Edited version of private advice

Authorisation Number: 1051639211227

Date of advice: 2 March 2020

Ruling

Subject: Employee share schemes

Question 1

Will the Company be entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 in respect of contributions made to the Trustee of the Employee Share Trust (the Trust) to acquire the Company's shares to satisfy grants of employee share scheme interests made under the Company's employee share schemes?

Answer

Yes

Question 2

Will the contributions by the Company to the Trustee of Trust, made at a time before the participants acquire the relevant employee share scheme interest, to fund the acquisition of shares be deductible to the Company at a time determined by s.83A-210?

Answer

Yes

Question 3

Will the contributions by the Company to the Trustee of the Trust, made at a time on or after the participants acquire the relevant employee share scheme interest, to fund the acquisition of shares be deductible to the Company at a time determined by section 8-1 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 4

Will the provision of contribution by the Company to the Trustee of the Trust to acquire shares be a fringe benefit within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No

Question 5

Will Contributions from the Company to the Trustee of the Trust to fund acquisition of shares be assessable income of the Trust pursuant to section 6-5, 6-10 of the Income Tax Assessment Act 1997 or Division 6 of the Income Tax Assessment Act 1936?

Answer

No

Question 6

Will any capital gain or capital loss made by the Trustee of the Trust arising as a result of either CGT event E5 or CGT event E7 happening in respect of shares allocated to a participant be disregarded under section 130-90 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 7

Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 applies to deny, in any part or in full, any deduction claimed by the Company in respect of contributions made to the Trustee of the Trust for the purpose of acquiring shares to satisfy grants of employee share scheme interests under the Company's employee share schemes?

Answer

No

Relevant facts and circumstances

Employee Share Scheme

1. The Company is an Australian resident company. The Company provides benefits to its employees through share ownership in the Company that assists the Company in creating sustainable shareholder returns.

2. The Board of the Company adopted plan rules which provide an overarching framework for making equity offers under the employee share scheme. The Commissioner provided the ruling on the basis of the specific offers made pursuant to the plan rules. Generally, eligible employees who participate in the offers (Participants) may have their interests vested subject to achievement of certain performance benchmark and/or service conditions.

Employee Share Trust

3. The Company established am employee share trust (Trust) to facilitate and administer awards under the employee share scheme. The trustee of the Trust (Trustee) is neither a subsidiary nor a related body corporate of the Company.

4. The Trust Deed broadly characterises the trust assets into general trust assets, which are held for the benefit of all beneficiaries, and allocated trust assets, which are the assets that have been allocated to identified beneficiaries.

5. The Trustee is only obliged to act in accordance with the direction of the Board to acquire shares and the Company must provide the Trustee with sufficient funds. During the life of the Trust, the Trustee is only allowed to hold and apply the trust assets for the benefit of the beneficiaries pursuant to the plan rules. The only circumstances the Trust may transfer trust assets to the Company is to repay any outstanding loan the Trust owes.

6. The Trust Deed can be amended; however, any amendment cannot confer on the Company any right to any money or shares already in the hands of the Trustee, or adversely affect the rights and entitlements of the beneficiaries to allocated trust assets. According to the Trust Deed, the Company is not a beneficiary and has no entitlement to any shares or other trust assets or to any return of contributions made to the Trust.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 136

Fringe Benefits Tax Assessment Act 1986 section 66

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 130-85

Income Tax Assessment Act 1997 section 130-90

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

7. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that:

(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.

8. To satisfy section 8-1, a taxpayer has to satisfy one of the positive limbs in subsection 8-1(1) and not fall within any of the negative limbs in subsection 8-1(1).

9. Draft Taxation Ruling TR 2017/D5 Income tax: employee remuneration trusts (TR 2017/D5) provides the Commissioner's view on a broad range of taxation issues for employers, trustees and employees who participate in an employee remuneration trust arrangement. According to TR 2017/D5, a contribution made by an employer is deductible to the employer under section 8-1 of the ITAA 1997 where all of the following apply:

- it is an irrevocable payment of cash, made at a time when the employer carries on a business for the purpose of gaining or producing assessable income

- the employer reasonably expects their business to benefit from the contribution via an improvement in employee performance, morale, efficiency or loyalty, and

- the contribution is intended to be permanently and entirely dissipated in remunerating employees of that business within a relatively short period of the contribution being made (other than employees who are wholly engaged in affairs of capital of the business).

10. The first dot point goes to the question of 'incurred'. In the context of an employee share scheme (ESS), an expense is incurred when a contribution by an employer to an employee share trust is irretrievable and non-refundable.

11. The second and third dot points go to the question of 'nexus' - that is, there must be sufficient connection between the contribution made by the company and the business, and the deduction is only available to the extent such a nexus exists.

12. The third dot point is also relevant to the nature of the expenses incurred. As paragraph 83 of TR 2017/D5 explains, when a contribution is intended to be retained within the trust for a longer period, it is questionable whether any advantages obtained from the contribution are revenue in nature.

Contribution must be incurred

13. For a loss or outgoing to be incurred, a taxpayer must be definitely committed in the year of income. In other words, the taxpayer is completely subject to the loss or outgoing that it cannot escape.

14. For the purpose of determining whether an amount of contribution by an employer is incurred, the ownership of that contribution must pass from the employer to the trustee and there must be no circumstance in which the employer can retrieve any of the contribution.

15. After a contribution is made by the Company to the Trust, it becomes part of the trust property.

16. The Trustee is expected to apply the contribution as directed by the Board to subscribe for shares or acquire shares so as to enable the Trustee to grant ESS interests pursuant to the offers. The shares then become part of the trust assets which the Trustee holds on behalf of the Participants.

17. During the life of the Trust, the Trustee is only allowed to hold and apply the trust assets for the benefit of the beneficiaries pursuant to the plan rules. The only circumstances the Trust may transfer trust assets to the Company is to repay any outstanding loan the Trust owes.

18. Further, neither the Company nor the Trustee can amend the Trust Deed by conferring on itself any right to any money or shares already in the hands of the Trustee.

19. The relevant terms in the Trust Deed demonstrate the irretrievable and non-refundable nature of the contributions made by the Company to the Trust. Accordingly, if the Company makes a contribution to the Trust to acquire shares pursuant to the offer, the amount is incurred for the purposes of subsection 8-1(1) of the ITAA 1997.

Sufficient Nexus

20. The High Court in Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation 1949) 78 CLR 47 at 56 explained the expression 'incurred in gaining or producing assessable income' as to mean:

...occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.

21. There is a long line of authority for the view that in order for an amount to be deductible, it is not necessary to specifically link or match that expenditure to assessable income derived in the same year as the expense is incurred.

22. The ESS is in place to assist the Company in incentivising and rewarding its employees, attracting new employees and aligning the interests of employees with its future growth and profitability.

23. The contribution made by the Company pursuant to its ESS is in essence an expense related to remunerating and rewarding the employees, and as such it is incurred in the process of carrying on a business for gaining or producing assessable income.

Not be capital or of a capital nature

24. A contribution is not deductible under section 8-1 to the extent it secures a capital advantage for the employer.

25. Whether an outgoing is 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.

26. According to TR 2017/D5, an amount of contribution will be considered to secure a capital advantage for the employer, therefore capital in nature, if it secures an asset or investment of a permanent nature.

27. The contributions by the Company to the Trust are for the purpose of acquiring shares to meet the Company's commitments arising under the plan rules. The advantage sought by the contributions is to effectively substitute ongoing expenditure (e.g. cash salary and bonus payments) with ESS interests so as to obtain the trust and confidence of the employees. It will in turn result in the enhancement of the Company's profit in each year during which the offers are in place.

28. The amount contributed to the Trust becomes part of the trust property and is expected to be applied to acquire shares. Once the shares are acquired and allocated to the Trustee on behalf of the Participants, the Trustee will hold the shares for the benefit of the Participants during the vesting period. After the vesting conditions are satisfied, the Trustee is obliged to transfer the shares to the Participants upon their request.

29. As such, it is not intended for the contributions to either form the permanent nucleus of the Trust or endure the whole life of either the Company or the Trust, but rather to be permanently and entirely dissipated in remunerating the employees through provision of legal and beneficial ownership in the shares.

30. For completeness, if a contribution is intended to be retained in the Trust for a period longer than five years, it may become harder for the taxpayer to establish a sufficient nexus between the payment and the ongoing business needs, and therefore, harder to prove the revenue nature of that amount.

31. The Company will make contributions on a regular basis as part of the ongoing process of remunerating Participants and the Trust is expected to acquire shares regularly. Nothing in the facts suggests it is intended for any contribution to be retained in the Trust for an extended period.

32. Accordingly, the provision of money to the Trustee by the Company for the purpose of remunerating its employees under the ESS is revenue in nature.

Question 2

33. It is often the case that an outgoing will be both incurred and paid in the same year of income, and as such, the amount is deductible in that income year for the purposes of section 8-1 of the ITAA 1997.

34. However, section 83A-210 of the ITAA 1997 modifies this rule in certain circumstances in respect of contributions provided by an employer to a trust to purchase shares under an ESS. Section 83A-210 specifically 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.

35. The effect of section 83A-210 is to deem the timing an employer incurred the outgoing to be the time when the ESS interest is acquired by a beneficiary, rather than the time when the employer makes the contribution to the trust, if the contribution was made before the shares are acquired.

36. 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.

37. The granting of the ESS interest to the Participants, the provision of the money to the Trustee, the acquisition and holding of shares by the Trustee and the allocation of shares to Participants are all interrelated components of the Company's ESS. All the components constitute an arrangement (for section 83A-210 purposes) that must be carried out so that the scheme can operate as intended.

38. 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.

39. Shares that are purchased by the Trustee to satisfy its obligation under the Company and subsequently granted to the Participants pursuant to the plan rules are ESS interests for the purpose of section 83A-210.

40. The Company's ESS satisfies the definition of an 'employee share scheme' in subsection 83A-10(2) as it is a scheme under which ESS interests in the Company are provided to the employees of the Company in relation to their employment in the Company.

41. If the Company provides irretrievable contributions in cash to the Trustee before the time the employees acquire the shares, then section 83A-210 will apply. As a consequence, the Company can only deduct the amount of contribution in the income year the shares are granted to the relevant Participants.

Question 3

42. As discussed previously, section 83A-210 only modifies the time an amount is incurred in the specific circumstances as described in that provision. In cases where money is provided by an employer at a time other than before the employees acquire the ESS interests, the general rule under section 8-1 applies to determine the income year in which the amount is deductible.

Question 4

43. The liability of an employer to pay fringe benefits tax arises under section 66 of the Fridge Benefits Tax Assessment Act (FBTAA). It provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax.

44. The term '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, but does not include:

...

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

...

45. Therefore, for the contribution to be excluded from the definition of 'fringe benefit', the Trust must be an 'employee share trust' as defined in the ITAA 1997.

Employee Share Scheme

46. 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.

47. Subsection 130-85(4) provides that 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).

48. Paragraphs 130-85(4)(a) and (b) are satisfied because:

i. The Trust acquires shares in the Company;

ii. ESS interests are provided to the Participants in relation to their employment under the employee share scheme in accordance with the Trust Deed and plan rules.

49. Therefore, whether the Trust is an employee share trust will depend on the scope of the activities undertaken by the Trustee pursuant to the Trust Deed.

Sole Activity Test

50. The Taxation Determination TD 2019/13 Income Tax: what is an 'employee share trust' (TD 2019/13) reaffirms the Commissioner's view on the application of subsection 130-85(4), particularly, the meaning of 'merely incidental'.

51. Activities are 'merely incidental' under paragraph 130-85(4)(c) if they are a natural incident or consequence of the trust obtaining, holding and providing shares or rights under an ESS, for example:

- the opening and operation of a bank account;

- the receipt and distribution of dividends arising from shares;

- using dividends on unallocated shares and interests to acquire additional shares for the purposes of the ESS;

- paying a dividend equivalent payment to a participating employee under the rules of the ESS;

- dealing with shares forfeited including the sale of forfeited shares and using the proceeds for activities permitted under subsection 130-85(4);

- the transfer of shares to participating employees, or the sale of shares on behalf of such employees and the transfer to the employee of the net proceeds of the sale of those shares; or

- receiving and immediately distributing shares under a demerger or actions in order to participate in a takeover or restructure covered by section 83A-130.

52. In contrast, activities are not 'merely incidental' if they are not a natural incident or consequence of administrating an ESS, for example:

- providing financial assistance (e.g. a loan) to employees to purchase an ESS interest in the employer company;

- payment of income or accrued capital from unallocated shares to any beneficiaries (or to employees who do not hold a beneficial interest in the employer company under the trust);

- waiving or relinquishing certain entitlements, such as waiving the right to be paid or credited dividends pursuant to a dividend waiver clause contained in the governing trust documents;

- exercising a general discretion to make distributions of income or capital to pay a class of participating employees or other beneficiaries of the trust amounts unrelated to their ESS interests or entitlements under the ESS rule;

- investing in assets other than shares or rights to shares in the employer company;

- engaging in trading activities in relation to shares in the employer company, other than purchasing and selling shares to satisfy obligations under the ESS;

- distributing mainly cash payments to participating employees rather than shares or ESS interests under the ESS; or

- providing additional benefits to participants and/or employees, over and above the delivery of the ESS interests or resulting shares and any dividend equivalent payment that accrues directly from the employee's ESS interest.

53. However, as the Commissioner pointed out in paragraphs 6 and 45 of TD 2019/13, the mere existence of those powers or duties in the trust document does not, of itself, mean that the trustee has breached the requirements to be an employee share trust. In examining whether the requirements of subsection 130-85(4) are met, it is necessary to examine the actual activities that the trustee has undertaken.

54. Consistent with TD 2019/13, in the present case, the Trustee has not engaged in any activities or is allowed under the Trust Deed to engage in any activities that might potentially result in the Trust failing the requirement in subsection 130-85(4) during the relevant income year.

55. On this basis, the Commissioner is satisfied that the Trust meets the definition of an 'employee share trust' under subsection 130-85(4) of the ITAA 1997.

56. As the Trust satisfies the definition of an 'employee share trust', the provision of contribution by the Company to the Trustee of the Trust to acquire shares pursuant to the Trust Deed is not a fringe benefit within the meaning of that term in subsection 136(1) of the FBTAA.

Question 5

57. Assessable income includes both ordinary income and statutory income according to sections 6-5 and 6-10 of the ITAA 1997. Ordinary income is income according to ordinary concepts. Statutory income is income that is not ordinary income but is included in assessable income because of a specific provision in the ITAA 1997 or Income Tax Assessment Act 1936 (ITAA 1936).

58. As Chief Justice Jordan noted in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 220:

.. 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 receipts.

Ordinary income

59. Ordinary income is not a defined term in tax law. However, case law has identified certain factors which may assist in determining whether a receipt is properly characterised as income according to ordinary concepts.

60. In GP International Pipecoaters v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 64 ALJR 392; (1990) 93 ALR 193; (1990) 21 ATR 1; 90 ATC 4413; [1990] HCA 25 (GP International), the High Court of Australia found that:

To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt 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

61. The contribution made by the Company to the Trust forms part of the corpus of the Trust that will be applied for the sole purpose of acquiring shares for the benefit of the Participant under the ESS. It is capital contributed to the Trust for the Trustee to perform and comply with its obligations under the Trust Deed.

62. Further, in Federal Commissioner of Taxation v. The Myer Emporium Ltd 1987 ATC 4363, the Full High Court of Australia emphasised on the importance of ascertaining the scope of a business and a recipient's purpose in engaging in it as a means of determining the character of a receipt.

63. The Trustee is not carrying on a business with a view to derive income or profit. There is no systematic course of buying and selling shares with the intent of profit-making. The Trustee's action in relation to allocation, transfer, discharge or sale of shares has to be in accordance with the direction from the Board.

64. Different from ordinary income which a recipient can expect to derive from the ordinary course of its business or activities, the Trustee does not have any right to have a contribution paid by the Company to it unless and until the amount has actually been paid or credited to the Trustee by the Company. The payment of the contribution is entirely at the Company's discretion and subject to its obligations under the plan rules and terms of the relevant offers. In other words, whether or not the Company makes a contribution to the Trust does not depend on what the Trustee does or does not do.

65. Further, it is irrelevant that, from the Company's perspective, the contribution is treated as ongoing expenditure rather than capital under section 8-1. Whether a receipt is income or capital depends on its objective character in the hands of the recipient, rather than the payer.

66. In GP International, the High Court made it clear that:

...although the amount expended on the construction of the plant was a capital expenditure, it does not follow that the taxpayer's receipt of the establishment costs was a receipt of capital.

67. Therefore, from the Trustee's perspective, the contribution made by the Company is not ordinary income but capital in nature and therefore not assessable to the Trust under section 6-5 of the ITAA 1997.

Statutory income

68. Section 10-5 of ITAA 1997 provides a list of provisions of assessable income for section 6-10 purposes. None of the provisions apply to a contribution made by an employer to a trust established under an ESS.

69. Therefore, the contribution made by the Company to the Trust to fund acquisition of shares is also not assessable income of the Trust pursuant to section 6-10 of the ITAA 1997.

70. This view is also consistent with ATO ID 2002/965 Income Tax -Trustee not assessable on employer contributions made to it under the employer's employee share scheme, which provides that:

The funds provided to the Trustee are used in accordance with the Trust Deed and Plan Rules for the sole purpose of and under the employee share scheme. The contributions constitute capital receipts to the Trustee, and are not assessable under sections 6-5 or 6-10 of the ITAA 1997.

Division 6 of Part III of the ITAA 1936

71. For a trust to which Division 6 of Part III of the ITAA 1936 applies, beneficiaries are generally the ones that will be assessed on the income of the trust. The trustee is generally taxed on the balance of the net income which no beneficiary is presently entitled to.

72. Subsection 95(1) of the ITAA 1936 defines 'net income' of a trust as the total assessable income of the trust calculated as if the trustee were a resident taxpayer in respect of that income, less all allowable deductions.

73. Trust income and trust estate are two distinct concepts, more specifically,

For trust law purposes, income of a trust is essentially that which is a product of (that is, 'flows' from) the trust property - for example, rent from the letting of trust property or interest on loans of trust property. On that basis, it is likely to correspond in most cases with what would be ordinary income under section 6-5 of the ITAA 1997 (which may include exempt and non-assessable non-exempt amounts).

74. As previously discussed, the contributions form part of the trust estate from which the Trustee uses to acquire shares to be allocated or transferred to the beneficiaries. It is not income that is derived by the Trust from its ordinary course of business or activities, but capital in nature. As such, the amount of contribution should not be included in the calculation of 'net income' of the Trust under Division 6.

75. Consequently, Contributions from the Company to the Trustee of the Trust to fund acquisition of shares are not assessable income of the Trust pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 or Division 6 of the Income Tax Assessment Act 1936.

Question 6

CGT Event E5

76. Pursuant to section 102-20 of the ITAA 1997, an entity can make a capital gain or loss if, and only if, a CGT event happens.

77. Under subsection 104-75(1) of the ITAA 1997, CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) as against the trustee.

78. The time of the event is when the beneficiary becomes absolutely entitled to the asset according to subsection 104-75(2) of the ITAA 1997.

79. If CGT event E5 happens, the trustee may make a capital gain if the market value of the asset, at the time of the event, is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base.

80. In the present case, the Trust is neither a unit trust nor a deceased estate to which Division 128 of the ITAA 1997 applies.

81. Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) explains the principles set out in the leading English trust law case of Saunders v. Vautier (1841) 49 ER 282 in relation to 'absolutely entitled' as follows:

... if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustees to transfer the trust property to them or at their direction, even though the trust deed contains a contrary intention. The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway.

82. A participant will generally become absolutely entitled to the shares when the shares are vested and the restrictions in respect of the shares have ceased or no longer apply. Upon the cessation of all the restrictions, the Participant has the right to request the Trustee to transfer the shares into his or her name and deal with the shares at his or her own will. At this point, the Participant will become absolutely entitled to the shares as against the Trustee, and CGT event E5 happens pursuant to subsection 104-75(1).

83. However, any capital gain or loss that the Trustee makes from CGT event E5 is disregarded if section 130-90 of the ITAA 1997 applies.

84. Subsection 130-90(1A) of the ITAA 1997 states:

Disregard any *capital gain or *capital loss made by an *employee share trust to the extent that it results from a *CGT event, if:

(c) immediately before the event happens, an *ESS interest is a *CGT asset of the trust; and

(d) either of the following subparagraphs applies:

(iii) the event is CGT event E5, and the event happens because a beneficiary, of the trust becomes absolutely entitled to the ESS interest as against the trustee;

(iv) the event is CGT event E7, and the event happens because the trustee *disposes of the ESS interest to a beneficiary of the trust; and

(c) Subdivision 83A-B or 83A-C (about employee share schemes) applies to the ESS interest.

85. Therefore, to qualify for the exemption in section 130-90, there must be an 'employee share trust' and an 'ESS interest'.

86. As previously discussed under Question 4, the Trust satisfies an 'employee share trust' in subsection 130-85(4) of the ITAA 1997 and the granting of shares under the relevant offers to the Participants falls within the definition of an 'ESS interest' in subsection 83A-10(1) of the ITAA 1997.

87. The shares granted under the offers are ESS interests to which subdivision 83A-B or 83A-C of the ITAA 1997 applies.

88. As such, any capital gain or loss that arises for the Trustee as a result of CGT event E5 happening is disregarded by virtue of section 130-90 of the ITAA 1997.

CGT Event E7

89. CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest or part of it, in the trust capital (section 104-85 of the ITAA 1997). The timing of the event is when the disposal occurs.

90. If CGT event E7 happens, the trustee may make a capital gain if the market value of the asset, at the time of the disposal, is more than its costs base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base.

91. When the Trustee transfers a share to a Participant at the end of the vesting period in satisfaction of its obligation, CGT event E7 will occur pursuant to section 104-85 of the ITAA 1997 and any capital gain or loss will generally be assessed for CGT purposes to the Trustee.

92. However, section 130-90 of the ITAA 1997 applies to disregard any capital gain or loss arising as result of the shares being disposed of by the Trustee to the Participant under CGT event E7 if the Trust is an employee share trust and the shares are an ESS interest. As discussed above, these two conditions are met in the present circumstances.

93. Consequently, section 130-90 of the ITAA 1997 will apply to disregard a capital gain or capital loss that arises for the Trustee at the time CGT event E7 happens if the employees acquire the shares for the same or less than the cost base of the shares in the hands of the Trustee.

Question 7

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

95. 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 ITAA 1997 are met.

96. 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 employee share trust arrangement.

97. 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 the Company to obtain a tax benefit. Consequently, the Commissioner will not make a determination that Part IVA applies to deny, in any part or in full, any deduction claimed by the Company in respect of contributions made to the Trustee of the Trust for the purpose of acquiring shares to satisfy grants of employee share scheme interests under the Company's ESS.