Edited version of private advice

Authorisation Number: 1051632305904

Date of advice: 14 February 2020

Ruling

Subject: Employee share scheme

Question 1

Is Company A entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act i> (ITAA 1997) in respect of irretrievable cash contributions made by Company A to the trustee of the Employee Share Plan Trust (EST or "the Trust") to fund the subscription or acquisition of fully paid ordinary shares in Company A (Shares) to satisfy the issue of Shares to Participants pursuant to the Employee Share Option Plan (ESOP or "the Plan")?

Answer

Yes

Question 2

Is Company A entitled to a tax deduction under section 8-1 of the ITAA 1997 in respect of costs incurred by it in relation to the on-going administration of the Trust?

Answer

Yes

Question 3

Will the irretrievable cash contributions made by Company A to the Trustee of the Trust to fund the subscription or acquisition of Shares on market to satisfy Company A's obligations with respect to the issue of Shares to Participants pursuant to the Plan, be deductible to Company A at a time determined by section 83A-210 of the ITAA 97 if those contributions are made before the allocation of the Shares to the Participants?

Answer

Yes.

Question 4

If the Trust satisfies its obligation under the Plan by subscribing for new Shares in Company A, will the subscription proceeds be included in the assessable income of Company A under section 6-5 or 20-20 of the ITAA 97, or trigger a capital gain tax (CGT) event under Division 104 of the ITAA 97?

Answer

No.

Question 5

Will the Commissioner seek to make a determination under section 177F that Part IVA of the ITAA 36 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 Trust to fund the subscription or acquisition of Shares?

Answer

No.

Question 6

Will the provision of Options by Company A to its employees under the Plan be a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

Question 7

Will the irretrievable cash contributions made by Company A to the Trustee of the Trust, to fund the subscription or acquisition of Shares, constitute 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 aggregate fringe benefits amount of Company A by the amount of the tax benefit gained from irretrievable cash contributions made by Company A to the Trustee, to fund the subscription or acquisition of Shares by the Trustee to satisfy its obligations under the Plan?

Answer

No.

The rulings for questions 1 - 5 inclusive each apply for the following periods:

Income tax year ended 30 June 2020

Income tax year ended 30 June 2021

Income tax year ended 30 June 2022

Income tax year ended 30 June 2023

Income tax year ended 30 June 2024

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

Fringe benefits tax year ended 31 March 2020

Fringe benefits tax year ended 31 March 2021

Fringe benefits tax year ended 31 March 2022

Fringe benefits tax year ended 31 March 2023

Fringe benefits tax year ended 31 March 2024

The scheme commences in:

Year Ending 31 March 2020.

Relevant facts and circumstances

1.   Company A is a public company, listed on the ASX.

2.   Company A is the head company of a tax consolidated group. The companies that make up the tax consolidated group are referred to as "the Group".

3.   Company A currently has an Employee Share Option Plan (ESOP or the Plan) in place, pursuant to which eligible employees (Participants) are granted Options for no cost to acquire shares in the company, upon satisfaction of certain vesting conditions.

4.   Once Options vest or are exercised, Shares are allocated to Participants. In the event that certain vesting conditions are not satisfied, the Options granted to Participants will lapse.

5.   The ESOP was established to:

(a)  assist in the reward, retention and motivation of employees; and

(b)  align the economic interests of Eligible Participants with those of shareholders of Company A by providing an opportunity for Eligible Participants to be remunerated by reference to the value of Shares in Company A.

6.   Each Option entitles the Participant to acquire one ordinary Share upon vesting or exercise.

7.   Options do not carry voting or dividend rights.

8.   Participants are entitled to dispose of their Shares pursuant to Company A's share trading policy.

Operation of Trust

9.   The Board has approved the establishment of an employee share plan trust (EST). The Trust Deed refers to the Deed of the EST.

10. ST was implemented with a view to:

(a) providing Company A with greater flexibility to accommodate the long-term incentive arrangements whilst the business continues to expand in terms of operation and employee numbers in future years;

(b) accommodating capital management flexibility for Company A in that the EST would be able to use contributions from Company A to either acquire shares on-market or subscribe for new shares in Company A; and

(c) facilitating a streamlined approach to the administration of the ESOP.

11. ackground of the Trust deed states that Company A wishes to establish the Trust to acquire, hold and transfer ordinary shares in Company A.

12.  the Trust Deed, the activities of the Trustee are to acquire and hold Shares for the purpose of providing them to Participants of the Plan on vesting and exercise of Options, and the administration of the Trust

13. ny A will, from time to time, give written notice to the Trustee of the number of Shares that must be acquired (by purchase or subscription) or allocated to satisfy the obligations of Company A in respect of Options granted to Participants under a Plan.

14.  to individual Participants becoming beneficially entitled to Shares, they will be held in an unallocated account.

15. ny A will be required to make contributions to the EST which are sufficient to:

(a) acquire the shares that the Trustee is directed to acquire;

(b) pay any transfer taxes and brokerage fees in respect of the acquisition or transfer of shares; and

(c) pay all costs associated with the acquisition or delivery of shares to a Participant and administration of the EST generally.

16. ny A will make contributions to the EST to meet the EST's obligations that it expects will vest/arise within any 12 month period.

17. rustee may not levy fees or charges for administering the Trust:

18. ny A is to supply all the funding for the Trust.

19. the exercise of options by Participants pursuant to the ESOP, the Trustee of the EST will acquire shares in Company A, either:

(a) on-market;

(b) by subscribing for new shares; or

(c) allocating shares held by the Trustee to the relevant Participant.

20.  the terms of the EST:

(a) the acquisition of shares by the Trustee of the Trust would be funded by irretrievable cash contributions made by Company A to the Trustee of the EST in accordance with the ESOP and terms of the EST trust deed;

(b) the Trustee would use the contributions received from Company A to subscribe for shares in Company A directly or purchase them on-market and hold the shares for the benefit of the Participants;

(c) prior to individual Participants becoming beneficially entitled to shares, they will be held by the Trustee of the EST in an unallocated account;

(d) the Trustee will then allocate shares to Participants, pursuant to their entitlement under the ESOP upon exercise of the Participant's options; and

(e) Participants should be absolutely entitled to the shares as against the Trustee when the shares are allocated to them in accordance with the EST trust deed. While such Shares are held on trust, Participants will be absolutely entitled to receive dividends, exercise voting rights, receive any bonus shares and participate in any rights issue in respect of the shares allocated to them.

21. ny A will not be a beneficiary under the EST trust deed and will have no interest in the shares held by the EST. Any funds contributed to the EST, other than specifically in the form of a loan, will not be refunded, repaid or returned to Company A other than by way of the Trustee paying the issue price when it subscribes for shares in Company A.

22. rretrievable cash contributions made by Company A will not relate to Company A gaining or producing exempt income or non-assessable non-exempt income.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

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

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

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 subsection 177F(1)

Income Tax Assessment Act 1997 section 8-1

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

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

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

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

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

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

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 paragraph 83A-210(a)(i)

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 701-1 and

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

Reasons for decision

Questions 1 to 5 - application of the single entity rule in section 701-1

The consolidation provisions of the Income Tax Assessment Act 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 the subsidiary members of an income tax consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period that they are members of the income tax consolidated group with the head company of the group being the only entity recognised for income tax purposes.

The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997.

As a consequence of the SER, the actions and transactions of the subsidiary members of the Company A income tax consolidated group (TCG) are treated, for income tax purposes, as having been undertaken by Company A as the head company of the TCG.

Questions 6 to 8

The SER in section 701-1 has no application to the Fringe Benefits Tax Assessment Act 1986. The Commissioner has therefore provided a ruling to each company which is a subsidiary member of the TCG in relation to these questions.

Question 1

For present purposes, subsection 8-1(1) will allow you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, pursuant to subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature, private or domestic/incurred in gaining or producing exempt or non-assessable non-exempt income..

Company A carries on a business which produces assessable income. Company A operates an employee share scheme as part of its remuneration strategy.

Under the ESOP, Company A grants options to employees and makes irretrievable contributions to the Trust (in accordance with the Rules and the Deed) which the Trustee will use to acquire shares (either on-market or by subscription) for allocation to Participants to satisfy their options or allocation of shares.

Incurred in carrying on a business

Company A must provide the Trustee with all the funds required to enable the Trustee to subscribe for, or acquire those Company A shares.

The contributions made by Company A are irretrievable and non-refundable to Company A in accordance with the Deed as:

·   rmination of the EST the remaining Shares are converted into money (unless they are bought back or cancelled by Company A for no consideration) and if there are any proceeds outstanding they are to be provided to an organisation for which tax deductible gifts or contributions may be made i.e. not to Company A and

·   ny A will at no time have or be entitled to obtain any beneficial interest in the EST's Assets

Company A grants options under the ESOP as part of its remuneration and reward program for Participants. The costs incurred by Company A for the acquisition of shares to satisfy options arise as part of these remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees.

Not capital or of a capital nature

The costs will be an outgoing incurred for periodic funding of a bona fide employee share scheme for employees of Company A and the Group. Costs incurred are likely to be in relation to more than one grant of options (rather than being one-off), and Company A intends to continue satisfy these using shares acquired by the Trust. This indicates that the irretrievable contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure of Company A.

While the contributions may secure an enduring or lasting benefit for the employer that is independent of the year to year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be sufficiently small. Therefore, the payments are not capital, or of a capital nature.

Private or Domestic/Exempt or non-assessable non-exempt income

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

Question 2

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, incurred in producing exempt or non-assessable non-exempt income or where a provision of the tax law prevents the deduction.

Company A carries on a business which produces assessable income. Company A operates an employee share scheme as part of its remuneration strategy.

Company A incurs on-ongoing administration costs for operating the Employee Share Scheme (ESS) such as

·   rage fees;

·   charges; and

·    ongoing administrative expenses.

These costs are regular and recurrent employment expenses which are deductible under section 8-1 as they are costs necessarily incurred in running the ESS while carrying on its business for the purpose of gaining or producing its assessable income.

Relevantly, these costs are not capital or of a capital nature as the loss or outgoings are regular and recurrent and are part of the ordinary employee remuneration costs of the company. (ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible)

Question 3

Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to the trust to purchase shares in excess of the number required to grant the relevant options to the employees arising in the year of income from the grant of options, under an employee share scheme. Further information is available 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.

The ESOP is an employee share scheme for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests (i.e. a beneficial interest in a share or a beneficial interest in a right to acquire a beneficial interest in a share) are provided to employees (i.e., Participants) in relation to their employment with a member of the Group.

The ESOP contains a number of interrelated components which includes the provision of irretrievable cash contributions by Company A to the Trustee of the Trust. These contributions enable the Trustee to acquire Company A shares for the purpose of enabling each Participant, indirectly as part of the ESOP, to acquire ESS interests.

The deduction for the irretrievable cash contribution can only be deducted from the assessable income of Company A in the income year when the relevant beneficial interest in a share in Company A, or beneficial interest in a Right to a beneficial interest in a share in Company A, is acquired by a Participant under the ESOP.

Question 4

Ordinary Income

Section 6-5 of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. The definition of 'income' was considered by Jordan CJ in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219; 3 ATD 142 at 144-145 where his Honour said:

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts...

A leading case on ordinary income is Eisner v Macomber 252 US 189 (1919) where it was said that:

The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. ...Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; ...that is income derived from property. Nothing else answers the description.

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 McHugh 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 incurred in carrying on a business.

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

The character of the contribution of share capital received by Company A from the trustee of the EST can be determined by the character of the right or thing disposed of in exchange for the receipt. Under this arrangement, Company A issues a new share (or shares) to the trustee of the EST. The character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds received by Company A, takes the character of share capital, and accordingly, will also be of a capital nature. This view is supported by the reasoning in ATO Interpretive Decision ATO ID 2010/155Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee.

Accordingly, when Company A receives subscription proceeds from the trustee of the EST for the issue of a new share in Company A to satisfy an obligation to a Participant under the Plan Rules, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account, and will not be ordinary income under section 6-5 of the ITAA 1997.

Section 20-20 of the ITAA 1997

Subsection 20-20(2) of the ITAA 1997 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 the amount can be deducted as a loss or outgoing in the current year or an earlier income year. Company A will receive an amount for the subscription of shares by the trustee of the EST. There is no insurance contract in this case, so the amount received for the subscription of shares is not received by way of insurance. Further, the amount received for the subscription of shares is not received by way of 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.

Subsection 20-20(3) of the ITAA 1997 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 of the ITAA 1997.

Subsection 20-25(1) of the ITAA 1997 defines a recoupment as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing. The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing.

So far as a deduction under section 8-1 of the ITAA 1997 is allowed for bad debts or rates or taxes, section 20-30 of the ITAA 1997 will apply such that if there was a recoupment of that deduction, that amount would be assessable. The subscription for new Company A shares by the trustee of the EST cannot be said to be a recoupment under subsection 20-25(1) of the ITAA 1997.

The receipt by Company A is received in return for issuing shares to the trustee of the EST, it is not received as a recoupment of previously deducted expenditure under section 8-1 of the ITAA 1997 regarding bad debts or rates and taxes that could be subject to section 20-30 of the ITAA 1997.

The subscription proceeds received by Company A from the trustee of the EST for issuing shares will not be an assessable recoupment under section 20-20 of the ITAA 1997.

Capital Gains Tax (CGT)

Section 102-20 of the ITAA 1997 states that there is a capital gain or loss if, and only if, a CGT event happens.

The relevant CGT events that may be applicable when the subscription proceeds are received by Company A 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) of the ITAA 1997 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, Company A is issuing shares, being equity interests as defined in section 974-75 of the ITAA 1997 to the trustee of the EST. CGT event D1 therefore does not happen.

In relation to CGT event H2, paragraph 104-155(5)(c) of the ITAA 1997 also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. CGT event H2 therefore also does not happen.

As no CGT event occurs, no amount will be assessable as a capital gain to Company A.

Question 5

Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

The Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust where the conditions of Division 83A of the Income Tax Assessment Act 1997 are met.

In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the EST arrangement.

Therefore, having regard to the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling Company A to obtain a tax benefit.

Question 6

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the Frings 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.

In general terms, a '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. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

In particular, paragraph (h) of subsection 136(1) of the FBTAA 1986 excludes the following from being a 'fringe benefit':

(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 83A-B or 83A-C of that Act applies;

The Commissioner accepts that the ESOP is an employee share scheme, the options for the Company A shares provided under the ESOP are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests.

Accordingly, the provision of options for Company A shares under the ESOP 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.

In addition, when an option is later exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the option and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

Question 7

One benefit excluded from being a 'fringe benefit', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA 1986, is 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.

In examining whether the requirements of subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that is relevant. To qualify as an employee share trust, a trustee's activities must be limited to those described in paragraphs 130-85(4)(a), (b) and (c).

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

·   rust acquires shares in a company, namely Company A; and

·   rust ensures that ESS interests as defined in subsection 83A-10(1) (being options in Company A) are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Deed and the ESOP.

Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Draft Taxation Determination TD 2019/13:Income tax: what is an 'employee share trust'?.

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental.

In the present case, the objects of the Trust are for the sole purpose of undertaking activities that are in line with the definition of an employee share trust under section 130-85(4) including paragraph 130-85(4)(c) as the other activities undertaken by the Trustee are merely incidental to managing the ESOP.

Therefore, the cash contribution made by Company A to fund the subscription for or acquisition on-market of Company A shares by the Trust will not be a fringe benefit.

Question 8

PS LA 2005/24 succinctly explains the operation of section 67 of the FBTAA 1986. Notably, paragraphs 185-188 of PS LA 2005/24 state:

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:

                  sp;     a benefit is provided to a person;

                  II.     ount is not included in the aggregate fringe benefits amount of the employer; and

                 III.     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 1986 if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. Paragraph 191 of PS LA 2005/24 states:

191. The approach outlined in this practice statement (refer to paragraphs 75 to 150) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant (except that amendments corresponding to the 2013 amendments of Part IVA have not been made to section 67) and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

Irretrievable cash contributions made by Company A to the EST will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986. As a result, the FBT liability of Company A is not any less than it would have been but for the existence of the arrangement.

The Commissioner will not make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount of Company A by the amount of the tax benefit gained from the irretrievable cash contributions made by Company A to the trustee of EST to fund the subscription for, or acquisition on-market of, Company A shares.