the extent that:

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

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

However, even if a positive limb is satisfied, a deduction is not permitted under subsection 8-1(2) (the negative limbs) to the extent that the loss or outgoing is:

(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 in 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 the ITAA 1997 or ITAA 1936 prevents you from deducting it.

Positive limbs

For a deduction to be allowable under subsection 8-1(1), there must be a nexus between your loss or outgoing and the gaining or producing of assessable income, or the loss or outgoing must be incurred in carrying on a business for the purpose of gaining or producing your assessable income. The expenditure must be incidental and relevant to the production of your assessable income (Ronpibon Tin NL and Tongkah Compound NL v FCT (1949) 78 CLR 47 at 56-7).

In the present case, the Company is carrying on an income producing business and engages employees in the ordinary course of its business. The irretrievable cash contributions are made to the Trustee to enable the Company to meet its obligations arising from the grant of Awards under the Plans as part of its remuneration strategy and aim to recognise long-term performance by allowing Participants to share in the Growth of the Company.

The Trust has been established for the sole purpose of subscribing for or acquiring shares for the Participants pursuant to the Plan and terms of the Trust Deed. Pursuant to the Trust Deed, the Company must provide the Trustee, any funds to subscribe for, purchase and/or allocate Shares in accordance with the Trust Deed. If those Shares are to be satisfied from the Trust, the Company has a legal obligation to fund the Trust for that purpose. The irretrievable cash contributions that the Company makes to the Trustee are employee remuneration costs directly related to the production of the Company's assessable income. Therefore, subsection 8-1(1) is satisfied.

Negative limbs

Even where a contribution satisfies the requirements of subsection 8-1(1), a deduction is not permitted under subsection 8-1(2) (the negative limbs).

The most relevant negative limbs in the present case are paragraph 8-1(2)(a) which provide that a loss or outgoing is not deductible under section 8-1 to the extent that it is a loss or outgoing of capital, or of a capital nature; and paragraph 8-1(2)(c) which provides that a loss or outgoing is not deductible under section 8-1 to the extent that it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income.

The nature of an outgoing as either capital or revenue can generally be determined by examining the character of the advantage sought, the manner in which it is to be used, relied upon or enjoyed and the means adopted to obtain it (Sun Newspapers Ltd and Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337 at 363; [1938] HCA 73; (1938) 1 AITR 403 at 413; (1938) 5 ATD 87 at 96).

Dixon J identified capital outgoings as those which had a lasting importance to the taxpayer's profit-yielding structure. Dixon J said (at 363) that there were three matters to be considered:

(a)   the character of the advantage sought

(b)   the manner in which it is to be used, relied upon or enjoyed, and

(c)   the means adopted to obtain it.

On weighting up the facts and circumstances in this case we consider:

·        the contributions by the Company to the Trustee of the Trust are for the purpose of acquiring the Company shares to meet the Company's commitments arising under the Plans. They are primarily outgoings incurred in the ordinary course of carrying on its business

·        the contributions will be applied within a relatively short period of time (i.e. 30 days to six months) to acquire the Company shares for the benefit of Participants after the Vesting Conditions specified in the Terms of Offer are satisfied

·        the amount of the contribution provided by the Company is sufficient for the Trustee of the Trust to acquire the requisite number of the Company shares under the terms of the Trust Deed.

·        Participants will receive absolute entitlement to the Company shares upon the exercise of Options and Vesting of Awards within the relevant Vesting Periods.

·        the Plans provide Participants with an opportunity to receive an equity interest in the Company because the Vesting Conditions are linked to performance and retention of Participants.

The irretrievable cash contributions made by the Company to the Trustee are not considered outgoings of capital or of a capital nature or are incurred in gaining or producing exempt income or non-assessable non-exempt income. Therefore, paragraph 8-1(2)(a) is not satisfied.

Nothing in the facts suggests that the irretrievable cash contributions made by the Company to the Trustee of the Trust are incurred in relating to gaining or producing exempt income or non-assessable non-exempt income.

Accordingly, the Company will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions made to the Trustee of the Trust to fund the acquisition of the Company shares.

Question 2

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

The Company has implemented the Trust for the purpose of facilitating the operation of the Plans and has appointed the Trustee to administer the Trust.

The Company will incur various costs in relation to the ongoing administration of the Trust. For example, the Company will incur costs associated with services performed by the Trustee including:

·        production and dispatch of holding statements to employees

·        employee plan record keeping

·        the acquisition of shares on market (e.g. brokerage costs and the allocation of shares to Participants), and

·        other Trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust.

The Trust Deed provides that the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration for operating or administering the Trust. However, the Company may reimburse the Trustee from its own account, any expenses incurred by the Trustee.

The costs incurred by the Company for the on-going administration of the Trust are regular and recurrent employment expenses deductible under section 8-1 as they are costs necessarily incurred by the Company in carrying on its business for the purpose of gaining or producing its assessable income.

The view that the costs incurred by the Company are deductible under section 8-1 is consistent with ATO Interpretative Decision 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 and accordingly deductible under section 8-1.

Question 3

As discussed in response to Question 1, the irretrievable cash contributions made by the Company to the Trustee of the Trust for purpose of remunerating its employees under the Plans is an allowable deduction under section 8-1.

The deduction 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:

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

An 'arrangement' is defined broadly in section 995-1 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 Trust and provision of irretrievable cash contributions 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.

Awards granted to Participants under the Plans will be ESS interests, within the meaning of subsection 83A-10(1), as they are or may later become a right to acquire the Company shares under the Plans for Participants in relation to their employment.

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 Plans are employee share schemes, for the purposes of Division 83A as they are arrangements under which ESS interests (Awards) are granted to Participants in relation to their employment with the Company or its subsidiaries. Awards are granted to Participants upon their acceptance of the Invitation to participate in the Plans.

Relevant connection

The making of the offer under the Plans, the provision of Awards under the Plans, the provision of irretrievable cash contributions to the Trustee under the Plans and the Trust Deed, 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 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. 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 cash contributions are provided by the company to the Trustee of the Trust before the time the Participant acquires the relevant ESS interest, section 83A-210 will apply. The effect is that the company can only deduct the amount of the cash contributions in the income year when Participants acquire the ESS interest.

However, section 83A-210 will not apply to a deduction for cash contributions provided by the Company to the Trustee if the contributions are made at or after the time the Participant acquires the ESS interest. The effect is that those cash contributions can be deducted by the Company under section 8-1 in the income year in which the contributions are made to the Trustee of the Trust.

Indeterminate Rights

Performance Rights or Share Appreciation Rights (Rights) are indeterminate rights for the purposes of section 83A-340.

Section 83A-340 states:

(1) This section applies if:

(a)   you acquire a beneficial interest in a right; and

(b)   the right later becomes a right to acquire a beneficial interest in a share.

Example 1: You acquire a right to acquire, at a future time:

(a)   shares with a specified total value, rather than a specified number of shares; or

(b)   an indeterminate number of shares.

Example 2: You acquire a right under which the provider must provide you with either ESS interests or cash, whichever the provider chooses.

(2) This division applies as if the right had always been a right to acquire the beneficial interest in a share.

In this circumstance the Rights are not rights to acquire a beneficial interest in a share unless and until the time the Board at its discretion has determined that they will be satisfied by provision of shares and the number of those shares can be determined.

If irretrievable contributions are made by the Company to the Trustee before Rights are acquired (and the Rights do subsequently become ESS interests), then section 83A-340 operates to deem the Rights 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, the irretrievable contributions to fund the acquisition of Shares to satisfy the Rights will only be deductible in the income year in which the ESS interests (Rights) were acquired by the Participants.

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 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme in relation to the employee's employment and the contributions are made before the acquisition of the ESS interests.

Accordingly, section 83A-210 will not apply where 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 Rights.

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

Ordinary Income

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. The term "income according to ordinary concepts" is not defined. However, there are a number of cases which have elaborated certain factors that assist in determining whether a receipt should be characterised as income according to ordinary concepts.

In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHug'h JJ stated at page 138 that:

"To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business".

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not received in the course of carrying on a business.

In an employee share scheme, where the trustee subscribes to the company for an issue of shares and pays the full subscription price for the shares, the Company receives a contribution for its share capital from the trustee.

The character of the subscription proceeds received by the Company from the trustee can be determined by the character of the right or thing disposed of in exchange. In this case, as the Company issues shares in itself to the Trustee in exchange for the subscription proceeds, the character of the newly issued shares is one of capital. Therefore, the receipt, being the subscription proceeds, takes the character of share capital, and, accordingly is of a capital nature.

The subscription proceeds received by the company from the Trustee where the Trustee has subscribed for new shares in the Company to satisfy obligations to Participants under the Plan are a capital receipt. That is, subscription proceeds will not be received on revenue account and will not be ordinary income under section 6-5.

Section 20-20

Subsection 20-20(2) provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year.

The Company will receive an amount when the Trustee of the Trust subscribes for shares in the Company. There is no insurance contract in this case, so the amount received is not received by way of insurance.

Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. The amount is not received by way of indemnity.

Subsection 20-20(3) makes assessable a recoupment of a loss or outgoing that is deductible in the current income year, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30.

Recoupment is defined in subsection 20-25(1) as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing.

None of the provisions listed in section 20-30 are relevant to the current circumstances. Therefore, the subscription amount does not constitute an assessable recoupment under subsection 20-20(3).

The subscription proceeds will therefore not be an assessable recoupment under section 20-20.

Capital Gains Tax (CGT)

Section 102-20 provides that you make a capital gains or loss if, and only if, a CGT event happens. Where the receipt of subscription proceeds does not relate to a CGT event, a capital gain will not arise.

The relevant CGT events that may be applicable when the subscription proceeds are received by the Company are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset).

However, paragraph 104-35(5)(c) states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, the Company will issue shares, being equity interests as defined in section 974-75, to the Trustee of the Trust, therefore CGT event D1 does not happen.

In relation to CGT event H2, paragraph 104-155(5)(c) also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Therefore, CGT event H2 will not occur.

As no CGT event occurs, there is no amount that will be assessable as a capital gain to the Company.

Therefore, when the Trustee of the Trust satisfies the obligations under the Plan by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under section 6-5 or section 20-20, nor trigger a CGT event under Division 104.

Question 5

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. Before the Commissioner can exercise his discretion to make a determination in respect of Part IVA under subsection 177F(1), the following three requirements must be met:

·     there must be a scheme within the meaning of section 177A

·     a tax benefit arises that was obtained or would be obtained in connection with the scheme but for Part IVA, and

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

In this case, each of the Plans constitutes a 'scheme' for the purposes of section 177A, and the deduction claimed by the Company is a tax benefit obtained in connection to the scheme under paragraph 177C(1)(b).

However, on the basis of the 'Relevant facts and circumstances' in this Notice of private ruling, it cannot be objectively concluded that the person or persons who entered into or carried out any part of the scheme did so for the dominant purpose of enabling the Company to obtain that tax benefit in connection with the scheme.

Therefore, the Commissioner will not seek to make a determination under section 177F, as a result of section 177D, to deny, in part or in 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 of the Company shares by the Trustee, pursuant to the Plans.

Question 6

The liability of an employer to fringe benefits 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. 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.

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' 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 83AB or 83AC of that Act applies.

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.

An employee share scheme is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees, or associates of employees.

The Commissioner accepts that the Plans are part of an employee share scheme, that the Awards provided under the Plans are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of Awards pursuant to the Plans 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 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.

The provision of the Company's shares

As stated above, a fringe benefit is a benefit provided to an employee or an associate of an employee in respect of' the employment of the employee.

Shares granted to employees upon vesting or exercise of the Options or relevant Awards are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C applies. Therefore the provision of these shares would not be specifically excluded from the definition of fringe benefits under paragraph (h) mentioned above.

However, when rights granted under an employee share scheme are exercised, and shares are allocated by the employer, it is considered that the benefit that arises comes as a consequence of the employee exercising the rights previously obtained under the scheme, and not in respect of employment.

This situation is similar to that which existed in Federal Commissioner of Taxation v. McArdle 89 ATC 4051; (1988) 19 ATR 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 ruled 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.

Therefore, the benefit that arises to an employee upon the vesting of an Award (being the provision of a Share) will not give rise to a fringe benefit as a benefit has not been provided to the employee 'in respect of' the employment of the employee.

Question 7

Pursuant to paragraph 136(1)(ha) of the of the FBTAA, a fringe benefit is defined to exclude:

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' for an 'employee share scheme' is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4) which 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).

As previously determined in answer to Question 3 above, the Plans administered by the Trust constitutes an 'employee share scheme' under subsection 83A-10(2).

The Company established the Trust under the Deed and the Trust's sole purpose is to obtain and allocate Shares to satisfy Awards granted to Participants under the Plans. There are some incidental activities undertaken by the Trustee to manage and administer the Trust, such as operation of bank accounts and maintenance of records, as provided in the Deed.

Therefore, the Trust is an employee share trust, as defined in subsection 995-1(1), as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the Trust from being a fringe benefit.

Accordingly, the irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for, or acquisition on-market of the Company's shares by the Trust pursuant to the Plans will satisfy the exclusion in paragraph (ha) of subsection 136(1) of the FBTAA.

Question 8

Section 67 of the FBTAA is the general anti-avoidance provision for FBT purposes. As stated in response to question 5 above, PS LA 2005/24 provides guidance in the application of Part IVA and other general anti-avoidance rules including subsection 67(1) of the FBTAA to an arrangement, including in a private ruling. It explains the operation of section 67 of the FBTAA and of relevance are paragraphs 185 - 188 as follows:

185. 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.

186. 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.

187. 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 of the FBTAA differs from subsection 177D(2) 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.

188. 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 would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement.

As discussed in responses to questions 6 and 7 above, irretrievable cash contributions made to the Trustee will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA. As there would be no fringe benefits tax payable, the fringe benefits tax liability is not any less than it would have been but for entering into the arrangement.

Accordingly, the Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of the Company, or other employer entities of the Group, by the amount of the tax benefit gained from the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of the Company shares.