Edited version of private advice

Authorisation Number: 1051899722774

Date of advice: 19 October 2021

Ruling

Subject: Employer remuneration trust

Question 1

Will the contributions of monies by the Employer to the Trustee pursuant to the Trust Deed in respect of arm's length Employees and/or Contractors of the Employer as a general class constitute an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the contributions of monies by the Employer to the Trustee pursuant to the Trust Deed in respect of arm's length Employees and/or Contractors of the Employer and then paid out and provided to a Participant as Remuneration as per clause JJ and/or clause KK of the Trust Deed almost immediately constitute an income tax deduction under section 8-1 of the ITAA 1997?

Answer

As the correctness of the ruling on this matter would depend on which assumptions were made, we decline to make the ruling as per paragraph 357-110(1)(a) of Schedule 1 to the Taxation Administration Act 1953 (TAA) and in accordance with the Full Federal Court in Commissioner of Taxation v Hacon Pty Ltd [2017] FCAFC 181 (Hacon).

Question 3

If the contributions of monies by the Employer to the Trustee pursuant to the Trust Deed in respect of arm's length Employees and/or Contractors of the Employer do not constitute an income tax deduction under section 8-1 of the ITAA 1997 will the contributions constitute business capital expenditure which will constitute income tax deductions over 5 years under section 40-880 of the ITAA 1997?

Answer

No.

Question 4

Will the contributions of monies made by the Employer to the Trustee pursuant to the Trust Deed for the benefit of a general class of Employees and/or Contractors constitute a 'fringe benefit' provided by the Employer to the Employee as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

Will the loans of monies made by the Employer to the Trustee pursuant to the Trust Deed for the benefit of a general class of Employees and/or Contractors constitute a 'fringe benefit' provided by the Employer to the Participants as defined in subsection 136(1) of the FBTAA?

Answer

No.

Question 6

Will the acquisition of investments by the Trustee constitute a 'fringe benefit' provided by the Trustee to the Participants as defined in subsection 136(1) of the FBTAA?

Answer

No.

Question 7

Will the acquisition of the Allocated Investments by the Employee at market value, to which trust assets will be allocated by the Trustee, constitute a 'fringe benefit' provided by the Trustee to the Participants as defined in subsection 136(1) of the FBTAA?

Answer

Yes.

Question 8

Will the loan provided by the Trustee to the Participants for the purpose of acquiring the Allocated Investments constitute a 'loan fringe benefit' provided by the Trustee to the Participants under section 16 of the FBTAA?

Answer

Yes.

Question 9

Where the Employee pays or accrues interest at least equivalent to the relevant notional or statutory interest rate in respect of the loan provided by the Trustee, will the taxable value of the loan fringe benefit which could arise under section 18 of the FBTAA be nil?

Answer

It is not necessary to answer this question as the Employer has advised that under the arrangement the Employee will not pay or accrue any interest in relation to the finance provided by the Trustee.

Question 10

Will the taxable value of the loan fringe benefit be reduced to nil due to the application of the 'otherwise deductible rule' under subsection 19(1) of the FBTAA?

Answer

As the correctness of the ruling on this matter would depend on which assumptions were made, we decline to make the ruling as per paragraph 357-110(1)(a) of Schedule 1 to the TAA and in accordance with the Full Federal Court in Hacon.

Question 11

Where the Allocated Investments are redeemed by the Employee for cash, will that redemption constitute a 'fringe benefit' provided by the Trustee to the Participants as defined in subsection 136(1) of the FBTAA?

Answer

No.

Question 12

Where the value of the Allocated Investments falls below the Issue Price and the Allocated Investment is surrendered to the Trustee in full satisfaction of the Employee loan obligation, will the surrender of the Allocated Investment constitute a 'fringe benefit' provided by the Trustee to the Participants as defined in subsection 136(1) of the FBTAA?

Answer

No.

Question 13

Will a 'fringe benefit' provided by the Trustee to the Participants as defined in subsection 136(1) of the FBTAA, arise where assets are transferred to the unallocated assets account of the Trust?

Answer

No.

Question 14

Will the operating costs associated with the administration of the Plan incurred by the Employer be deductible under section 8-1 of the ITAA 1997?

Answer

No.

Question 15

Will the meeting of operating costs associated with the administration of the Plan by the Employer constitute a 'fringe benefit' provided by the Employer to the Participants as defined in subsection 136(1) of the FBTAA?

Answer

Yes.

Question 16

Will the payment of Administration Fees by the Employer to the Administrator under the Plan Administration Agreement (PAA) for the provision of Administration Services to the Trustee be deductible under section 8-1 of the ITAA 1997?

Answer

No.

Question 17

Will the payment of Administration Fees by the Employer to the Administrator under the PAA for the provision of Administration Services to the Trustee constitute a 'fringe benefit' provided by the Employer to the Participants as defined in subsection 136(1) of the FBTAA?

Answer

Yes.

Question 18

If the Trustee, pursuant to clause KK of the Trust Deed, provides discounted rights to shares to the Employee, are the shares a 'fringe benefit' as defined in subsection 136(1) of the FBTAA?

Answer

Yes.

Question 19

Where the Trustee provides a loan bearing a limited recourse feature, will that limited recourse feature be a 'fringe benefit' as defined in subsection 136(1) of the FBTAA?

Answer

Yes.

Question 20

Will the general anti-avoidance provisions under section 67 of the FBTAA apply to the scheme described?

Answer

No.

Question 21

Will the general anti-avoidance provisions under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the scheme described?

Answer

No.

This ruling applies for the following periods:

Fringe benefits tax year ending 31 March 20XX

Fringe benefits tax year ending 31 March 20XX

Fringe benefits tax year ending 31 March 20XX

Fringe benefits tax year ending 31 March 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Relevant facts and circumstances

The employer entity intends to implement a long-term equity plan for the purpose of providing a long-term equity incentive structure to deliver equity based benefits to employees and/or contractors selected by the board of the employer entity.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Division 4 of Part III

Fringe Benefits Tax Assessment Act 1986 section 16

Fringe Benefits Tax Assessment Act 1986 subsection 16(1)

Fringe Benefits Tax Assessment Act 1986 section 18

Fringe Benefits Tax Assessment Act 1986 section 19

Fringe Benefits Tax Assessment Act 1986 subsection 19(1)

Fringe Benefits Tax Assessment Act 1986 section 40

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 subsection 138(3)

Fringe Benefits Tax Assessment Act 1986 section 147

Income Tax Assessment Act 1936 section 6

Income Tax Assessment Act 1936 former section 26

Income Tax Assessment Act 1936 former paragraph 26(e)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1997 section 8-1

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

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

Income Tax Assessment Act 1997 paragraph 8-1(1)(b)

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

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

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

Income Tax Assessment Act 1997 subsection 25-5(1)

Income Tax Assessment Act 1997 paragraph 25-5(2)(a)

Income Tax Assessment Act 1997 subsection 40-25(7)

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 subsection 40-880(2)

Income Tax Assessment Act 1997 paragraph 40-880(5)(f)

Income Tax Assessment Act 1997 subsection 40-880(6)

Income Tax Assessment Act 1997 Division83A

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 paragraph 110-25(5)(a)

Income Tax Assessment Act 1997 subsection 110-25(5A)

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

Tax Administration Act 1953 paragraph 357-110(1)(a) of Schedule 1

Reasons for decision

Question 1

Summary

No.

Detailed reasoning

Section 8-1 of the ITAA 1997[1] provides:

(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...

In determining whether subsection 8-1(1) is satisfied, a number of questions need to be answered, including:

(1)  Is the outgoing incurred?

(2)  Does the outgoing have a sufficient connection with the income being earned or the business being carried on?

(3)  Is the outgoing capital in nature?

These questions have been considered in further detail below.

Is the outgoing incurred?

The Employer will incur an outgoing at the time it owes a present money debt that it cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance (TR 94/26).

The Employer has stated that the contributions to the Trust will be effected by way of a real cash payment to the bank account of the Trustee and paid under the Trust Deed. Once contributed to the Trust, the Employer will not be able to retrieve the contributions back from the Trustee. As such, we accept that the Employer's contribution to the Trust will be incurred at the time it is paid to the Trustee for the purposes of section 8-1.

Does the outgoing have a sufficient connection with the income being earned or the business being carried on?

Is the outgoing incurred in gaining or producing assessable income? (first limb of subsection 8-1(1))

Paragraph 8-1(1)(a) enquires whether the costs were 'incurred in gaining or producing your assessable income'. The phrase 'incurred in gaining or producing' assessable income means incurred 'in the course of gaining or producing'. It does not mean 'in connection with'.[2] In Commissioner of Taxation v Payne (Payne) the High Court said the question that requires consideration is 'is the occasion of the outgoing found in whatever is productive of actual or expected income?'[3]

In Healy v FC of T, the AAT suggested the following may assist in determining whether a loss or outgoing was incurred 'in the course of' gaining or producing actual or expected income:[4]

94. What is required is an objective:

(i) identification of the "occasion" for the loss or outgoing;

(ii) identification of the "activity" that is "productive" of the assessable income in question; and

(iii) a determination whether the loss or outgoing can be properly regarded as having been incurred in the course of that activity: see Federal Commissioner of Taxation v Anstis [2010] HCA 40; (2010) 241 CLR 443 and Federal Commissioner of Taxation v Visy Industries USA Pty Ltd [2012] FCAFC 106; (2012) 205 FCR 317.

95. What makes the outgoing deductible under s 8-1 of the ITAA 1997 is the existence of a sufficient connection, a "link" or "nexus", between the loss or outgoing and the production of assessable income. A taxpayer's subjective purpose in incurring a loss or outgoing is not normally relevant to whether a sufficient connection exists.'

In Watson as Trustee for the Murrindini Bushfire Class Action Settlement Fund v Commissioner of Taxation, the Full Federal Court held:[5]

While the connection with activities which more directly gained or produced the assessable income need not be direct (Day at [21]), the occasion of the outgoing must be found in what is productive of the assessable income; there must be a sufficient nexus between the outgoing and "the activities which more directly gain or produce the assessable income".

And, after determining this, consideration must be given to whether the outgoing is 'incidental and relevant' to the activity.[6]

The Employer carries on a business of XXXX. Having regard to the terms of the Trust Deed, contributions to the Trust are not incidental or relevant to this business activity. Such contributions will not be 'productive of actual or expected income'. As a consequence, they will not be incurred in gaining or producing the Employer's assessable income under paragraph 8-1(1)(a).

Is the outgoing necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income? (second limb of subsection 8-1(1))

The Employer is 'carrying on'[7] a business[8]. In determining whether the Employer's contributions (outgoings) will be necessarily incurred for the purpose of gaining or producing assessable income, it is necessary to consider the following factors:

•         the outgoing must be characterised and the relationship between the outgoing and the carrying on of business must be looked at,[9] and

•         the purpose or motivation for the making of the outgoing considered, that is:

whether the outgoing was reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of that business and, if so, whether those responsible for carrying on the business so saw it.[10]

In the present circumstances, the following can be established:

•         the Employer's outgoings will be cash contributions it makes to the Trust for the 'benefit' of a general class of Employees/Contractors

•         the Employees/Contractors may include beneficiaries (or associates) of the Employer trust or shareholders, directors (or associates of either) of the corporate trustee of the Employer trust, and

•         the relationship between the outgoings made and the carrying on of the business is to 'assist in attracting, retaining and motivating key employees of the Employer and any Associated Company'. This is the stated advantage the Employer intends to achieve.[11]

In Essenbourne Pty Ltd v Commissioner of Taxation (Essenbourne), it was considered:[12]

A reference in this case to the payment to the Employee Incentive Trust as an outgoing does not provide an answer to the question whether it was reasonably incurred by Essenbourne in carrying on its business. It is equally possible, on the bare facts, that it be seen as a transfer of the profits of the company to the Trust so that they might be shared and, at the same time the taxation advantages obtained.

Looking at the Employer's activities[13], the business it conducts and the need to attract, retain and motivate staff, there is an argument that the outgoing was necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. If it is accepted that the outgoing was reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the Employer's business and those who are running the Employer's business, agree as such, then the second limb of section 8-1 could be satisfied.

However, we consider that the operation of and the Employer's contributions to the Trustee are not reasonably capable of being seen as contributing to staff attraction, motivation or retention for the following reasons.

Where contributions are made for the benefit of beneficiaries (or their associates) of the Employer trust, or shareholders, directors or associates of the corporate trustee of the Employer trust, there is no immediately apparent benefit that accrues to the Employer's business in this situation. This is because the participants who are benefiting from the Trust already have an ownership stake in the business, via a shareholding, or an interest in the profitability of the business. In both instances, there is a pre-existing motivation to make the business profitable. There is no readily apparent reason to explain how a contribution to the Trust, which entails the application of business profit, through a trust structure, to investments outside of the business, is going to improve or contribute to the business ends of the business being carried on.

Where contributions are made for the benefit of arm's length Employees or Contractors who are engaged in or to provide services to the Employer's business (and have no ownership or pre-existing rights to income as a beneficiary or shareholder), it is similarly difficult to understand how a contribution to the Trust will assist in attracting, retaining and motivating these Employees or Contractors. The following features of the arrangement are relevant:

•         The benefits from the Trust are not subject to vesting or performance conditions. An Employee can perform poorly and even be dismissed for cause and still enjoy the gain from investment in the Trust. Similarly, a Contractor can also perform poorly and the services no longer engaged and still enjoy the gain from the investment in the Trust.

•         An Employee does not have to continue to be employed to enjoy the benefits from the Trust, that is they do not depend on continued employment.

•         The contribution is primarily applied by the Trustee in making an interest free loan to the Employee. The subsequent investment by the Employee is a private investment and gains from that investment arise from the performance of that investment, not the performance of the Employee, as an employee.

•         The right the Employee or Contractor obtains from the arrangement in relation to the payment of the loan principal back to the Employee or Contractor is a discretionary right, at best. There is no certainty that the Employee or Contractor will derive any further benefits from the Trust and there are no reasonable performance parameters or requirements that have been established that would have a positive impact on the Employee's or Contractor's performance.

•         The Employer has not identified any particular concerns with Employee (or Contractor) attraction, retention or performance that would deem an incentive arrangement of this type necessary. The Employer has not demonstrated how this arrangement addresses any concerns that it has as to staff attraction, retention or motivation.

•         Participation in or benefits from the Trust are not integrated into employment or service contracts and therefore there is no contractual obligation on the Employer's behalf to offer the arrangement or participation in the arrangement to any of its Employees or Contractors.

•         Because the benefits from the Trust are derived primarily from the performance of independent investments of the Trustee, an Employee or Contractor is not granted an interest in the Employer entity and this arrangement is not analogous to nor will it deliver the same benefits that an employee share scheme[14] can so deliver.

•         All of the rights and entitlements of the Employees or Contractors who participate in the arrangement are subject to an overriding discretion by the Trustee, including whether the loan application is approved or not approved. If it is approved, then the only apparent guaranteed benefit to an Employee or Contractor is the receipt of an interest free loan on uncommercial terms. It is difficult to establish how an interest free loan (that is subject to repayment) can contribute positively to Employee or Contractor attraction, retention and motivation.

•         At the time the amount of the contribution is made, it is made for participants as a general class. There is no amount contemplated or specifically calculated for individual Contractors or Employees. Further, the Employer has not identified the likely size and scale of the contributions. Whether the amount that is contributed is appropriate to meet the Employer's business ends cannot therefore be assessed.

In conclusion, the Employer's contributions will not be necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and thus its contributions will not be deductible under paragraph 8-1(1)(b).

Will the outgoing be capital, or of a capital nature?

Even if subsection 8-1(1) is satisfied, the deduction will not be allowed if it satisfies one of the negative limbs of subsection 8-1(2),[15] in particular it is a loss or outgoing of capital, or of a capital nature (paragraph 8-1(2)(a)).

As outlined in Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues (TR 2011/6):

66. The classic test for determining whether expenditure is of a capital or revenue nature is explained in the following passage from the judgment of Dixon J in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; (1938) 1 AITR 403 (Sun Newspapers):

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay...

67. The character of the advantage sought provides important direction. It provides the best guidance as to the nature of the expenditure as it says the most about the essential character of the expenditure itself. ...

68. If expenditure produces some asset or advantage of a lasting character for the benefit of the business it will be considered to be capital expenditure. As stated in Sun Newspapers at 355 per Latham J, an enduring benefit does not require that the taxpayer obtain an actual asset, it may be a benefit which endures, in the way that fixed capital endures. ...

Whether expenditure is capital or revenue in nature has recently been considered in a number of cases including: Ausnet Transmission Group Pty Ltd v Commissioner of Taxation (Ausnet);[16] Commission of Taxation v Sharpcan Pty Ltd (Sharpcan);[17] Origin Energy Ltd v Commissioner of Taxation (No 2) (Origin Energy);[18] Mussalli v Commissioner of Taxation;[19] and Commissioner of Taxation v Healius Ltd (Healius).[20]

In Origin Energy, Thawley J referred to the decision in Ausnet saying:

In AusNet, the majority emphasised the importance of the "advantage sought by the taxpayer by making the payments": at [23], quoting Gibbs ACJ in Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 at 655. Their Honours referred to the decision of Fullagar J in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 at 454 to the effect that payments forming part of the purchase price of an asset, which form part of the fixed capital of a business, are outgoings of capital: at [24]. Fullagar J identified the questions commonly arising as (emphasis in original):

(1) What is the money really paid for? - and (2) Is what it is really paid for, in truth and in substance, a capital asset?

The answer to the question what the money is really "for" is not necessarily answered solely by reference to a "juristic classification of legal rights": Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648. The answer "depends on what the outgoing is calculated to effect from a practical and business point of view": Sharpcan at [18]; Hallstroms at 648.

In Sharpcan the High Court held, in determining the characterisation of expenditure, that it:[21]

primarily depends on what the outgoing is calculated to effect a practical business point of view. Identification of the advantage sought to be obtained ordinarily involves consideration of the manner in which it is to be used and whether the means of acquisition is a once-and-for-all outgoing for the acquisition of something of enduring advantage or a periodical outlay to cover the use and enjoyment of something for periods commensurate with those payments.

In relation to this paragraph from Sharpcan, Thawley J observed in Origin Energy:[22]

The primary question is the character of the advantage sought by the taxpayer in incurring the expenditure: GP International Pipecoaters Pty Ltd v Commissioner of Taxation (1990) 170 CLR 124 at 137.

Similarly, in Healius,the Full Federal Courtobserved, 'the chief if not critical factor in determining the character of the particular payment is the advantage that the taxpayer sought to secure by making the contentious payments.' Once the advantage that is being sought has been identified, it needs to be characterised:[23]

•         by reference to the distinction between acquisition of the means of production and the use of them

•         between establishing or extending a business organisation and carrying on the business

•         between the implements employed in work and the regular performance of the work in which they are employed, and

•         between an enterprise itself and the sustained effort of those engaged in it.

Further, the High Court in Sharpcan opined that in working out whether an outgoing is capital or revenue, there is a need to identify a counterfactual: ^[24]

specifically, whether the outgoing is calculated to effect the acquisition of an enduring advantage to the business. And the identification of what (if anything) is to be acquired by an outgoing ultimately requires a counterfactual, not an historical, analysis: specifically, a comparison of the expected structure of the business after the outgoing with the expected structure but for the outgoing, not with the structure before the outgoing.

With these decisions in mind, we will consider the advantage being sought by the Employer's contributions.

Advantage being sought

The nature of the advantage being sought is determined objectively.[25] Here, the Employer states that the purpose of the Trust is to 'assist in attracting, retaining and motivating key Employees of the Employer and any Associated Company' by obtaining investments, of which beneficial rights and interests in those investments are provided to Employees and/or Contractors of the Employer. It is represented that this will be achieved by the Employer's contributions to the Trust. These contributions will provide the Trust with the funds (capital) with which it can operate for its intended purpose.[26] The Employer's contributions will provide an enduring benefit because they will be:

•         loaned to Participants to enable them to participate in the Trust

•         used to acquire assets (being the Allocated Investments) which will be held in the Trust Fund and will provide a return to Participants, and

•         kept within the Trust Fund unless a Participant specifically elects to 'cash out' their participation in the Fund.

The Employer has contended the Plan will attract, retain and motivate key Employees (and, presumably, Contractors), as more motivated Employees/Contractors boost productivity, reduce staff turnover and encourage positive working relationships. Even if this purpose is accepted, the Employer's contributions can still be capital or of a capital nature, as was found in Essenbourne[27]. In that case, Kiefel J considered whether a company was entitled to a deduction for contributions to an employee investment trust. Her Honour considered the decision in British Insulated & Helsby Cables Ltd v Atherton[28] where:

at issue was the payment by a company into a pension fund for its employees. On the winding up of the fund the whole amount was to be distributed among the members. In the judgment of Viscount Cave (213-214) when an expenditure is made both ''once and for all'' and ''with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade...'' there is good reason to treat the expenditure as attributable not to revenue, but to capital. The lasting advantage to be obtained was the company retaining the services of a ''contented and efficient staff'' (214). Lord Atkins was of a similar view, holding that a payment not to meet a liability but having a purpose, in a general way, of improving the position of staff is a capital outlay (222). Earlier his Lordship had observed that the fund was not treated as part of the assets of the company. It had parted with its rights to it and the trustees had absolute power over the fund (220-221).

Kiefel J then referred to Dixon J's adoption of these considerations in Sun Newspapers (as outlined above in TR 2011/6)before concluding the company's contribution was 'of a capital nature and, for that reason, not deductible' because:

the payment in question is of the surplus profits out of the company. The payment is not referrable to the conduct of its income-producing business. The advantage or benefit sought to be secured from it, from Essenbourne's point of view, is the improvement of the position of the three principals in the business. It has produced a benefit to be derived by them at some point in the future and the intangible benefit of job satisfaction in the interim. The payment is not made in such a way as to be seen as an operating expense. The fact that in most years Essenbourne made superannuation contributions does not assist in characterising this payment. In my view the payment is.

That is a similar advantage to that precured by the Employer's contributions to the Trust Fund. The Employer's contributions will make up the balance of the Trust Fund which will have a lasting benefit for it as the contributions continue to form part of the Trust Fund in perpetuity.

The circumstances of the Employee's contributions and the Trust's use of the funds are similar to the circumstances described in paragraphs 16 to 19 in Taxation Ruling TR 2018/7 Income tax: employee remuneration trusts (TR 2018/7), in which the Commissioner outlines his view that such contributions are of a capital nature and therefore not deductible under section 8-1. In particular, paragraph 19 provides, amongst other things:

Where a contribution is made to an [Employee Remuneration Trust (ERT)] to secure any of the following benefits (without limitation), it is likely to be capital expenditure by the employer:

...

•         to provide loans, on a continuous basis, to employees.

...

•         to acquire arm's length investments where the intention is to derive a return to be paid to employees, whilst keeping the capital of the trust fund intact.

Both of the dot points above are what is proposed by the Plan. That is, the Employer's contributions to the Trust are loaned to Employees/Contractors which are then applied as Application Moneys to acquire Investments, which are defined in the Trust Deed as 'any income producing investment, including shares, options, rights, debentures, managed funds, cash management accounts, stapled products, currencies, commodities and their derivatives'. These Investments are allocated to a Participant (being an Eligible Employee/Eligible Contractor) and as such are Allocated Investments. These Allocated Investments provide a return to the Participants, being the net income of the Trust Fund derived during that Accounting Period (1 July to 30 June) that is attributable to their Allocated Investment.

Capital advantage is small or trifling

A contribution to an ERT may be deductible under section 8-1 if it secures a small or trifling capital advantage for an employer.[29] It is the Commissioner's view that a capital advantage is small or trifling when:[30]

within a relatively short period of a contribution (which secures the capital advantage) being made to the ERT, so much of the trust fund as comprises that contribution is permanently and entirely dissipated in remunerating employees.

The Employer has contended, citing the Trust Deed, that there is an immediate dissipation of contributions made:

Contributions and/or loans to the Trustee will be dissipated immediately by payments and/or the provision of benefits to participating Employees and Contractors.

The Trust Deed relevantly provides:

Those moneys settled on the Trustee will be dissipated immediately by the Trustee in making loans and allocation of Investments in the Trust once the Trustee receives a completed Participant Application Form as set out in Attachment 2 of this Deed.

For the purposes of ERTs, the Commissioner has defined 'remuneration' as:[31]

A payment or other benefit that is provided to an employee in respect of, for or in relation directly or indirectly to, any employment.

Remuneration can be provided to a third party to the employment contract, where it is applied or dealt with in any way on the employee's behalf or as the employee directs.

Remuneration does not include benefits provided in connection with termination of employment unless it is deferred remuneration.

In considering the concept of remuneration, Rich J stated in Mutual Acceptance Co Ltd v. Federal Commissioner of Taxation (Mutual Acceptance):[32]

That is to say, only such allowances are intended to be included as are in the nature of remuneration akin to wages, salary, commissions, or bonuses. The factor common to all these forms of remuneration is that they are payments designed to confer on the employee a substantial benefit for himself and from which he in fact obtains such a benefit.

Here, the Employer's contributions will be used by the Trustee to provide loans to the Employees/Contractors, and for financed amounts to be used to be offset against the market value of the Investments acquired by the Trustee, which are allocated on a one-to-one basis to the Allocated Investments issued to the Employee/Contractor. The definition of 'Trust Fund' in the Trust Deed includes all of the steps undertaken to acquire and hold the Allocated Investments under the Trust. Given the contribution, in effect, continues to form part of the Trust Fund, it has not been permanently and entirely dissipated in remunerating the Employee/Contractor. The contribution is only permanently dissipated when:

•         the crystallisation of a Cancellation Entitlement occurs and the Trustee offsets the Cancellation Entitlement against the financed amount, and

•         the Employer instructs the Trustee to pay amounts to the Employee/Contractor from the amounts that were offset against the loan.

In summary, the better view is that the capital advantage resulting from the Employer's contribution to the Trustee is not small and trifling. Thus, the contribution is capital in nature.

Relatively short period

It should also be noted that the Commissioner has outlined a compliance approach at Appendix 1 of TR 2018/7 in determining what is considered to be a 'relatively short period' in the context of the permanent and entire dissipation of a contribution by the ERT. Paragraphs 89 and 90 of TR 2018/7 state:

89. As a matter of practical administration, subject to paragraph 90 of this Ruling, the Commissioner will treat 'relatively short period' as a period of no more than five years from the date of the relevant contribution to an ERT.

90. Provided that:

•         the evidence reasonably leads to the conclusion that the contribution will in fact be permanently and entirely dissipated in providing remuneration within five years from the date of the contribution, and

•         the arrangement is not part of a scheme to which an anti-avoidance rule (general or specific) might reasonably apply,

the Commissioner will not apply compliance resources to further investigate whether such a period is in fact a 'relatively short period' for the purposes of applying this Ruling.

There is no evidence based on the arrangement as described that the Employer's contributions will be permanently and entirely dissipated in providing remuneration within five years from the date of the contribution. Therefore, the Commissioner cannot apply this compliance approach in the circumstances and determine that the contributions are deductible on the basis that they are providing remuneration within a 'relatively short period'.

Counterfactual

As indicated above, the High Court stated in Sharpcan that in working out whether an outgoing is capital or revenue in nature, there is a need to identify a counterfactual,[33] which 'was made for something which was part of [your] profit-yielding structure'.[34] Here, what will exist after the Employer's contributions to the Trustee is a benefit:

•         to the Employer's Employees and Contractors in the form of the Allocated Investments, and

•         to the Employer in that it would potentially assist in 'attracting, motivating and retaining its key Employees and Contractors' of the Employer and any Associated Company. This would be achieved by providing additional benefits to Participants, as they receive returns on Allocated Investments. The Employer's contributions to the Trust are, in effect, invested on behalf of Participants who then receive a return on their Allocated Investments. By making contributions to the Trust, the Employer has invested capital in the Trust and provided an additional means by which Participants receive benefits that arise from the investments made by the Trustee on their behalf.

Considering the facts, the Employer's contribution to the Trust is an investment in capital. If the Employer does not make the contributions, the Employer's Employees and Contractors will not receive an additional (personal) benefit. The Employer contends the Plan is to attract, retain and motivate key Employees and Contractors, as more motivated Employees/Contractors boost productivity, reduce staff turnover and encourage positive working relationships. However, based on the information we hold, the Employer would still be capable of employing personnel without any of the additional benefits that arise as a result of its contributions to the Trust, namely assisting in 'attracting, motivating and retaining its' key Employees and Contractors.'

United Kingdom cases

In the correspondence to the Commissioner dated 9 December 2019 and 6 September 2021, the Employer's representative notes that the Trust is akin to the employee share trust (EST) involved in the case of Heather v P-E Consulting Group Ltd[35] (Heather's case) in which the House of Lords ruled that employer contributions to the EST would be fully deductible to the employer, being P-E Consulting Group Ltd. Further, in correspondence provided by the applicant, it is noted that the decision in Heather's case was confirmed in the subsequent, similar cases such as Jeffs v Ringtons Ltd[36] (Jeffs) and E Bott Ltd v Price[37] (E Bott).

The Commissioner notes that Heather's case, Jeffs and E Bott are United Kingdom cases that must be considered on their own facts and are not binding authority on Australian courts which have developed a basis for the application of principles for deductibility of employer contributions under section 8-1 in Australia, including cases such as Essenbourne which has been cited above. Further, Essenbourne was followed in Walstern Pty Ltd v Federal Commissioner of Taxation[38] (Walstern), in which Hill J. considered the cases of Heather and Jeffs but instead followed the approach of Kiefel J. in Essenbourne in disallowing the deduction for the contribution in each year on the ground that each contribution was capital or of a capital nature.[39] It is considered that these authorities are more relevant in the current context than the United Kingdom cases and in any event, the Commissioner is bound to apply Australian authorities in the context of Australian income tax deduction sections such as section 8-1.

Conclusion - application of section 8-1

The Employer's contributions to the Trust will not be deductible under section 8-1 because they will not be incurred in gaining or producing its assessable income and will not be necessarily incurred in carrying on a business for the purposes of gaining or producing its assessable income. In addition, the Employer's contributions will not be deductible under section 8-1 because they are capital, or of a capital nature. The contributions are capital, or of a capital nature because they will:

• secure an enduring benefit for the Employer, and
• not permanently and entirely be dissipated in remunerating the Employer's Employees and Contractors within a relatively short period.[40] That is, the contribution does not come home to the Participants in a form of a payment or benefit to which the Participant has complete disposition and control.[41] In fact, Participants are prevented by the Trust Deed from dealing with their interests in the Trust Fund. Rather, the Employer's contributions will be used to:
  • provide loans, on a continual basis, to Participants so they can participate in the Trust, and
  • acquire personal, non-employment related investments with the intention of providing a return to Participants, while preserving the capital as part of the Trust Fund.

The contributions are not akin to remuneration, but rather are loans that are used to acquire personal investments and must be repaid by the Employees/Contractors.

Question 2

Summary

As the correctness of the ruling on this matter would depend on which assumptions were made, we decline to make the ruling as per paragraph 357-110(1)(a) of Schedule 1 to the TAA and in accordance with the Full Federal Court in Hacon.

Detailed Reasoning

The Trust Deed provides that contributions of monies by the Employer are to be applied in making loans to Employees and Contractors. Under the Trust Deed, contributions of monies are not to be applied in making payments or providing benefits under clauses JJ or KK of the Trust Deed.

Section 8-1

In order for a contribution to be deductible under section 8-1, it must constitute a loss or outgoing "incurred" by the Employer.

Subsection 8-1(1) provides:

8-1(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.

TR 97/7 sets out the Commissioner's position on what is meant by the word 'incurred'. As there is no statutory definition of the term 'incurred', the courts have provided some guidance as to the scope of the definition in the context of the assessment acts.[42]

In general, it is accepted that the Employer will incur an outgoing at the time it owes a present money debt that it cannot escape. In the case of a payment where there is no presently existing liability (and where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid.

In Walstern[43], Hill J concluded that a contribution by Walstern to an offshore superannuation fund had not been incurred by the employer as at the time that Walstern made the contribution there was no person who was a member of the fund. In law, the trustee of the fund held the contribution upon resulting trust for the company, pending nomination of an employee as member and ultimate acceptance of the person as member after payment of the qualifying contribution. Unless and until any person became a member (and this did not happen until the later year of income) it was simply not correct to say that the company had made a contribution to the fund for the benefit of a person who was an eligible employee. It was only in the following year of income that the amounts could be said to have been incurred in gaining assessable income after the Medichs became members. Prior to that, the monies were still owned by the company.[44]

Under the Plan, the Employer makes contributions of amounts of money to the Trustee from time to time for the benefit of Employees and/or Contractors. Contributions will be sourced from available cash of the business but will be commensurate with the amounts to be immediately loaned to the Employee and/or Contractor at that time.

The Employer will nominate an Employee and/or Contractor and will advise the Trustee when an Employee and/or Contractor agrees to participate in the Plan.

Should the Employee and/or Contractor receive an invitation to apply to enter the Plan and decide not to accept it, then the amount of contribution that would have funded a loan to the Employee/Contractor will not be paid and will be offered to another Employee/Contractor of the Employer. In these circumstances and applying Walstern, the Employer will not have made a contribution for the benefit of a person who was an Employee and/or Contractor - the monies will still be owned by the Employer. Therefore, the contribution will not have been incurred by the Employer and it is not necessary to determine whether the contribution was a loss or outgoing that was incurred under subsection 8-1(1).

Should an Employee and/or Contractor choose to accept an invitation to participate in the Plan (which is entirely voluntary), the Employee and/or Contractor must make an application for Allocated Investments accompanied by a request for a loan. The loan must be for an amount equal to the total issue price of Allocated Investments that the Employee and/or Contractor is applying for, and contain a direction to the Trustee that, should the application be approved, the funds will be applied in payment of the issue price of Allocated Investments. Once the Trustee accepts the application by the Employee and/or Contractor, the Employee and/or Contractor becomes a beneficiary of the Trust. The beneficial interest of the Employee and/or Contractor is the Allocated Investment. In these circumstances and applying Walstern, the Employer will have made a contribution for the benefit of a person who was an Employee/Contractor. Therefore, the contribution will have been incurred by the Employer and it is necessary to determine whether the contribution was a loss or outgoing that was incurred under subsection 8-1(1).

The Commissioner may decline to make a private ruling if the Commissioner considers that the correctness of a private ruling would depend on which assumptions were made about a future event or other matter.

The Commissioner considers that the correctness of a determination on whether the contribution was a loss or outgoing that was incurred under subsection 8-1(1) would depend on certain assumptions being made, including:

•         the timing of the contribution relative to the identification of the Employee/Contractor for whom the contribution is made (as considered above), and

•         the Trustee's ability to make the payment at a future time to the Participant almost immediately after the contribution is made, which does not seem permissible under the Trust Deed.

The Commissioner is not prepared to make a ruling on the basis of these assumptions. As the correctness of the ruling on this matter would depend on which assumptions were made, we decline to make the ruling as per paragraph 357-110(1)(a) of Schedule 1 to the TAA and in accordance with the Hacon.

Question 3

Summary

No.

Detailed reasoning

Section 40-880 covers deductions that are allowed for business related costs, its purpose being to target:[45]

black hole expenditure, namely business expenses incurred by taxpayers that fall outside the scope of deduction provisions of income tax law. Thus, as s 40-880(1) provides, a deduction under s 40-880 is only allowed to the extent that the expenditure is not taken into account in some way elsewhere in the income tax law.

There are limits to the deductions that are allowed under section 40-880. The relevant aspects of this section state:

Object

(1) The object of this section is to make certain *business capital expenditure deductible over 5 years,... if:

(a) the expenditure is not otherwise taken into account; and

(b) a deduction is not denied by some other provision; and

(c) the business is, was or is proposed to be carried on for a *taxable purpose.[[46]]

Deduction

(2) You can deduct, in equal proportions over a period of 5 income years starting in the year in which you incur it, capital expenditure you incur:

(a) in relation to your *business; or ......'

Limitations and exceptions

(5) You cannot deduct anything under this section for an amount of expenditure you incur to the extent that:

...

(f) it could, apart from this section, be taken into account in working out the amount of a *capital gain or *capital loss from a *CGT event; or ...

(6) The exceptions in paragraphs (5)(d) and (f) do not apply to expenditure you incur to preserve (but not enhance) the value of goodwill if the expenditure you incur is in relation to a legal or equitable right and the value to you of the right is solely attributable to the effect that the right has on goodwill.

Under subsection 40-880(2), the expenditure must be 'in relation to' the taxpayer's business. The phrase 'in relation to' is defined widely,[47] and its meaning:[48]

must be ascertained by reference to the nature and purpose of the provision in question and the context in which it appears.

Further, in BOS International (Australia) Ltd v Babcock & Brown International Pty Ltd[49], Rein J quoted Toohey and Gummow JJ in PMT Partners Pty Ltd v Australian National Parks & Wildlife Service, stating:[50]

that the connection required by the phrase "in relation to" is a question of degree and "[t]here must be some 'association' which is 'relevant' or 'appropriate'".

See also paragraph 75 of TR 2011/6 which states that:

The words 'in relation to', whilst positing a test that is not as strict as 'in carrying on' however indicate that the expenditure in question is sufficiently relevant to the business to impress on it the character of a business expense of that business.

While it is acknowledged that the Employer's contributions are intended to benefit its Employees and Contractors, its contributions lack the necessary association or connection to the taxable purpose for which its business is carried on for them to be described as being 'in relation to' the Employer's business.[51] This is because the contributions will make up the capital of the Trust Fund. That capital will be used to acquire Allocated Investments for the purported benefit of Participants, being the Employees/Contractors. Such Investments and returns are not, objectively, of a business character. In any case, since these Investments are held and made by the Trustee, an entity separate to the Employer and not actively involved in the business carried on by the Employer, they lack an association to the Employer's business to be 'in relation to' it.

Paragraph 40-880(5)(f)

Alternatively, even if it is accepted (which it is not) that the Employer's contributions deliver or produce a business-related benefit, they will still not be deductible under section 40-880 because paragraph 40-880(5)(f) would apply. This provision denies a section 40-880 deduction:[52]

for an amount of expenditure [you] incur to the extent that it could be taken into account in working out the amount of a capital gain or capital loss from a CGT event.

Subsection 108-5 provides that a CGT asset includes any kind of property, or any legal or equitable right that is not property.

Under a contract of employment or engagement for services, both an employee/contractor and an employer obtain significant legal rights. For the employer, amongst other things the contract confers the right to receive or require the performance of particular services on an ongoing or fixed basis;[53] the right to give lawful and reasonable directions (including for example a direction to report to work, and other reasonable requests within the scope of the contract for employment) that must be followed by the employee;[54] and the right to expect that the employee will diligently apply their particular skills and knowledge towards the duties specified in the contract.[55] The employee/contractor in turn obtains the right to remuneration and other benefits in exchange for their services.

These legal rights obtained by the employee/contractor and employer represent CGT assets that, should a CGT event occur, may be the subject of a capital gain. Specifically, as defined in subsection 108-5(1), a CGT asset extends to non-proprietary legal or equitable rights. As stated in the Explanatory Memorandum to the Taxation Laws Amendment Bill (No 4) of 1992 (Cth):[56]

a legal right of a personal character which is not capable of assignment, such as the rights under a contract of personal services, will be an asset.

The bundle of rights an employer obtains under such contracts are therefore a relevant CGT asset for the purposes of the CGT provisions. Paragraph 110-25(5)(a) relevantly states that an amount of capital expenditure that is incurred for the purpose or expected effect of increasing or preserving an asset's value is included as part of the fourth element in the cost base of a CGT asset.[57]

If we accept that the Employer's contributions are intended to deliver or produce a business-related benefit, because they are, for example, intended to deliver or produce a business related benefit for the Employer in the form of increased Employee morale, efficiency, loyalty or Employee goodwill, which may, in turn, increase the Employer's profits and the value of its business; the rights the Employer has under its contracts with Eligible Employees/Eligible Contractors will have great utility.

By making contributions, the Employer is making a payment for the express purpose of enhancing the quality or quantity of, and the value of, the services performed by its Employees/Contractors. By increasing the value of the services performed by its Employees/Contractors in relation to their, and the expected ease and/or utility with which they will be performed, the expected effect of such a contribution is to increase the value of the bundle of rights the Employer has in relation to those contracts. At the very least, the expected effect of the Employer's contributions will be that it increases the value of these CGT assets.

Therefore, where the Employer's contributions are capital in nature (as we have ruled in relation to Question 1), it therefore forms part of the cost base of relevant CGT assets under

paragraph 110-25(5)(a). This means that the Employer's contributions could be taken into account in calculating an amount of a capital gain or capital loss from a CGT event.

Accordingly, paragraph 40-880(5)(f) would deny a deduction under section 40-880 because the Employer's contributions 'could, apart from this section, be taken into account in working out the amount of a capital gain or capital loss from a CGT event'.

Exception to the application of paragraph 40-880(5)(f) contained in subsection 40-880(6)

The exception to the application of paragraph 40-880(5)(f), contained in subsection 40-880(6), allows a deduction for a capital gain if the expenditure is to 'preserve (but not enhance) the value of goodwill'. The High Court in Sharpcan said 'the purpose of subsection 40-880(6) was to confine deductibility under subsection 40-880(2) for expenditure in relation to goodwill to expenditure in relation to goodwill that could not otherwise be brought to account under the 1997 Act.'[58] The High Court made no finding on whether this is an objective or subjective test.[59] Here, the Employer's contributions will do more than preserve its goodwill; it will enhance it, because the Employer's contributions to the Trust are an investment in capital. The Employer entered into the Plan to attract, retain and motivate key Employees and Contractors, as more motivated Employees/Contractors boost productivity, reduce staff turnover and encourage positive working relationships. This was achieved by:

•         the Employer investing capital in the Trust, and

•         the Trustee of the Trust lending money to the Employer's Employees/Contractors, which allows these individuals to become entitled to an interest in the Trust's investments and receive benefits that arise from the investments made.

Alternative position - cost base of Allocated Investments

As an alternative to the positions described above, the Employer's contributions to the Trust are used to acquire Investments, which are defined in the Trust Deed as 'any income producing investment, including shares, options, rights, debentures, managed funds, cash management accounts, stapled products, currencies, commodities and their derivatives'. These Investments are allocated to a Participant (being an Employee/Contractor) and as such are Allocated Investments. The contributions would form part of the cost base (or reduced cost base) of the Allocated Investments and would be taken into account in determining a capital gain or capital loss from a CGT event happening to those Allocated Investments. The contributions would also be reflected in the cost base (and reduced cost base) of the interests in the Trust that are held by the Participants.

Accordingly, paragraph 40-880(5)(f) would deny a deduction under section 40-880 because the Employer's contributions 'could, apart from this section, be taken into account in working out the amount of a capital gain or capital loss from a CGT event'. Paragraph 40-880(5)(f) does not require that the amount must be taken into account in working out the amount of a capital gain or loss from a CGT event that happens to the entity which incurred the expenditure. At the time the Employer makes the contribution, it knows the contribution will be applied in a certain way under its arrangement with the Trustee. As the Employer's contribution is being made under such an arrangement and subject to the strict terms of the Trust Deed, it is reasonable to conclude that the Employer knows the contribution will be taken into account and would form part of the cost base.

As outlined above, the exception to the application of paragraph 40-880(5)(f), contained in subsection 40-880(6), allows a deduction for a capital gain if the expenditure is to 'preserve (but not enhance) the value of goodwill...'. Here, the Employer's contributions do more than preserve the goodwill; it enhances it, for the reasons articulated above.

Conclusion - application of section 40-880

Section 40-880 will not apply in relation to the contributions made by the Employer to the Trust and therefore cannot be deducted in the income year the expenditure is incurred; nor can it be deducted in equal proportions over a period of 5 income years.

Question 4

Summary

No.

Detailed Reasoning

In order for a contribution to be a 'fringe benefit', the definition of 'fringe benefit' in

subsection 136(1) of the FBTAA requires that it must be provided in respect of the employment of the employee. As described above, at the time of the contribution, it may be made, variously, in respect of the Employer's Employees and Contractors as a general class. It may also be made in respect of beneficiaries of the Employer trust (or their associates), directors or shareholders (or their associates) of the corporate trustee of the Employer trust. Therefore, it is unlikely that the contribution, at the time it is paid to the Trustee, will satisfy the requirement that it be dissectible and paid in respect of the employment of any one Employee. As such, it will not be a 'fringe benefit' as defined in

subsection 136(1) of the FBTAA.

However, there will be instances where the contribution to the Trust is made in respect of a small and discrete group of Employees and in these instances, it may be possible to identify what parts of the contribution are being made in respect of each Employee. As was discussed in the Full Federal Court decision of Federal Commissioner of Taxation v Indooroopilly Children's Services (QLD) Pty Ltd 2007 ATC 4236 (Indooroopilly), per Edmonds J at 4245

This does not mean, as seems to be suggested in [ 9 ] - [ 14 ] of the Commissioner ' s written submissions, that a benefit provided to a number of employees or a benefit provided to a common associate of a number of employees - such as the trustee of a trust under which those employees are capable of taking a share of the benefit - cannot be a " fringe benefit " . It will be a fringe benefit provided the identity of each of the employees who will take a share of the benefit is known with sufficient particularity, at the time the benefit is provided, to enable it to be said that the benefit is provided in respect of the employment of each of those employees. [emphasis added]

Where the contribution is made and at the time of being made, the Employees who will benefit from the contribution is known with sufficient particularity, a 'fringe benefit' may arise. However, the scheme of arrangement is such that the Trustee of the Trust (who is an associate of the Employee) will receive the contribution and immediately loan it to the Employer's Employees. Under subsection 138(3) of the FBTAA, joint provision of a benefit to an employee and associate shall be deemed to have been provided to the employee only and therefore, will not arise in respect of the associate. This avoids the double counting of benefits.

Contributions that are made by the Employer to the Trustee are subsequently and immediately applied by the Trustee, notionally at least, in making loans or providing financial accommodation to Employees under an arrangement with the Employer. The making of the contribution and the application of the funds in facilitating the benefit of the loan to the Employee happens in very quick succession and as part of a broader arrangement facilitated by the Employer and the Trustee.

We consider subsection 138(3) of the FBTAA applies to this arrangement to deem any benefit provided to the associate (the Trustee) to have been provided to the Employee only. In this case, it is the loan, or financial accommodation provided from the funds received by the Trustee that is the benefit that has been provided.

Therefore, no benefit arises under subsection 138(3) of the FBTAA to the Trustee at the time the contribution is made by the Employer. This is because the fringe benefit that arises is the making of the loan or provision of the financial accommodation that occurs when the Trustee immediately applies the contributed funds.

Question 5

Summary

No

Detailed reasoning

For similar reasons given above at Question 4, we consider that a contribution via a loan/s by the Employer to the Trustee will not constitute a fringe benefit.

Question 6

Summary

No. The acquisition of Investments by the Trustee is not a 'benefit provided' 'in respect of employment' of a particular employee.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee or to an associate of an employee by:

• the employer
• an associate of the employer
• the arranger (within the meaning of paragraph (e) of the definition of 'fringe benefit'), or
• a person (other than the employer or an associate of the employer) within the meaning of paragraph (ea) of the definition of 'fringe benefit'.

in respect of the employment of the employee.

A 'fringe benefit' does not include the items listed in paragraphs (f) to (s) of the definition in subsection 136(1) of the FBTAA.

A 'benefit' is defined in subsection 136(1) of the FBTAA to include:

Any right (including a right in relation to, and an interest in real or personal property), privilege service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be provided under ...

Under the Plan, a contribution is made by the Employer to the Trust and the Trustee applies those funds to make a loan to the Eligible Employee. The Eligible Employee utilises those funds and acquires an interest in the Trust. Once the Trustee receives those contributions from the Eligible Employee, they will acquire/or designate Investments to that Eligible Employee and record that Eligible Employee as a "Participant" on the Register. As a "Participant", the Eligible Employee will be entitled to benefits from the Trust. As an Eligible Employee, that Employee will also be able to participate in a distribution of Trust Assets upon winding up of the Trust, even though they may no longer be registered as a "Participant" on the Register.

Whilst the underlying investments held by the Trustee may constitute the assets of the Trust, the acquisition by the Trustee of those investments doesn't provide a particular benefit to the Eligible Employee /Participant. The acquisition of the Investments doesn't constitute an additional benefit to the Employee as the Employee has already acquired their rights under the Trust at the time their contributions are received by the Trustee and the Employee becomes a Participant on the Register.

We consider that this outcome is consistent with the policy and purpose of the FBTAA. As was discussed in the Full Federal Court decision in Slade Bloodstock v Federal Commissioner of Taxation[60].

Fringe benefits tax was only ever intended to tax the provision of benefits where, if the benefit had been provided in cash, there would have been a derivation of income. It is true that it was also the policy and purpose of the legislation to tax benefits which might not be income of the employee because the benefit was provided to an associate of the employee or because the benefit could not be converted into money. But it was never intended to apply to a repayment of a loan made by an employee to his employer; such a repayment could never be a derivation of income by the lender/employee.

The Slade Bloodstock decision indicates that the test of a "benefit" to which the FBTAA is intended to apply is whether it would have been income, if provided in cash, regardless of whether it is provided to an associate or could not in fact be converted to money. Arguably, an Investment by the Trustee by way of a term deposit or similar cash investment (in lieu of the shares or units) would not be income of the Employee. Nothing could have been said to have been derived by the Employee, and certainly, no amount of income would have been derived by the Employee at the time that the Trustee acquires the Investments.

As such, the acquisition of the Investments by the Trustee does not constitute the provision of a 'benefit' to the Employee and therefore does not satisfy the definition of 'fringe benefit' in subsection 136(1) of the FBTAA.

Question 7

Summary

Yes. The acquisition of the interest in the Trust by the Employee will constitute a 'fringe benefit'.

In considering this question, we note that the Commissioner was not required to form a view about whether the acquisition of the Allocated Investments by the Employee was at market value and has not done so for the purposes of answering this question.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee by an employer, associate, arranger or other person under paragraph (ea) of the definition of 'fringe benefit', in respect of the employment of the employee.

Ordinarily, where an employee acquires a benefit from an employer or an associate of an employer via a contract of sale and provides full market value consideration for that benefit, nothing has been provided to the employee in respect of employment. However, if something is being made available for purchase to the employee under a specific arrangement with employees and is generally only a benefit available to those employees, a connection with employment usually exists.

Where a connection with employment exists, the taxable value of that benefit will have regard to the market value consideration provided by the employee.

We consider that the provision of the interest in the Trust has occurred in respect of the Employees' employment. This is because the Trust has been established primarily for the Employees of the Employer and the scheme is operated for those Employees. Employees who are selected and invited to participate in the arrangement are so selected due to their employment. General members of the public are not entitled to participate in the arrangement.

As such, the interest in the Trust is a property fringe benefit for the purposes of section 40 of the FBTAA.

Property Fringe Benefit

Section 40 of the FBTAA provides that a property fringe benefit arises in the following circumstances:

Where, at a particular time, a person (in this section referred to as the provider) provides property to another person (in this section referred to as the recipient), the provision of the property shall be taken to constitute a benefit provided by the provider to the recipient at that time.

The value of a property fringe benefit depends for the purposes of the FBTAA on whether it is an in-house property fringe benefit or an external property fringe benefit. Broadly, an in-house property fringe benefit is defined in subsection 136(1) of the FBTAA as a property fringe benefit, where the provider carries on a business which includes the provision of identical or similar property. An external property fringe benefit is defined in subsection 136(1) of the FBTAA as being a property fringe benefit other than an in-house property fringe benefit.

Under the Plan, it could be said that the Trustee (as provider) will provide property, being the interest in the Trust, to the Employee (as recipient). Under section 40 of the FBTAA, this should be taken to constitute a property fringe benefit to the Employee.

It could also be said that the benefit is provided to the Eligible Employees 'in respect of their employment', for the following reasons:

• The Trustee is only able to offer an interest in the Trust to Eligible Employees, who are defined in the Trust Deed as a person who is an Employee at the time the person is selected by the Employer to be invited to apply to the Trustee for Investments. An Employee is relevantly defined as a person who is in permanent employment of the Employer.
• In order for an Employee to participate in the Plan, and acquire an interest in the Trust, the Employer is to advise the Trustee of the Eligible Employee that has been selected.
• The Trustee advises the Eligible Employee of the value of the interest in the Trust that they are eligible to apply for, as determined in the absolute discretion of the Employer (per the Trust Deed).

As such, we consider that there is a necessary connection between the employment of the Employee and the provision of the interest in the Trust.

We therefore consider that the Trustee, being the Employer's associate, will provide an external property fringe benefit to the Employee at the time that the Eligible Employee's name is included on the Register as a Participant.

Question 8

Summary

Yes. The loan provided by the Trustee to the Employee is a 'loan fringe benefit' under

subsection 136(1) of the FBTAA.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee by an employer, associate, arranger or other person under paragraph (ea) of the definition of 'fringe benefit', in respect of the employment of the employee.

The 'fringe benefit' that ordinarily arises as a result of the provision of a loan benefit is a 'loan fringe benefit'.

Loan fringe benefit

A 'loan' is defined in subsection 136(1) of the FBTAA to include:

(a) an advance of money;

(b) the provision of credit or any other form of financial accommodation;

(c) the payment of an amount for, on account of, on behalf of or at the request of a person where there is an obligation (whether expressed or implied) to repay the amount; and

(d) a transaction (whatever its terms or form) which in substance effects a loan of money.

A 'loan fringe benefit' is defined in subsection 136(1) of the FBTAA as meaning a fringe benefit that is a loan benefit. Subsection 136(1) of the FBTAA defines a 'loan benefit' as meaning a benefit referred to in subsection 16(1) of the FBTAA, which provides:

Where a person (in this subsection referred to as the provider) makes a loan to another person (in this subsection referred to as the recipient), the making of the loan shall be taken to constitute a benefit provided by the provider to the recipient and that benefit shall be taken to be provided in respect of each year of tax during the whole or a part of which the recipient is under an obligation to repay the whole or any part of the loan.

An obligation to pay or repay an amount is outlined in section 147 of the FBTAA which states that 'For the purposes of this Act, a person shall be deemed to be under an obligation to pay or repay an amount notwithstanding that the amount is not due for payment or repayment.'

Under the Plan, contributions that are made by the Employer to the Trustee are subsequently applied by the Trustee, notionally at least, in making loans to Employees as part of a broader arrangement facilitated by the Employer and the Trustee. The loan can only be used by the Employee to acquire an interest in the Trust. The loan is evidenced by terms agreed to by the Employee, the Trust Deed and the financial statements and records of the Trust.

Although there is no actual cash paid to the Employee representing loan proceeds, funds are recorded and applied via journal entry. The amount so recorded becomes re/payable to the Trustee upon cancellation of the Employee's interest in the underlying Allocated Investment.

Where this occurs, under the terms of the Trust Deed, the Employee is under an obligation to pay or repay the whole or any part of the loan, being the lesser of the market value of the Allocated Investment at the time of cancellation or the amount of the loan that was made available.

As such, where the Trustee makes a loan or otherwise provides financial accommodation to the Employee for the purpose of acquiring an interest in the Trust, the loan will meet the definition of a 'loan benefit' provided by the Trustee to the Employee under the definition in subsection 16(1) of the FBTAA.

The Trustee as arranger

The Trustee is 'an arranger' for the purposes of paragraph (e) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA. At the time of the making of the loan, there is a benefit provided to an Employee by the Trustee under an arrangement between the Employer and the Trustee. This arrangement is evidenced by the Trust Deed, Employee Handbook and scheme documentation.

The loan is provided in respect of employment

In J & G Knowles & Associates Pty Ltd v. FC of T[61] (Knowles), the Federal Court considered the meaning of 'in respect of employment' in the FBTAA. The Court noted that what has to be established in determining if a benefit is 'in respect of employment' is whether there is a sufficient or material, rather than a causal, connection or relationship between the benefit and the employment.

Where loans are provided to an Employee and are made at the request of the Employer in its capacity as an Employer, the loan is sufficiently and materially connected to the Employee's employment.

Therefore, the financial accommodation provided by the Trustee to the Employee under an arrangement with the Employer is a 'fringe benefit' and it is a 'loan fringe benefit' for the purposes of subsection 136(1) of the FBTAA.

Question 9

It is not necessary to answer this question as the Employer has advised that under the arrangement the Employee will not pay or accrue any interest in relation to the finance provided by the Trustee.

Question 10

Summary

As the correctness of the ruling on this matter would depend on which assumptions were made, we decline to make the ruling as per paragraph 357-110(1)(a) of Schedule 1 to the TAA and in accordance with the Full Federal Court in Hacon.

Detailed reasoning

As noted in Question 8, the loan provided by the Trustee to the Employee for the purpose of acquiring the interest in the Trust will constitute a 'loan fringe benefit' under subsection 136(1) of the FBTAA.

Where the loan qualifies as a loan fringe benefit, section 18 of the FBTAA provides that the taxable value is the amount by which the notional amount of interest exceeds the amount of interest that has accrued on the loan in respect of the year of tax.

The Employer has advised that under the Plan, the Employee will not pay or accrue any interest in relation to the provision of the loan. This means the taxable value of the loan fringe benefit will be the entirety of the notional amount of interest, as no interest has accrued on the loan. The notional amount of interest, for the purposes of the definition of that term in subsection 136(1) of the FBTAA, means the amount of interest that would have accrued on the loan if the interest were calculated on the daily balance of the loan at the statutory interest rate in relation to the year of tax.

However, under section 19 of the FBTAA, this taxable value is reduced by the amount that the Employee would have been able to claim as a once-only tax deduction under the ITAA 1936 or the ITAA 1997, had they actually incurred interest on the loan. This is referred to as the 'otherwise deductible rule'.

Reduction of taxable value - otherwise deductible rule

Subsection 19(1) of the FBTAA relevantly provides that the taxable value of the loan fringe benefit may be reduced where:

(a)  the recipient of a loan fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and

(b)  if the recipient had, on the last day of the period (in this subsection called the loan period) during the year of tax when the recipient was under an obligation to repay the whole or any part of the loan, incurred and paid reimbursed interest (in this subsection called the gross interest), in respect of the loan, in respect of the loan period, equal to the notional amount of interest in relation to the loan in relation to the year of tax - a once-only deduction (in this subsection called the gross deduction) would, or would if not for section 82A of the ITAA 1936, and Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the recipient under either of those Acts in respect of the gross interest:

...

It is noted that the 'otherwise deductible rule' in subsection 19(1) of the FBTAA only applies to loan fringe benefits provided directly to Employees. It does not apply to loans provided to associates of Employees. Therefore, where a loan fringe benefit is provided to an associate of an Employee, the 'otherwise deductible rule' does not apply and the taxable value of the loan fringe benefit will not be reduced.

Deductions for interest

Under section 8-1, interest is deductible to the extent that it is incurred in gaining or producing the taxpayer's assessable income or in carrying on a business for that purpose and is not capital or of a capital, private or domestic nature.

The term 'incurred in gaining or producing assessable income' means incurred in the course of gaining or producing assessable income (Payne[62]). For an expense to be incurred in gaining or producing assessable income, it is both sufficient and necessary that the occasion of the expense should be found in whatever is productive of assessable income (Payne; Ronpibon Tin NL v Commissioner of Taxation[63]; Commissioner of Taxation v Day[64] (Day)). If no assessable income is produced, the occasion of the expense should be found in what would be expected to produce assessable income.

In determining the deductibility of interest, the courts and tribunals have looked at the purpose of the borrowing and the use to which the borrowed monies have been put (Fletcher & Ors v FC of T[65]; FC of T v Energy Resources of Australia Limited[66]; and Steele v FC of T[67]).[68] Using the borrowed money for the purpose of gaining or producing assessable income provides the nexus between the interest incurred on the borrowed money and the assessable income derived from its use.

However, paragraph 16 of Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities (TR 2004/4) highlights that although the concepts of the use to which funds are put and of subjective purpose are useful tools in determining the deductibility of interest, the statutory issue is whether the interest outgoing was incurred in the course of the income producing activity.[69]

Under the Plan, the loan can only be used by the Eligible Employee to acquire an interest in the Trust. The Trustee will use subscription monies provided by the Employee to it to acquire Australian Securities Exchange (ASX) listed shares and/or public trading trust units.

It is accepted that under the terms of the Trust Deed, to the extent that the underlying Investments do generate income, that income will be distributed to Participants. Under the Trust Deed, an Allocated Investment entitles the holder to receive a distribution in respect of each Accounting Period equal to the IDE. Under the Trust Deed, the Eligible Employee is presently and absolutely entitled to the net income of the Trust Fund derived during that Accounting Period that is attributable to their particular IDE.

The Eligible Employee's IDE is defined in the Trust Deed as follows:

Investment Distribution Entitlement' means, in relation to an Allocated Investment in respect of an Accounting Period a sum equal to any dividends or other income received by the Trustee during that Accounting Period on Allocated Investments referable to that Allocated Investment

In this case, the Employee will have an entitlement to a sum equal to the amount of any dividends or other income received by the Trustee arising from the Allocated Investments referable to that Allocated Investment.

Having regard to the general operation of the 'otherwise deductible rule' under section 19 of the FBTAA, the pertinent question in this case is whether the interest in the Trust purchased using the loan funds can be said to be have been acquired for an income producing purpose. That is, was the interest in the Trust acquired with the purpose or expectation of producing trust income?

The Commissioner may decline to make a private ruling if the Commissioner considers that the correctness of a private ruling would depend on which assumptions were made about a future event or other matter.

The Commissioner considers that the correctness of a determination on whether the interest in the Trust purchased using the loan funds can be said to have been acquired for an income producing purpose would depend on certain assumptions being made about the interest in the Trust and whether it was acquired with the purpose or expectation of producing trust income which was not a mere theoretical possibility. For example, the Commissioner would be required to make assumptions as to whether there is a reasonable expectation of the underlying investments made by the Trustee ever generating profit, or any assessable income at all.

As the correctness of the ruling on this matter would depend on which assumptions were made, we decline to make the ruling as per paragraph 357-110(1)(a) of Schedule 1 to the TAA and in accordance with the Full Federal Court in Hacon.

Question 11

Summary

No. The Cancellation Entitlement received by the Employee will not constitute a 'fringe benefit' as defined in subsection 136(1) of the FBTAA.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee (or their associate) by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee.

On cancellation of a Participant's interest in the Trust, they will become entitled to either a cash payment or an in specie distribution, known as the Cancellation Entitlement from the Trustee under the Trust Deed. A Participant's Cancellation Entitlement is, per the Trust Deed, subject to the repayment of any outstanding loan monies under the Trust Deed.

Benefit provided in respect of the employment of the employee

In Knowles[70], the Full Federal Court held that benefits provided 'in respect of the employment of the employee' include benefits where '... there is a sufficient or material, rather than a causal connection or relationship between the benefit and the employment...'

As outlined in paragraph 60 of TR 2018/7:

Benefits have an insufficient connection with employment ... when they are received by the employee other than in their capacity as an employee, such that it can be concluded after consideration of all relevant circumstances, that the benefit is not being provided to the employee in respect of employment. This will arise where the consideration for the payment is not the employment services. Factors that will evidence that benefits provided by a trustee are not remuneration or remuneration in nature include the following:

•         the benefits are consideration for an arm's length surrender, exercise or disposal of an asset (property or rights) and that asset was acquired in return for valuable and arm's length consideration (or as remuneration, and those rights were appropriately dealt with as such)

•         the benefits arise because the recipient is a beneficiary of a trust and the trustee has exercised its power under the deed to provide those benefits to the recipient independent of an arrangement or understanding with, or direction by, the employer

•         the benefits do not rely on continuing employment nor have regard to, or are conditional upon, individual employment-related performance conditions, or

•         the timing and amount of benefits is identical in respect of all recipients who hold the same property or rights, regardless of their employment relationship with the employer.

In addition, the first instance decision of Fisher J in McArdle v Federal Commissioner of Taxation[71] (McArdle) (upheld on appeal) provides a summary of decisions relevant to the term 'in respect of employment' in the context of former section 26 of the ITAA 1936. McArdle concerned the accessibility of the consideration a taxpayer had received on surrendering the share options he had acquired in his employment. Fisher J relevantly held, after considering Federal Commissioner of Taxation v Dixon[72] (Dixon) and Smith v Commissioner of Taxation[73] (Smith):

it is necessary to go beyond the historical or temporal connection which had existed or presently existed between an employer and an employee. It is necessary to consider whether the taxpayer received the payment in any capacity other than that of employee, whether there was any consideration other than services rendered or to be rendered, and whether it could be said that the payment was in consequence only of the employee's service or of some other consideration.

Dixon concerned the accessibility of a payment made by an employer to make up the difference between the employee's military pay and the pay he would have received in his civilian occupation. Smith concerned the accessibility of an employer's payment to their employee under its 'encouragement to study' scheme.

Fisher J quoted Dixon CJ and Williams J in Dixon where they said:

It may be conceded also that the proviso has an effect upon the construction of par. (e) of s. 26, but the effect is only to show that the allowance may be in consequence of a retirement from or termination of the office, not to show that a mere historical connection, as it may be called, is sufficient.

And Fullagar J who said:

The fact of the respondent's employment explains the selection of him as a recipient but it in no degree characterizes the payment. The payment does not partake in any degree of the character of a reward for services rendered or to be rendered.

In concluding:

These two sentences can be aptly applied to the present matter, where the taxpayer was selected as a recipient of options because he was an employee, which fact however has no bearing on the character of the payment received by him under the surrender agreement.

In my opinion the test of assessability of benefits under sec. 26(e) as stated by the majority of the High Court in Smith's case is that the benefit must be the consequence of the employment relationship. In the present matter the crucial fact was that by the month of November 1981 the taxpayer had significant rights in contract as the option holder to acquire shares. These rights to call for shares were capable of being exercised subsequent to the termination of his employment or after his death. It was these contractual rights, and his entitlement as an option holder, which enabled him to deal with Delhi International in relation to the surrender arrangements. The mere existence of an employer-employee relationship in November 1981 was nothing to the point if he had not been the holder of options...

If... one looks to the consideration for the payment of $1,100,000, this consideration was the surrender, or perhaps more strictly the extinguishment or abandonment, of his rights to acquire shares or alternatively to obtain cash under the LSAR agreements. That consideration passed from the taxpayer as holder of the options and not by virtue or in consequence of the employer-employee relationship.

Therefore, the consideration received was not assessable to the taxpayer under former paragraph 26(e) of the ITAA 1936.

Under the Plan, a Participant will acquire an interest in the Trust. The Participant will continue to hold their interest until they either decide to dispose of it or their interest is terminated (including, in the case of an Employee, due to the termination of the Employee's employment with the Employer). While an Eligible Employee would only be selected as a Participant in the Plan because they are employed by the Employer, this does not characterise all payments made through the Plan as payments made in respect of the Employee's employment.

The payment of the Cancellation Entitlement is an entitlement that the Eligible Employee has, subject to the terms of the Trust Deed, in their capacity as beneficiary of the Trust. The Employer does not have the power to decide whether the payment should be made to the Eligible Employee, or to stop the payment from being made. There are no employment conditions or performance hurdles attached to the Cancellation Entitlement.

Rather, the only precondition for payment is the cancellation of the rights to the Allocated Investments.

As such, we consider that, as in McArdle, the payment is made because the Eligible Employee has an interest in the Trust which (for the most part) is exchanged as consideration for the payment. The payment arises as a result of the Eligible Employee enforcing rights (arising out of their interest) previously obtained.

Accordingly, we consider that payment of the Cancellation Entitlement made on the cancellation of rights to Allocated Investments is not a payment made in respect of the Employee's employment and will not constitute a fringe benefit.

Question 12

Summary

No. When the rights to the Allocated Investments are surrendered to the Trustee in full satisfaction of the Eligible Employee's loan obligation, this will not constitute a 'fringe benefit' as defined in subsection 136 (1) of the FBTAA.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee (or their associate) by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee.

ATO Interpretative Decision ATO ID 2003/316[74] outlines whether any benefit arising from the discharge of a limited recourse loan provided by an associate of the employer to an employee would constitute a fringe benefit under the definition in subsection 136(1) of the FBTAA.

ATO ID 2003/316 relies on the interpretation of the term 'in respect of the employment of the employee' in cases such as Knowles and McArdle, to outline that any benefit that arises where the redemption of shares is used to discharge a loan is not a benefit in respect of the employment of the employee, but rather a benefit that arises from the employee exercising rights previously obtained under the loan agreement in their capacity as debtor.

In order for the benefit received on exercise of the limited recourse rights to be treated as a fringe benefit, they must be provided 'in respect of' the employee's employment.

In Knowles[75], the Full Federal Court noted that:

... what must be established is whether there is a sufficient or material, rather than a causal connection or relationship between the benefit and the employment...

The Court also suggested that it would be useful to ask 'whether the benefit is a product or incident of the employment'.

In FC of T v. McArdle[76], 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.

When rights are exercised or exploited, 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.

Under the Plan when the rights to the Allocated Investments are cancelled and the finance becomes immediately payable, if the Cancellation Entitlement is not enough to fully discharge the outstanding finance owed by the Eligible Employee to the Trustee, the Employee can exercise their rights under the Trust Deed and require that the Trustee accept surrender and cancellation of the rights in the Trust as full and final satisfaction of the debt outstanding on the finance. The benefits received or enjoyed on exercise of this previously granted right have no reflection on or reference to ongoing employment or employment services performed. Whilst a sufficient connection with employment will exist upon initial grant of the right, that connection is merely causal at the time the rights are exercised. The benefit is not, at that time, a product or incident of the employment.

It is our view that the surrender of the rights to Allocated Investments, in satisfaction of the loan made to the Eligible Employee, will not constitute a fringe benefit because the benefit is not provided in respect of the employment of the Eligible Employee.

Question 13

Summary

No. A fringe benefit will not be provided where Investments are transferred to the Unallocated Investment Account of the Trust.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee (or their associate) by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee.

Under the Plan, the Trustee will transfer Allocated Investments to the Unallocated Investment Account in one of two circumstances:

•         where the rights to Allocated Investments to which the Investments were referable are to be cancelled, and the Eligible Employee has elected to receive their Cancellation Entitlement in cash, the Trustee will transfer the Investments to the Unallocated Investment Account in preparation for them to be sold on the ASX, or

•         where the rights to Allocated Investments to which the Investments were referable are to be cancelled, and the Eligible Employee has elected to receive their Cancellation Entitlement in cash, the Trustee will transfer the Investments to the Unallocated Investment Account in order for them to be reallocated to another Eligible Employee.

In both circumstances, a benefit is not provided to an Employee and even if there was a particular 'benefit' so provided, those benefits are not provided in respect of that Employee's employment. As no benefit is being provided to an Employee when the Trustee transfers Allocated Investments to the Unallocated Investment Account, there will be no 'fringe benefit' provided.

Question 14

Summary

No. The operating costs associated with the administration of the Plan incurred by the Employer will not be deductible under section 8-1.

Detailed reasoning

Under the Trust Deed, the Employer has agreed to reimburse the Trustee for all costs and expenses incurred in the operation of the Trust. Under the Trust Deed, the Employer has also agreed to meet Investment Plan expenses to the extent they are not met out of the Trust Fund.

The Trust Deed provides:

Reimbursement of Expenses

The Employer agree to reimburse the Trustee, on demand, for all costs and expenses incurred in the operation of the Trust, including any expenses (including brokerage and stamp duty) or any tax (including income tax) or other charges the Trustee is required to pay in respect of the acquisition or disposal of Investments and the operation of this Deed.

The Trust Deed further provides:

INVESTMENT PLAN EXPENSES

Investment Plan expenses, to the extent that they are not met out of the Trust Fund are to be met by the Employer.

As outlined above, section 8-1 provides:

(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

...

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

Is the outgoing incurred

To qualify for a deduction under section 8-1, a payment to the Trustee must be incurred. Broadly, an outgoing is incurred at the time a taxpayer owes a present money debt that they cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in TR 97/7 and TR 94/26.

We accept that the Employer will incur the expenses identified when it pays amounts to the Trustee as reimbursement of the Plan expenses.

The Trustee's expenses may include brokerage fees, rent, office expenses, furniture, rates, taxes, office equipment, electricity, cleaning and any other charges the Trustee is required to pay in respect of the acquisition or disposal of the Investment and the operation of the Trust Deed.

Paragraph 8-1(1)(a) - the first limb of section 8-1

There is no discernible connection between gaining or producing the Employer's assessable income and meeting, by way of reimbursement, expenses of a Trustee who is charged with managing investments of Employees, associates and Contractors. The Employer's payment of the Trustee's expenses will not be 'productive of actual or expected income' for the Employer. While, as in Day[77], a 'direct connection between the expenditure in question and an activity productive of income'[78] is not required; 'the occasion of the outgoing must be found in what is productive of the assessable income; there must be a sufficient nexus between the outgoing and "the activities which more directly gain or produce the assessable income".[79] Any connection between the occasion of the expenditure and the earning of assessable income through the work of the Employer's Employees and Contractors will be insufficient and too indirect to be deductible under paragraph 8-1(1)(a). The first limb of section 8-1 is not satisfied.

Paragraph 8-1(1)(b) - the second limb of section 8-1

In respect of the second limb and whether the expense is necessarily incurred in carrying on a business, the Employer is 'carrying on'[80] a business[81] of XXXX. In determining whether the Employer's reimbursement to the Trustee will be necessarily incurred in the course of that business, it is necessary to consider the following factors:

•         the outgoing must be characterised and the relationship between the outgoing and the carrying on of business;[82] and

•         the purpose or motivation for the making of the outgoing considered, that is:

whether the outgoing was reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of that business and, if so, whether those responsible for carrying on the business so saw it.[83]

In the present circumstances, the following can be established:

•         the Employer's outgoings will be the expenses it incurs to administer the Trust for the 'benefit' of Employees/Contractors

•         the Employees/Contractors may include associates of the Employer that have an interest either via shareholding or as a beneficiary in the Employer's business, and

•         the Employer has stated that the relationship between the outgoings made and the carrying on of the business is to 'assist in attracting, retaining and motivating key employees of the Employer and any Associated Company'.[84] This is the stated advantage the Employer intends to achieve.[85]

In Essenbourne, it was considered:[86]

A reference in this case to the payment to the Employee Incentive Trust as an outgoing does not provide an answer to the question whether it was reasonably incurred by Essenbourne in carrying on its business. It is equally possible, on the bare facts, that it be seen as a transfer of the profits of the company to the Trust so that they might be shared and, at the same time the taxation advantages obtained.

Looking at the Employer's activities,[87] the business it conducts and the need to attract, retain and motivate staff, there is an argument that the administrative expenses are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. If it is accepted that the administrative expenses are reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the Employer's business and those who are running its business, saw it as such, then the second limb of section 8-1 could be satisfied.

However, we consider that the operation of the Trust (and therefore, associated administrative costs paid to the Trustee) is not reasonably capable of being seen as contributing to staff attraction, motivation or retention for the following reasons.

Where expenses are incurred for the benefit of beneficiaries (or their associates) of the Employer trust, or the shareholders, directors or associates of the corporate trustee of the Employer trust, there is no immediately apparent benefit that accrues to the Employer's business in this situation as the Participants who are benefiting from the Trust already have an ownership stake in the business, via a shareholding, or an interest in the profitability of the business, in their capacity as a beneficiary.

In both instances, there is a pre-existing motivation to make the business profitable. There is no readily apparent reason to explain how a contribution to the Trust (and the expenses reimbursed to the Trustee running the Trust), which entails the application of business profit, through a trust structure, to investments outside of the business, is going to improve or contribute to the business ends of the business being run.

Where expenses are incurred for the benefit of employees who are engaged in the business of the Employer (and have no ownership or pre-existing rights to income as a beneficiary or shareholder), it is similarly difficult to understand how the Trust will assist in attracting, retaining and motivating these employees. The following features of the arrangement are relevant:

•         The benefits from the Trust are not subject to vesting or performance conditions. An Employee can perform poorly and even be dismissed for cause and still enjoy the gain from investment in the Trust. Similarly, a Contractor can also perform poorly and the services no longer engaged and still enjoy the gain from the investment in the Trust.

•         An Employee does not have to continue to be employed to enjoy the benefits from the Trust, that is, they do not depend on continued employment.

•         The contribution is primarily applied by the Trustee in making an interest free loan to the Employee. The subsequent investment by the Employee is a private investment and gains from that investment arise from the performance of that investment, not the performance of the Employee, as an employee.

•         The right the Employee or Contractor obtains from the arrangement in relation to the payment of the loan principal back to the Employee or Contractor is a discretionary right, at best. There is no certainty that the Employee or Contractor will derive any further benefits from the Trust and there are no reasonable performance parameters or requirements that have been established that would have a positive impact on the Employee's or Contractor's performance.

•         The Employer has not identified any particular concerns with Employee (or Contractor) attraction, retention or performance that would deem an incentive arrangement of this type necessary. The Employer has not demonstrated how this arrangement addresses any concerns that it has as to staff attraction, retention or motivation.

•         Participation in or benefits from the Trust are not integrated into employment or service contracts and therefore there is no contractual obligation on the Employer's behalf to offer the arrangement or participation in the arrangement to any of its Employees or Contractors.

•         Because the benefits from the Trust are derived primarily from the performance of independent investments of the Trustee, an Employee or Contractor is not granted an interest in the Employer entity and this arrangement is not analogous to nor will it deliver the same benefits that an employee share scheme[88] can so deliver.

•         All of the rights and entitlements of the Employees or Contractors who participate in the arrangement are subject to an overriding discretion by the Trustee of the Trust, including whether the loan application is approved or not approved. If it is approved then the only apparent guaranteed benefit to an Employee or Contractor is the receipt of an interest free loan on uncommercial terms. It is difficult to establish how an interest free loan (that is subject to repayment) can contribute positively to Employee or Contractor attraction, retention and motivation.

•         At the time the amount of the contribution is made, it is made for participants as a general class. There is no amount contemplated or specifically calculated for individual Contractors or Employees. Further, the Employer has not identified the likely size and scale of the contributions. Whether the amount that is contributed is appropriate to meet the Employer's business ends cannot therefore be assessed.

As with the Employer's contributions to the Trust, its payment of the Trustee's expenses is not incidental or relevant to its business.

Therefore, we consider that the Employer's payment of the Trustee's expenses will not be necessarily incurred in carrying on a business for the purpose of gaining or producing the Employer's assessable income.

Paragraph 8-1(2)(a) - the first negative limb

Notwithstanding that neither of the first or second positive limbs have been satisfied, as outlined in the answer to Question 1, the Trustee's expenses will be outgoings of a capital nature, and therefore will not be deductible under paragraph 8-1(2)(a).

Paragraph 8-1(2)(d) - the fourth negative limb

Furthermore, in relation to amounts paid towards the Trustee's income tax liability, the expense of 'tax', is specifically not deductible as a cost of managing affairs deduction under subsection 25-5(1) by paragraph 25-5(2)(a). Section 6 of the ITAA 1936 defines 'tax' to mean "income tax imposed as such by any Act, as assessed under this Act, but does not include mining withholding tax or withholding tax." Similarly, 'income tax' is defined in section 6 of the ITAA 1936 to mean "income tax imposed as such by any Act, as assessed under this Act" which includes the ITAA 1936, ITAA 1997, Schedule 1 to the TAAand Part IVC so far as it relates to those Acts and Schedule. Therefore, any amount that the Employer pays towards the Trustee's income tax liability is not deductible under paragraph 8-1(2)(d).

Question 15

Summary

Yes. A fringe benefit will arise where the Employer meets the operating costs associated with the administration of the Plan.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee (or their associate) by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee.

The Full Federal Court in Indooroopilly[89]held that, for the purposes of determining whether there was a 'fringe benefit', it was necessary to identify, at the time a benefit was provided, a particular employee in respect of whose employment the benefit was provided.

In circumstances where the Employer reimburses the Trustee for operating expenses, the reimbursements are made for the benefit of Employees who are participating in and have Investments in the Trust in that particular year. That is, the exact Employees who will benefit from the payment of the operating fees is known with sufficient particularity at the time the reimbursement contribution is made.

The net income of the Trust is distributed in accordance with clause NN of the Trust Deed. In accordance with clause NN, Participants shall be presently and absolutely entitled to the 'net income of the Trust Fund' derived during that Accounting Period that is attributable to their particular Allocated Investment Distribution Entitlement. Further, that net income shall be distributed among Participants in accordance with their entitlement thereto.

The definition of 'Net Income of the Trust fund' in the Trust Deed is circular and merely refers to the amount calculated in accordance with clause NN. Draft Taxation Ruling TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions (TR 2012/D1) provides some assistance on the general trust law approach to income and expenses within the Trust Deed. At paragraph 71 of that Ruling, it is stated:

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).

Further, in terms of allocating expenses, at paragraph 73 of TR 2012/D1, it is stated:

Expenses and outgoings must also be allocated against either income or capital. In Carver v. Duncan (Inspector of Taxes) Lord Templeman explained that this allocation is generally as follows:

The general rule is that income must bear all ordinary outgoings of a recurrent nature, such as rates and taxes, and interest on charges and incumbrances. Capital must bear all costs, charges and expenses incurred for the benefit of the whole estate.

Finally, how a trustee accounts for profit and expenses will differ, having regard to the purpose of the Trust. This is discussed further in paragraphs 76 and 77 of TR 2012/D1:

76. As explained by the High Court in Bamford, a trustee is required to apportion what has come into the fund and what has gone out of it, during the relevant period, between those beneficiaries entitled to income and those entitled to capital. Performance of that duty requires the trustee to engage in a process of accounting for the accretions to and depletions of the trust fund over the relevant period as either income or capital.

77. The process of accounting that is to be adopted must be one that is appropriate given the purposes for which the trust was established, having regard to the trust instrument, and the nature of the trustee's activities. What may be an appropriate form of accounting for one trust (for example, a trust for successive interests) may not be appropriate for another (for example, a collective investment vehicle with one class of beneficiaries).

In relation to the present case, the only guiding content we have in the Trust Deed is clause NN. In accordance with clause NN, and considering the overarching purpose of the arrangement, it is clear that the intent is to deliver an Investment to the Participant and enable that Participant to enjoy gains from that Investment. The net income of the Trust Fund that they become presently and absolutely entitled to is that part that is 'attributable to their particular Allocated Investment Distribution Entitlement' (clause NN). The Allocated Investment Distribution Entitlement is not defined but Investment Distribution Entitlement is defined in the Trust Deed, as follows:

.... means in relation to an Allocated Investment in respect of an Accounting Period a sum equal to any dividends or other income received by the Trustee during that Accounting Period on Allocated Investments referable to that Allocated Investment.

The broad intention of the Trust Deed is to ensure that an Employee benefits from net income that is referable to Allocated Investments. Correspondingly, we also take the view that as it is a reference to net income, that share of the expenses that is also attributable to those Allocated Investments will also be calculated into that expense. Therefore, for example, in the case of a brokerage fee in respect of a particular tranche of shares, that fee will be attributable to a particular gain made by a particular Employee, in the calculation of the net income of the Trust.

Therefore, when the Employer makes a contribution to the Trust that is intended to reimburse the Trustee for the Trustee's expenses, the amount that is contributed is directly attributable to an Employee's Investment in the Trust. In turn, the Employee will directly benefit from the contribution via an increased accretion to the net income calculation for the purposes of clause NN of the Trust Deed. As a benefit intended to be delivered at the outset of the arrangement by the Employer to the Trustee, for the benefit of Employees, there is no question that the benefit enjoyed by the Employees is in respect of employment. It is an undertaking by the Employer to deliver a tangible and quantifiable cash benefit to the Trustee to be passed on to the Employees.

As such, to the extent that the reimbursements are made in relation to expenses incurred by the Trustee in respect of investment costs incurred in relation to Investments held by Employees, there will be a 'fringe benefit' provided as defined in subsection 136(1) of the FBTAA.

Question 16

Summary

No. The payment of the Administration Fees by the Employer to the Administrator under the PAA will not be deductible under section 8-1.

Detailed reasoning

As outlined above, section 8-1 provides:

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

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

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

(4)  ...

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

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

(7)  ...

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

The PAA defines 'Administration Fees' to mean 'the fees payable to the Administrator by the Employer in accordance with clause XX and Schedule X to this agreement'. The Administration Fees do not cover the Costs outlined in the PAA.

The costs outlined in Schedule X of the PAA include various fees associated with the Plan which include:

• Entry Fees on Contributions: being an amount calculated by a percentage of the aggregate contribution amount payable upon contributing to the Plan.
• Plan Management Fees: being an amount calculated by a percentage of the aggregate fund value which is payable annually on 30 June of each year.
• Plan Member Fee: an amount charged per Member (Participant) which is payable annually on 30 June of each year.
• Miscellaneous Fees which includes brokerage and transfer costs.

Paragraph 8-1(1)(a) and Paragraph 8-1(1)(b) - the first and second limbs of section 8-1

As with the Employer's contributions to the Trust, its payment of the Administration Fees will not be incidental or relevant to its business. And, nor will the Employer's payment of the Administration Fees be 'productive of actual or expected income' for the Employer. While, as in Day[90], a 'direct connection between the expenditure in question and an activity productive of income'[91] is not required; 'the occasion of the outgoing must be found in what is productive of the assessable income; there must be a sufficient nexus between the outgoing and "the activities which more directly gain or produce the assessable income".[92] Any connection between the occasion of the expenditure and the earning of assessable income through the work of the Employer's Employees and Contractors will be insufficient and too indirect to be deductible under paragraph 8-1(1)(a).

Looking at the Employer's activities,[93] the business it conducts and the need to attract, retain and motivate staff, there is an argument that the Administration Fees are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. If it is accepted that the Administration Fees are reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the Employer's business and those who are running its business, saw it as such, then the second limb of section 8-1 could be satisfied.

However, we consider that the operation of the Trust and the Employer's Administration Fees paid to the Trustee are not reasonably capable of being seen as contributing to staff attraction, motivation or retention for the following reasons.

Where Administration Fees are incurred for the benefit of beneficiaries (or their associates) of the Employer trust, or the shareholders, directors or associates of the corporate trustee of the Employer trust, there is no immediately apparent benefit that accrues to the Employer's business in this situation as the Participants who are benefiting from the Trust already have an ownership stake in the business, via a shareholding, or an interest in the profitability of the business, in their capacity as a beneficiary. In both instances, there is a pre-existing motivation to make the business profitable. There is no readily apparent reason to explain how a contribution to the Trust which entails the application of business profit, through a trust structure, to investments outside of the business, is going to improve or contribute to the business ends of the business being run.

Where Administration Fees are incurred for the benefit of Employees who are engaged in the business of the Employer (and have no ownership or pre-existing rights to income as a beneficiary or shareholder), it is similarly difficult to understand how the Trust will assist in attracting, retaining and motivating these Employees. The following features of the arrangement are relevant:

• The benefits from the Trust are not subject to vesting or performance conditions. An Employee can perform poorly and even be dismissed for cause and still enjoy the gain from investment in the Trust. Similarly, a Contractor can also perform poorly and the services no longer engaged and still enjoy the gain from the investment in the Trust.
• An Employee does not have to continue to be employed to enjoy the benefits from the Trust, that is they do not depend on continued employment.
• The contribution is primarily applied by the Trustee in making an interest free loan to the Employee. The subsequent investment by the Employee is a private investment and gains from that investment arise from the performance of that investment, not the performance of the Employee, as an employee.
• The right the Employee or Contractor obtains from the arrangement in relation to the payment of the loan principal back to the Employee or Contractor is a discretionary right, at best. There is no certainty that the Employee or Contractor will derive any further benefits from the Trust and there are no reasonable performance parameters or requirements that have been established that would have a positive impact on the Employee's or Contractor's performance.
• The Employer has not identified any particular concerns with Employee (or Contractor) attraction, retention or performance that would deem an incentive arrangement of this type necessary. The Employer has not demonstrated how this arrangement addresses any concerns that it has as to staff attraction, retention or motivation.
• Participation in or benefits from the Trust are not integrated into employment or service contracts and therefore there is no contractual obligation on the Employer's behalf to offer the arrangement or participation in the arrangement to any of its Employees or Contractors.
• Because the benefits from the Trust are derived primarily from the performance of independent investments of the Trustee, an Employee or Contractor is not granted an interest in the Employer entity and this arrangement is not analogous to nor will it deliver the same benefits that an employee share scheme[94] can so deliver.
• All of the rights and entitlements of the Employees or Contractors who participate in the arrangement are subject to an overriding discretion by the trustee of the Trust, including whether the loan application is approved or not approved. If it is approved then the only apparent guaranteed benefit to an Employee or Contractor is the receipt of an interest free loan on uncommercial terms. It is difficult to establish how an interest free loan (that is subject to repayment) can contribute positively to Employee or Contractor attraction, retention and motivation.
• At the time the amount of the contribution is made, it is made for participants as a general class. There is no amount contemplated or specifically calculated for individual Contractors or Employees. Further, the Employer has not identified the likely size and scale of the contributions. Whether the amount that is contributed is appropriate to meet the Employer's business ends cannot therefore be assessed.

As with the Employer's contributions to the Trust, its payment of the Trustee's Administration Fees is not incidental or relevant to its business. And, nor will the Employer's payment of the Trustee's Administration Fees be 'productive of actual or expected income' for the Employer. While, as in Day, a 'direct connection between the expenditure in question and an activity productive of income'[95] is not required; 'the occasion of the outgoing must be found in what is productive of the assessable income; there must be a sufficient nexus between the outgoing and "the activities which more directly gain or produce the assessable income".[96] Any connection between the occasion of the expenditure and the earning of assessable income through the work of the Employer's Employees and Contractors will be insufficient and too indirect to be deductible under paragraph 8-1(1)(a).

Therefore, we consider the Employer's payment of the Trustee's Administration Fees will not be necessarily incurred in carrying on a business for the purpose of gaining or producing the Employer's assessable income.

Paragraph 8-1(2)(a) - the first negative limb

Notwithstanding that neither of the first or second positive limbs have been satisfied, as also outlined in answer to Question 1, the Trustee's expenses will be outgoings of a capital nature, and therefore will not be deductible under paragraph 8-1(2)(a).

Paragraph 8-1(2)(d) - the fourth negative limb

Furthermore, in relation to amounts paid towards the Trustee's income tax liability, the expense of 'tax', is specifically not deductible as a cost of managing affairs deduction under subsection 25-5(1) by paragraph 25-5(2)(a). Section 6 of the ITAA 1936 defines tax to mean "income tax imposed as such by any Act, as assessed under this Act, but does not include mining withholding tax or withholding tax." Similarly, 'income tax' is defined in section 6 of the ITAA 1936 to mean "income tax imposed as such by any Act, as assessed under this Act" which include the ITAA 1936, ITAA 1997, Schedule 1 to the TAA and Part IVC so far as it relates to those Acts and Schedule. Therefore, any amount that you pay towards the Trustee's income tax liability is not deductible under paragraph 8-1(2)(d).

Question 17

Summary

Yes.

Detailed reasoning

We consider the analysis above at Question 15 is equally applicable here.

Question 18

Summary

Yes.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee (or their associate) by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee.

We consider that the provision of the discounted rights to the shares pursuant to clause KK of the Trust Deed, is a property fringe benefit for the purposes of section 40 of the FBTAA.

Section 40 of the FBTAA provides that a property fringe benefit arises in the following circumstances:

Where, at a particular time, a person (in this section referred to as the provider) provides property to another person (in this section referred to as the recipient), the provision of the property shall be taken to constitute a benefit provided by the provider to the recipient at that time.

The value of a property fringe benefit depends for the purposes of the FBTAA on whether it is an in-house property fringe benefit or an external property fringe benefit. Broadly, an in-house property fringe benefit is defined in subsection 136(1) of the FBTAA as a property fringe benefit, where the provider carries on a business which includes the provision of identical or similar property. An external property fringe benefit is defined in subsection 136(1) of the FBTAA as being a property fringe benefit other than an in-house property fringe benefit.

Under the Plan, the Trustee (as provider) will provide property, being the discounted rights to the shares, to the Employee (as recipient). Under section 40 of the FBTAA, this is taken to constitute a property fringe benefit to the Employee.

The benefit is provided to the Eligible Employees 'in respect of their employment', for the following reasons:

• participation in the Plan can only happen if the person is an Employee of the Employer
• the Trustee is only able to offer discounted rights to shares under clause KK of the Trust Deed where the Employer has instructed them to do so, and
• the Employer knows that the Trustee will be transferring the Investment to the Employee.

As such, we consider that there is a necessary connection between the employment of the Employee and the provision of the discounted rights to shares.

We therefore consider that the Trustee, being the Employer's associate, will provide an external property fringe benefit to the Employee at the time that the discounted rights to the shares are transferred.

As the Employee does not make a payment to receive the discounted rights to shares, the taxable value of the property fringe benefit will not be reduced.

Accordingly, the Employer will be liable to pay an amount of fringe benefits tax for the discounted rights to shares provided by the Trustee to the Employee.

Question 19

Summary

Yes.

Detailed Reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee (or their associate) by an employer, associate, arranger or person as defined in paragraph (ea), in respect of the employment of the employee.

The Trustee provides a loan to the Employee to enable the Employee to acquire an interest in the Trust. Alongside that loan is a limited recourse right that protects the Employee from loss, should the value of the interest in the Trust fall below the loan balance when the loan is discharged. This protection is often referred to as downside risk protection (DRP). In this case, the DRP operates to enable the Employee to surrender their interest in the Trust in full satisfaction of the amounts owed to the Trustee.

Thus, under agreement with the Trustee, the Employee is considered to obtain at least two advantages or benefits - one being the use of the loan funds to acquire the interest in the Trust and the other being the right to the DRP.

There is no dispute that the right to the DRP is provided to the Employee as part of the Trust arrangement facilitated by the Employer. Like the benefit inherent in the loan itself, the right to the DRP is provided to the Employee 'in respect of employment' of the Employee.

The right to the DRP may give rise to a property benefit or a residual benefit provided that it is not also a benefit pursuant to Division 4 of Part III of the FBTAA.

A benefit that is a 'loan benefit' cannot be either a property or residual benefit by virtue of exclusions contained within the definition of 'property benefit' and section 45 of the FBTAA.

In Westpac Banking Corporation v. Federal Commissioner of Taxation[97], the Court examined loans provided by the bank to its employees. The loans were at a concessional interest rate and the usual loan establishment fees charged to the public were generally waived.

The Court found that the benefits relating to the loan establishment service were not within the subject matter of Division 4 of Part III of the FBTAA and more generally, that Division 4 of Part III of the FBTAA was not an exclusive code for all benefits that in any way relate to loans.

ATO ID 2003/315[98] considered the FBT implications of DRPs embedded in commercial loan agreements and observed that:

Whilst all benefits that relate to a loan may not necessarily fall within Division 4, where a loan is provided on a commercial basis, the DRP benefits that specifically arise under the terms of the loan are considered to be within the subject matter of Division 4.

As such the DRP benefits that arise under terms of a limited recourse loan cannot also give rise to either property benefits or residual benefits.

In the present case, the DRP is not embedded in a commercial loan agreement, rather it forms part of a Trust Deed and constitutes at least part of the bundle of rights a beneficiary obtains in the Trust. Whilst there is an agreement to loan funds to the Employee by the Trustee, the loan exhibits some uncommercial features and reflects the non-arm's length basis upon which the terms of the agreements are set. We consider the DRP to be a separate and distinct benefit derived from the arrangement with the Trustee because:

• the loan is not affected by way of cash advance to the Employee and can only be applied in acquiring an interest in the Trust
• the interest acquired in the Trust with the loan funds cannot be transferred by the Employee
• no security is required to be offered on the loan
• the loan terms are contained in the Trust Deed and the Employee agrees to be bound by those terms. No separate loan agreement is entered into with the Trustee
• no credit checks or lending criteria must be met before the loan is approved
• the loan is not interest bearing and repayments are not required
• repayment of the loan is only required when the interest in the Trust is cancelled
• if the interest in the Trust is cancelled at a time when the loan amounts owed exceed the value of the interest in the Trust, the interest in the Trust can be surrendered to the Trustee in full satisfaction of the loan
• the amounts owed by the Employee to the Trustee will be set off against any Cancellation Entitlement payable to the Employee, and
• once the loan is repaid, the Trustee has the power to refund to the Employee the amount of the loan principal.

As such, we would consider that the loan or finance entered into by the Trustee and the Employee is not provided to the Employee on a commercial basis. This fact, together with the overall structure of the arrangement and the embedding of the bundle of rights an Employee obtains from the arrangement within the Trust Deed itself (and not isolated to an independent and commercial loan agreement), is evidence that the right to the DRP is a separate benefit provided under the terms of the Trust Deed and Trust arrangement more broadly and is either a property or residual benefit for the purposes of the FBTAA.

Question 20

Summary

No.

Detailed Reasoning

Provided that the Plan as implemented is materially identical to the scheme described in this ruling it is considered that section 67 of the FBTAA would not apply in respect of the Plan.

Question 21

Summary

No.

Detailed Reasoning

Provided that the Plan as implemented is materially identical to the scheme described in this ruling it is considered that Part IVA of the ITAA 1936 would not apply to cancel a tax benefit (if any) obtained by the Employer.

[1] All legislative references are to the ITAA 1997 unless otherwise stated.

[2] Commissioner of Taxation v Payne [2001] HCA 3; 202 CLR 93 at [9] per Gleeson CJ, Kirby and Hayne JJ. Applied in Watson as Trustee for the Murrindini Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 at [32] per Kenny, Davies and Thawley JJ.

[3] (2001) 202 CLR 93 at 99 [9]; Federal Commissioner of Taxation v Day (2008) 236 CLR 163 at 179 [31] per Gummow, Hayne, Heydon and Keifel JJ.

[4] [2013] AATA 281 at [94] to [95].

[5] [2020] FCAFC 92 at [33].

[6] Watson as Trustee for the Murrindini Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 at [34].

[7] Defined in subsection 995-1(1) as: 'carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise'.

[8] 'Business' is widely defined in subsection 995-1(1) as 'business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee'; Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1.

[9] Essenbourne Pty Ltd v Commissioner of Taxation [2002] FCA 1577 at [24], Kiefel J relying on Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1, 17; and Hart v Federal Commissioner of Taxation [2002] FCAFC 222.

[10] Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542 at 4560-4561; (1980) 49 FLR 183 at 208.

[11] Essenbourne Pty Ltd v Commissioner of Taxation [2002] FCA 1577 at [25].

[12] Essenbourne Pty Ltd v Commissioner of Taxation [2002] FCA 1577 at [29].

[13] Watson as Trustee for the Murrindini Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 at [36].

[14] As defined in section 83A-10.

[15] In Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 at 468 [24], the High Court said: 'it only becomes necessary to consider the exceptions [i.e. negative limbs] if it has already been concluded, or accepted by hypothesis, that one or other of the positive limbs applies.'

[16] (2015) 255 CLR 439; [2015] HCA 25.

[17] (2019) 373 ALR 414; [2019] HCA 36.

[18] [2020] FCA 409 per Thawley J.

[19] [2020] FCA 544 per Jagot J.

[20] [2020] FCAFC 173 per Jagot, Moshinsky and Colvin JJ.

[21] Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36, [18].

[22] Origin Energy Ltd v Federal Commissioner of Taxation [2020] FCA 409 at [86] citing Sharpcan, [18].

[23] Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36, [18].

[24] Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36, [33].

[25] Mussalli v Commissioner of Taxation [2020] FCA 544 at [42] per Jagot J.

[26] Federal Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36 at [18].

[27] [2002] FCA 1577.

[28] (1926) AC 205.

[29] TR 2018/7 Income tax: employee remuneration trusts at [17].

[30] TR 2018/7 Income tax: employee remuneration trusts at [17].

[31] TR 2018/7 Income tax: employee remuneration trusts at [4].

[32] Mutual Acceptance Co Ltd v. Federal Commissioner of Taxation (1944) 69 CLR 389.

[33] Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36 at [33].

[34] Healius Ltd v Commissioner of Taxation [2019] FCA 2011 at [57], quoting Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36 at [33].

[35] [1973] 1 All ER 8.

[36] Jeffs (Inspector of Taxes) v Ringtons Ltd [1986] 1 ALL ER 144.

[37] E Bott Ltd v Price (Inspector of Taxes) [1987] STC 100.

[38] [2003] FCA 1428.

[39] Per Hill J. in Walstern at [70] to [80] (inclusive).

[40] TR 2018/7 Income tax: employee remuneration trusts at [17].

[41] Mutual Acceptance Company Ltd v FC of T (1944) 69 CLR 389 at [396].

[42] Paragraph 6, TR 97/7.

[43] [2003] FCA 1428.

[44] Per Hill J. in Walstern at [81].

[45] Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36 at [46].

[46] 'Taxable purpose' is defined in subsection 40-25(7) of the ITAA 1997 and includes 'the purpose of producing assessable income.'

[47] First Provincial Building Society v Federal Commissioner of Taxation (1995) 128 ALR 118; 95 ATC 4145; Commissioner of Taxation v Eichmann [2019] FCA 2155; BOS International (Australia) Ltd v Babcock & Brown International Pty Ltd [2011] NSWSC 1382 at [21] - [23].

[48] PMT Partners Pty Ltd v Australian National Parks & Wildlife Service [1995] HCA 36; (1995) 184 CLR 301 at 313.

[49] [2011] NSWSC 1382.

[50] [2011] NSWSC 1382 at [23].

[51] TR 2011/6 at [76].

[52] TR 2011/6 at [253].

[53] See for example Browning v. Crumlin Valley Collieries Ltd (1926) 1 KB 522 per Greer J at 528; O'Grady v. M. Saper Ltd (1940) 2 KB 469 per MacKinnon LJ at 473; Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435; [1946] HCA 25 per Latham CJ.

[54] See for example Purcell v. Tullett Prebon (Aust) Pty Ltd [2010] NSWCA 150; R v. Darling Island Stevedoring and Ligheridge Co Ltd; Ex Parte Halliday & Sullivan (1938)60 CLR 601; [1938] HCA 44.

[55] See for example, Harmer v. Cornelius, 5 CBNS 236 per Willes, J at 246; Lister v. Romford Ice and Cold Storage Co Ltd [1957] 1 All ER 125.

[56] See for example, Harmer v. Cornelius, 5 CBNS 236 per Willes, J at 246; Lister v. Romford Ice and Cold Storage Co Ltd [1957] 1 All ER 125.

[57] However, it does not apply to capital expenditure incurred in relation to goodwill: See subsection 110-25(5A).

[58] [2019] HCA 36 at [4].

[59] [2019] HCA 36 at [48].

[60] [2006] AATA 666 at [10].

[61] (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22.

[62] [2001] HCA 3.

[63] [1949] HCA 15.

[64] [2008] HCA 53.

[65] 91 ATC 4950; (1991) 22 ATR 613.

[66] 96 ATC 4536; (1996) 33 ATR 52.

[67] 99 ATC 4242; (1999) 41 ATR 139.

[68] Refer to paragraph 6 of Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities.

[69] See Hill J in Kidston Goldmines Ltd v Federal Commissioner of Taxation 91 ATC 4538; (1991) 22 ATR 168; and FC of T v JD Roberts 92 ATC 4380; (1992) 23 ATR 494, and paragraph 16 of TR 2004/4.

[70] (2000) 96 FCR 402.

[71] 88 ATC 4222.

[72] [1952] HCA 65.

[73] [1987] HCA 48, at pages 4236-4237.

[74] ATO ID 2003/316 Can a fringe benefit as defined in subsection 136(1) of the FBTAA arise upon the discharge of a limited recourse loan provided to an employee?

[75] (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22.

[76] (1988) 89 ATC 4051; (1988) 19 ATR 1901.

[77] [2008] HCA 53.

[78] Day, at [21].

[79] Watson as Trustee for the Murrindini Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 at [33].

[80] Defined in subsection 995-1(1) as: 'carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise'.

[81] 'Business' is widely defined in subsection 995-1(1) as 'business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee'; Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1.

[82] Essenbourne Pty Ltd v Commissioner of Taxation [2002] FCA 1577 at [24], Kiefel J relying on Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1, 17; and Hart v Federal Commissioner of Taxation [2002] FCAFC 222.

[83] Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542 at 4560-4561; (1980) 49 FLR 183 at 208.

[84] Paragraph A of the Trust Deed's recitals.

[85] Essenbourne Pty Ltd v Commissioner of Taxation [2002] FCA 1577 at [25].

[86] Essenbourne Pty Ltd v Commissioner of Taxation [2002] FCA 1577 at [29].

[87] Watson as Trustee for the Murrindini Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 at [36].

[88] As defined in section 83A-10.

[89] [2007] FCFCA 16; (2007) 239 ALR 85; (2007) 158 FCR 325.

[90] [2008] HCA 53.

[91] Day, [21].

[92] Watson as Trustee for the Murrindini Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 at [33].

[93] Watson as Trustee for the Murrindini Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 at [36].

[94] As defined in section 83A-10.

[95] Day at [21].

[96] Watson as Trustee for the Murrindini Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 at [33].

[97] (1996) 70 FCR 52; (1996) 34 ATR 143; 96 ATC 5021.

[98] ATO ID 2003/315 Fringe benefits tax: Loan fringe benefits: loans with limited recourse loan facility.