Edited version of private advice

Authorisation Number: 1052134544344

Date of advice: 17 January 2024

Ruling

Subject: Employee share scheme

Question 1

Is Company A as head company of the Company income tax consolidated Group (Company TCG), entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by Company A and members of the Company TCG to the Trustee of the Company A Employee Share Plan Trust (Trustee) to fund the subscription for, or on-market (or off-market) acquisition of ordinary shares in Company A (Shares) by the Trustee under the Company Plan A, Company Plan B and Company Plan C (collectively, the Plans) in respect of Participants that are employed by members of the Company TCG?

Answer

Yes.

Question 2

Will Company A's irretrievable cash contributions to the Trustee, to fund the subscription for, or on-market (or off-market) acquisition of, Shares by the Trust under the Plans in respect of employees of the Company TCG, be deductible to Company A under section 8-1 of the ITAA 1997:

(a)  at the time determined by section 83A-210 of that Act, if those contributions are made before the acquisition of the relevant ESS interests by Participants under the Plans?

(b)  in the income year when the contributions are made, if those contributions were made after the acquisition of the relevant ESS interests by the Participants under the Plans?

Answer

Yes.

Question 3

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company for the irretrievable cash contributions made to the Trust to fund the subscription for, or on-market (or off-market) acquisition of, Shares by the Trustee, under the Plans?

Answer

No.

Question 4

Will the provision of Options, Rights and Restricted Shares to employees of Company A, Company B and Company C under the Plans constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 5

Will the irretrievable cash contributions made by Company A, Company B, and Company C to the Trustee of the Trust, to fund the subscription for, or on-market (or off-market) acquisition of, Shares under the Plans constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

This ruling applies for the following periods for questions 1 to 3:

Income years ended 30 September 20XX to 30 September 20XX

This ruling applies for the following periods for questions 4 to 5:

Fringe benefits tax year ended 31 March 20XX to 31 March 20XX

The scheme commenced on:

1 October 20XX

Relevant facts and circumstances

Background

Company A is an Australian public company and is the head company of an income tax consolidated group (Company TCG).

Company B and Company C are wholly-owned Australian tax resident subsidiaries of Company A and are members of the Company TCG.

The Plans

Whilst the Plans are not restricted to Australian tax-resident employees, the scope of this ruling is limited to Awards granted under the Plans to Australian tax-resident employees of members of the Company TCG who engage in activities that derive income assessable in Australia.

Plan A

Plan A allows Company A to grant Options, Rights or Restricted Shares to Employees, that is any employee or director of the Company or a Group Company, or any other person so designated by the Board.

Offer

At the time of the invitation or grant, the Board will provide each Employee with a Grant Letter which amongst other things, includes:

• whether the Award is a Right, Option or Restricted Share (Equity Award)
• the number or value of Awards to be granted, or how that number or value will be determined
• the date the Awards will be granted or how that date will be determined
• terms of any Disposal Restrictions that apply to Shares or Restricted Shares
• the method and form of applying for, accepting, or rejecting the invitation
• any amount payable upon the grant of Awards
• whether the Awards will be subject to Conditions and the applicable Period
• whether Vested Awards must be Exercised to receive Shares, the period during which the Awards may be Exercised, the manner of Exercise of those Awards and any applicable Exercise Price (which may be nil)
• whether a Dividend Equivalent will apply to the Award, including whether it will apply before or after Vesting, or both
• the time and circumstances when Awards Lapse, and
• any other term applying to Awards.

An invitation that requires an eligible Employee to apply for a grant of Awards can, at the discretion of the Board, have their application rejected. An invitation that stipulates if an eligible Employee will automatically be deemed to have accepted the Award, need only return an "opt out" form to the Board, if they do not wish to participate.

To the extent of any inconsistency, the terms and conditions set out in the Grant Letter will prevail over any other provision under the Plan A Rules.

Awards

Following the acceptance (or deemed acceptance) of an invitation, the Board will issue the relevant number of Awards to the Participant on the date set out in the Grant Letter.

No payment is required for a grant of an Award unless otherwise stated in the Grant Letter.

Unless the Board determines otherwise, or as provided in the Plan A Rules:

• a grant of Awards will not be made in part
• a grant of Awards is personal to the Participant and cannot be transferred to other persons or entities, and
• Awards may only be registered in the name of the Participant.

Awards that are subject to performance or service-related conditions will not vest and become a Vested Award unless those Conditions have been satisfied during the applicable Period. The Board must notify Participants to the extent that any applicable Conditions have been satisfied and, the date that Awards Vest or will Vest.

The Board has the discretion to adjust any performance-related Conditions, or determine that an Award Vests prior to the end of a Period (being the period or periods over which the Conditions are measured or tested as specified by the Board for the purposes of the Award).

Rights or Options

A Participant allocated an unvested Right or Option shall not be entitled to vote, receive dividends or distributions, or have any other rights of a Shareholder in respect of the Rights or Options until the underlying Shares are allocated to the Participant following Vesting and, if applicable, Exercise of the Right or Option.

Subject to the Plan A Rules, a Right or Option will Vest at a time at which a Participant:

• with respect to a Right or Option to receive a Share that does not require Exercise - has the Shares underlying their Rights or Options allocated to them, or
• with respect to a Right or Option to receive a Share that does require Exercise - becomes entitled to Exercise the Right or Option (as specified in the Grant Letter) and upon Exercise has the Shares underlying their Rights or Options allocated to them.

A Share allocated on the Vesting or Exercising of a Right or Option, may be subject to Disposal Restrictions.

Each Vested and, if applicable, Exercised Equity Award entitles the Participant to receive the relevant number of Shares in Company A, as set out in the Grant Letter.

Upon Vesting and, if applicable, the Exercise of Equity Awards, Company A must, for Rights or Options, allocate or procure the transfer of the relevant number of underlying Shares to, or for the benefit of, the relevant Participant.

The Board, at its discretion, may determine to settle Rights or Options upon Vesting and valid Exercise (where provided to Participants in the Grant Letter) to be settled in cash, equal to the gross value of the Shares that would have been allocated or transferred to the Participant, less applicable Taxes and other withholdings, and any Exercise Price that would have been payable by the Participant (Cash Equivalent Value).

The Board retains discretion as to how the gross value of the Shares is calculated for the purpose of determining the value of any Cash Equivalent payment.

Restricted Shares

A Participant allocated a Restricted Share, being a Share subject to Disposal Restrictions, is entitled to vote, receive dividends or distributions, and have any other rights of an ordinary Shareholder in respect of the Restricted Shares.

Upon Vesting and, if applicable, the Exercise of Equity Awards, Company A must lift the Disposal Restrictions for each Vested Restricted Share (where Disposal Restrictions does not apply following Vesting) to, or for the benefit of, the relevant Participant. A Participant is deemed to have acquired, and is entitled to the underlying Share at a time when a Restricted Share Vests and all Disposal Restrictions are lifted.

Restricted Shares may be granted as a separate Award only and are not able to be provided through settlement of a Vested Right or an Exercised Option.

Restriction of disposal of Shares

Restricted Shares and Shares allocated (following Vesting or Exercise of Rights or Options, as applicable) to Participants may be subject to Disposal Restrictions.

Disposal Restrictions are imposed to prevent the sale, transfer, assigning, encumbrance, hedge, swap or otherwise dispose of all, or part of the rights or obligations attached to an Award or Share, or to attempt to do any of these things.

The Board, at its discretion, may determine (including specifying in the Grant Letter) that Disposal Restrictions will apply to a Share allocated to a Participant until a time it so determines, including a Disposal Restriction applied to Shares allocated after a Participants Vested (and Exercised) Rights or Options, and a post Vesting Disposal Restriction for a Restricted Share.

Lapse or forfeiture of Awards

Subject to the Board's absolute discretion, an unvested Award will lapse in whole or in part when:

• any Conditions imposed under the Plan A Rules or a Grant Letter have not been satisfied
• a Participant resigns or is terminated for cause (including gross misconduct)
• the Board determines that the Award should lapse, or
• the date specified in the Grant Letter is reached, or if no date is specified, 15 years after the Award was granted to the Participant.

A Vested Award will lapse when:

• any Conditions imposed under Plan A or a Grant Letter have not been satisfied
• a Participant is terminated for cause (including gross misconduct) and has a Vested Award that is required to be Exercised but is not at the time of their termination, or
• the Board determines that the Award should lapse.

Plan B

Plan B allows Company A's Board to offer equity-based incentives and encourage long term employment to eligible Employees, that is any person who is in the full-time or part-time employment of Company A or its subsidiaries.

The Board will administer Plan B and determine the Employees who are eligible to participate for the purposes of the Plan B (Participants) based on the recommendation of the Company's Human Resources Committee.

Offer

Company A may make an Offer to an eligible Employee to participate in the Plan B. Participants will be granted a Right to acquire a fully paid Share which may, subject to the terms of the Offer and Plan B Rules or, at the discretion of the Board, be settled with a cash equivalent payment determined by the Board in lieu of Shares.

An Offer to an Employee to apply for Rights may be made on such terms and conditions determined by the Board, including as to:

•         the number of Rights for which that Employee may apply

•         the amount payable (if any) for the acquisition of a Right or how it is calculated

•         the Time Period

•         the Vesting Date

•         any Vesting Condition

•         any Disposal Restrictions, and

•         the method of acceptance of the Offer, and

•         any other terms and conditions determined by the Board.

By accepting an Offer, the Participant is bound by the terms of the Offer and Application Form (Application), the provisions of the Plan B Rules and the constitution of Company A.

Unless otherwise determined by the Board or set out in the Offer, no consideration will be payable by an eligible Employee for the grant or conversion of a Right.

A Participant will be deemed to have accepted the Offer unless they elect not to participate in the Offer in the manner and within the time-frame set out in the Offer.

An offer under the Plan is personal to the Employee to whom it is made and Rights and Shares acquired under Plan B may be registered only in the name of the Employee to whom the Offer is made.

Applications will not be accepted if, at the date the Application would otherwise be accepted:

•         the applicant is not an Employee

• the applicant has given the Company notice of their resignation as an Employee, or
• the applicant has been given a notice of termination of employment as an Employee or if, in the opinion of the Board, they have tendered their resignation to avoid such dismissal.

The Board may determine at its discretion that an Application by an Employee who would otherwise be eligible to participate under the Plan B Rules will not be accepted.

Rights

Rights will vest on the Vesting Date applicable to those Rights where the Vesting Conditions as specified in the Offer (or otherwise determined by the Board at its discretion) are satisfied or waived.

The Board has the discretion to amend, reduce or waive Vesting Conditions attached to Rights in whole or in part, and specify different a Vesting Date for Rights offered under the Offer.

Each Vested Right gives the relevant Participant the right to receive one Share, subject to the terms of Plan B Rules and the Offer. No Right will give a Participant an interest in a Share subject to that Right until it has vested and the Share issued or transferred to the Participant as a result.

As soon as practicable after a Vesting Date, the Board must procure the transfer of existing Shares to a Participant to satisfy the rights attached to the Rights that are Vested Rights on that Vesting Date.

Unless determined by the Board or set out in an Offer, a Participant is not required to exercise their Vested Rights before receiving Shares to which they are entitled.

If a Participant ceases to be employed by Company A during the Vesting Period for reasons other than as a Bad Leaver the Participant will be entitled to retain their Unvested Rights. Any Unvested Rights which continue to be held by a Participant will vest at the Vesting Date.

Transfer provisions of Rights

No Participant may Encumber or Transfer any Right, or any interest in any of them, except with prior written consent of the Board, where:

• 'Encumber' means any mortgage, lien, charge, pledge, assignment by way of Right, Right interest, title retention, preferential right or trust arrangement, Claim, covenant, profit a prendre, easement or any other Right arrangement or any other arrangement having the same effect or any agreement to create any of them.
• 'Transfer' means sell, transfer, assign, swap or otherwise dispose of or deal with any Interest, and includes taking any steps or attempting to dispose of or deal in any Interest.

Restrictions on disposal of Shares

The Board may apply Disposal Restrictions as set out in the Offer to any Shares issued or transferred in relation to Vested Rights.

Lapse or forfeiture of Rights

A Participant who ceases to be employed by Company A during the Vesting Period is deemed to be a Bad Leaver - and unless determined by the Board, any Unvested Rights held by the Participant at the date of cessation of employment will immediately lapse - if they cease employment due to:

• resignation

•         dismissal for cause or poor performance, or

•         any other circumstance determined by the Board

If a Participant ceases to be employed by Company A during the Vesting Period for reasons other than as a Bad Leaver, the Participant will be entitled to retain their Unvested Rights.

Any Unvested Rights which continue to be held by the Participant will vest at the Vesting Date, in accordance with the Plan B Rules.

The Board has the ultimate discretion to treat any Unvested Rights held by a Participant who ceases to be employed by Company A during the Vesting Period in a manner other than as set out above, where the Board determines that the relevant circumstances warrant such treatment.

Plan C

Plan C allow Company A's Board to offer equity-based remuneration with long-term performance focus to eligible Executives. An Executive includes any person who is in the full-time or part-time employment of Company A or its subsidiaries.

The Board may determine the Executives who are eligible to participate in Plan C.

Offer

Company A may make an Offer to an eligible Executive to participate in Plan C. Executives who participate in the Plan C (each being a Participant), will be granted a right to acquire a fully paid Share which may, subject to the terms of the Offer and the Plan C rules or, at the discretion of the Board, be settled via a cash equivalent payment determined by the Board in lieu of Shares (Right).

An Offer to an Executive to apply for Rights may be made on such terms and conditions determined by the Board, including as to:

•         the number of Rights for which that Executive may apply

•         the amount payable (if any) for the acquisition of a Right or how it is calculated

•         the Performance Period

•         the Vesting Date

•         any Vesting Condition

•         any Disposal Restriction

•         the method of acceptance of the Offer, and

•         any other terms and conditions determined by the Board.

By accepting an Offer, the Participant is bound by the terms of the Offer and Application Form, the provisions of the Plan C Rules and the constitution of Company A.

Unless otherwise determined by the Board and set out in the Offer, no consideration will be payable by an Employee for the grant or conversion of a Right.

An Executive will be deemed to have accepted the Offer as specified in the Offer unless the Executive has elected not to participate in the Offer in the manner and within the time-frame set out in the Offer.

An Offer under the Plan C is personal to the Executive to whom it is made and Rights and Shares acquired under the Plan C may be registered only in the name of the Executive to whom the Offer is made.

Rights

Rights will vest on the Vesting Date assigned to those Rights provided that, Vesting Conditions are met or otherwise waived.

Vesting Conditions in relation to a Right, means any condition set out in the Offer that must be satisfied or waived before that Right becomes Vested for the purposes of Plan C.

The Board has the discretion to amend, reduce or waive Vesting Conditions attached to Rights in whole or in part, and specify different Vesting Dates for Rights offered under the Offer.

Each Vested Right gives the relevant Participant the right to receive one Share, subject to the terms of the Rules and the Offer. No Right will give a Participant an interest in a Share subject to that Right until that Right has vested and the Share issued or transferred to the Participant as a result.

As soon as practicable after the delivery by a Participant of a signed Notice of Exercise to the Registered Office of the Company - the Board must procure the transfer of existing Shares to a Participant to satisfy the rights attaching to the Vested Rights.

Unless determined by the Board or set out in an Offer, a Participant is required to Exercise their Vested Rights before receiving Shares to which they are entitled.

Transfer provisions of Rights

No Participant may Encumber or Transfer any Right, or any interest in any of them, except with prior written consent of the Board, where:

•         'Encumber' means any mortgage, lien, charge, pledge, assignment by way of Right, Right interest, title retention, preferential right or trust arrangement, Claim, covenant, profit a prendre, easement or any other Right arrangement or any other arrangement having the same effect or any agreement to create any of them.

•         'Transfer' means sell, transfer, assign, swap or otherwise dispose of or deal with any Interest, and includes taking any steps or attempting to dispose of or deal in any Interest.

Restrictions on disposal of Shares

The Board may apply Disposal Restrictions as set out in the Offer to any Shares issued or transferred in relation to Vested Rights.

Lapse or forfeiture of Rights

If the Vesting Conditions have not been satisfied or waived on or by the Vesting Date, any Unvested Rights will immediately lapse.

If a Participant ceases to be employed by Company A during the Vesting Period due to:

•         resignation

•         dismissal for cause or poor performance, or

•         any other circumstance determined by the Board,

they are deemed to be a Bad Leaver, and unless determined otherwise by the Board, any Unvested Rights held by the Participant at the date of cessation of employment will immediately lapse.

If a Participant ceases to be employed by Company A during the Performance Period for reasons other than as a Bad Leaver:

•         the Participant will be entitled to retain a pro-rata amount of their Unvested Rights, and

•         all other Rights held by that Participant will lapse.

Any Unvested Rights which continue to be held by the Participant will be tested at the end of the Performance Period, in accordance with the Vesting Conditions set out in the Offer.

The Board has the ultimate discretion to treat any Unvested Rights held by a Participant who ceased to be employed by Company A during the Vesting Period other than in the manner set out above, if the Board determines that the relevant circumstances warrant such treatment.

Trust

On [DATE], Company A established the Trust under a deed entered into between Company A and the Trustee.

The Trust Deed was amended on [DATE].

The Trustee is an independent third party.

For the purposes of the Trust Deed, "Share" means a fully paid ordinary share of Company A to which no beneficiary is entitled (i.e. Unallocated Shares).

An "Incentive Share" is a Share held by the Trustee on behalf of a Participant in accordance with the requirements of the Deed and the relevant Plan Rules (i.e. Allocated Share).

A Participant under the Trust Deed means either a current, former or prospective director or employee of the Group, or an associate to the extent their participation is in relation to the aforementioned persons employment.

The Trust Deed states that the objective and activities of the Trust are limited to managing the Plans, operating solely for the purpose of acquiring, holding and transferring Shares or rights to acquire Shares, providing beneficial interests in those Shares (or rights to those Shares) under the Plans to its beneficiaries and conducting other activities that are merely incidental to the aforementioned activities.

The Trustee's powers are subject to the objects of the Trust, and includes the power to:

•         subscribe for, purchase, or otherwise acquire and to sell or otherwise dispose of Shares

•         open bank accounts and retain on current or deposit account at any bank any money which it considers proper

•         buy or sell any Shares or Shares held by the Trustee on behalf of a Participant in (Incentive Shares) and apply the proceeds of the sale in accordance with the Trust Deed (and the Plans Rules), and

•         receive dividends or distributions on Shares and apply those amounts in accordance with the Trust Deed.

The Trustee may open and maintain an account in respect of a Participant which contains a written record of the relevant Incentive Shares held by the Trustee on behalf of a Participant (Account).

Each Account must record the number of Incentive Shares, date of acquisition and the number of bonuses issued to a Participant in respect of its Incentive Shares (Bonus Shares).

Company A and the Trustee agree that the Trust will be managed and administered so that is satisfies the definition of 'employee share trust' for the purposes of section 130-85(4) of the ITAA 1997.

Neither the Trustee nor any entity in the Group may use Shares or Incentive Shares as security.

Nothing in the Trust Deed confers or is intended to confer that Company A has any proprietary right or interest, charge or lien in the Shares acquired by the Trustee under the Trust Deed. Company A and all its subsidiaries are prohibited from benefiting under the Trust Deed and are not eligible to acquire a beneficial interest in the Shares held by the Trust.

Acquisition and transfer of Shares

If directed by the Board, the Trustee must, for the purpose of enabling Company A to satisfy its obligations to allocate Shares under the terms of the Plans, acquire:

•         Shares in the ordinary course of trading on the market

•         Shares by way of an off-market transaction, and/or

•         new Shares issued by Company A.

The acquisition price for each Shares acquired shall be at market value, based on their trading price on the Australian Stock Exchange.

Shares subscribed for or acquired are to be registered in the name of the Trustee on subscription or acquisition and are general Trust property to be held subject to the terms of the Trust Deed.

The Board may also, by notice in writing to the Trustee, instruct the Trustee to subscribe for, acquire and/or allocate a number of Shares specified in the notice, to be held by the Trustee as Incentive Shares in respect of its Participants.

On receipt of a direction by the Board or at the request of a Participant in accordance with the relevant Plan Rules, the Trustee must transfer to the Participant the relevant number of Incentive Shares on the date specified by the requesting party.

Company A will register the Participant as the holder of those Incentive Shares (after transfer) and the Participant will be absolutely legally and beneficially entitled to them.

No Participant has any legal or beneficial interest in a Share merely by virtue of participating in any other Plan. A Participants right under the terms of any Plan are purely contractual and personal.

Funding

Company A must provide the Trustee with any funds required by the Trustee to comply with its obligations to obtain Shares under the Trust Deed.

Employing entities (who are subsidiary members of the TCG) may also make contributions to the Trust in relation to their employees who participate in the Plans.

All funds received by the Trustee from Company A will constitute Accretions to the corpus of the Trust and will not be repaid to Company A and no Participant shall be entitled to receive such funds, unless funds received by the Trustee from Company A are paid to Company A where the Trustee subscribes for Shares in accordance with the Trust Deed, the relevant Plan or terms of participation.

Where an amount paid by Company A to the Trustee is in excess of the amount required, Company A may require the Trustee to:

•         apply such amount to subscribe for, acquire and/or allocate and deliver Shares in accordance with the Trust Deed, the Plan or the relevant terms of participation, and/or

•         deposit the funds into any account opened and operated by the Trustee for the purposes of acquiring, subscribing and allocating Shares accordance with the Trust Deed, the Plan or relevant terms of participation

Company A will pay to the Trustee fees and reimbursement of expenses incurred by the Trustee as Company A and the Trustee agree. The Trustee is entitled to retain for its own benefit any such fee or reimbursement.

The Trustee is not entitled to receive any fees, commission or other remuneration in respect of its office from an Account.

The balance of the Net income of the Trust to which no Participant is presently entitled may be applied, in whole or in part, to meet any reasonable costs and expenses incurred by the Trustee in it exercising its power, authority or discretions afforded to it as Trustee of the Trust (including administration, trust financial and audit expenses).

The Trustee may apply any income received by the Trustee (including, but not limited to dividends and returns of capital) from:

•         any Shares or other Fund assets in which the Trustee has an equitable interest and to which no Participant is presently entitled to, and

•         any Incentive Shares, in the manner directed by the relevant Participant,or otherwise as the Trustee determines is appropriate.

Unallocated Shares

The balance of the Net Income of the Trust for a Year of Income to which no participant is presently entitled to may be accumulated by the Trustee as an Accretion to the Trust.

Before the allocation to a Participant of a Share held by the Trustee, the Trustee:

• must not exercise any voting rights in relation to a Share.
• may apply any capital receipts, dividends or other distributions received in respect of a Share to either:

(i)    pay interest on loans provided to the Trust for the acquisition of Shares or rights in Company A, provided the interest payable does not exceed arm's length commercial rates.

(ii)   pay necessary and incidental costs of administering the Trust and undertaking activities as described in paragraphs 130-85(4)(a), (b) and (c) (including audit, professional service fees or brokerage and tax levied in connection with the Trust).

(iii)  acquire additional Shares for the purposes of the Plans.

• may participate in any corporate action of Company A, including but not limited to a rights issue provided the Trustee determines it is 'merely incidental' to obtaining, holding and providing Shares in Company A to Participants.
• must hold any shares issued as part of a bonus issue of Shares in respect of the Share on trust for the purposes of the Trust Deed.
• must keep an account of all Shares acquired by the Trustee that are held as assets of the Trust.

Rights in respect of Incentive Shares

Subject to the Plan Rules, a Participant is presently entitled to so much of the Net Income of the Trust for a Financial Year which is attributable to:

• Incentive Shares held by the Trustee on behalf of the Participant
• proceeds of sale arising from the sale of Incentive Shares by the Trustee on behalf of the Participant, and
• transactions or events related to the Incentive Shares or property related to or arising from Incentive Shares held by the Trustee on behalf of the Participant.

Subject to the relevant Plan Rules, in relation to Incentive Shares held on behalf of a Participant:

• the Participant is entitled to receive all dividends and other distributions, bonus issues or benefits payable to the Trustee for those Shares
• the Trustee may direct the Group to pay dividends and other distributions or benefits directly to the Participant
• Participants may direct the Trustee in writing how to exercise voting rights
• Bonus Shares that are issued in respect to Incentive Shares will be issued to the Trustee and held for the Participants on the same terms and conditions of the underlying Shares, and
• Trustee may sell on behalf of a Participant its incentive shares and pay the proceeds to that Participant.

If rights arise on a rights issue in respect of Incentive Shares, The Trustee must seek instructions from the Participant as to how they should be dealt. If no instructions are given by the Participant, the Trustee:

• must use reasonable endeavours to sell those rights
• pay the proceeds of sale (net of related applicable costs including stamp duty and taxes)
• has no obligation to maximise the sale price of the rights
• may aggregate the rights to be sold, and
• may attribute a sale price to each right sold to the average price of each right sold by the Trustee.

If the Trustee acquires Shares after taking up rights on behalf of a Participant, they must transfer those shares to the Participant.

Reasons for decision

All legislative references are to provisions of the ITAA 1936 or to provisions of the ITAA 1997, unless otherwise indicated.

Question 1

Summary

Company A, as the head company of the Company TCG, will be entitled to deduct an amount under section 8-1 in respect of irretrievable cash contributions made by it or members of the Company TCG to the Trustee of the Trust to fund the subscription for, or acquisition on-market (or off-market) of Shares by the Trustee under the Plans in respect of Participants that are employed by members of the Company TCG.

Detailed reasoning

Subsection 8-1(1) allows you to deduct from your assessable income any loss or outgoing to the extent that it is either:

•         incurred in gaining or producing your assessable income

•         necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

However, subsection 8-1(2) prevents such a deduction to the extent that the outgoing is:

•         capital or of capital nature

•         of a private or domestic nature

•         incurred in gaining or producing exempt income

•         prevented from being deductible under a specified provision of the ITAA 1997 or the ITAA 1936.

Company A carries on a business. Company A operates an ESS typified by three Plans (The Plans) as part of its strategy to attract, retain and motivate key talent.

Under the Plans, Company A grants Options, Rights or Restricted Shares to eligible Employees and makes irretrievable cash contributions to the Trustee, (in accordance with the Plans and the Trust Deed) which the Trustee will use to acquire Shares for allocation to Participants.

Incurred in gaining or producing assessable income or in carrying on a business

Under the Trust Deed, Company A must provide the Trustee with any funds required by the Trustee in order to comply with its obligations under the Plans.

The cash contributions made by Company A to the Trustee are irretrievable as:

•         all funds received by the Trustee from Company A will constitute Accretions to the corpus of the Trust and will not be refunded, repaid or returned to Company A

•         Company A, or any other member of the Group cannot be a beneficiary of the Trust or hold interest in the Shares held by the Trust

•         where an amount paid by Company A to the Trustee in respect of the acquisition of Shares is in excess of the amount required by the Trustee to subscribe for, acquire, allocate of deliver those Shares, the Trustee may be required to deposit the funds into any account opened and operated by the Trustee in accordance with the Trust Deed.

Under the Plans, Company A has granted, and may grant in the future, ESS interests (that is a beneficial interest in a share, or a beneficial interest in a right to acquire a beneficial interest in a share) as part of its remuneration and reward program for employees. Therefore, subsection 8-1(1) is satisfied.

Not capital or of a capital nature

The costs incurred by Company A for the acquisition of Shares to satisfy its obligations under the Plans in respect of the grants of Options, Rights or Restricted Shares arise as part of these remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. As such, the irretrievable cash contributions are incurred in the process of carrying on a business for gaining or producing Company A's assessable income.

While the irretrievable cash contributions may secure an enduring or lasting benefit for the employer that is independent of the year-to-year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be comparatively small. Therefore, the payments are not capital, or of a capital nature, and paragraph 8-1(2)(a) is not satisfied.

Accordingly, the irretrievable cash contributions made by Company A and members of the Company TCG) to the Trustee of the Trust to fund the acquisition of Shares will be an allowable deduction to Company A under section 8-1 to the extent they relate to employees of members of the Company TCG.

Question 2a

Summary

Irretrievable cash contributions made by Company A (or a member of the Company TCG) to the Trustee, to fund the subscription for, or on-market (or off-market) acquisition of Shares by the Trustee under the Plans in respect of employees of the Company TCG will be deductible to Company A under section 8-1 at a time determined by section 83A-210 if the contributions are made before the acquisition of the relevant ESS interests.

Detailed reasoning

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

Section 83A-210 modifies this rule in certain circumstances in respect of contributions provided by an employer to a trust to purchase shares under an ESS.

The effect of section 83A-210 is to deem the time an employer incurred the outgoing to be the time the ESS interest is acquired by a beneficiary, rather than the time the employer makes the contribution to the trust, if the contribution was made before the ESS interests are acquired. Further information is available in ATO Interpretative Decision ATO ID 2010/103 Income tax - Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

Each Plan is an ESS for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests (that is a beneficial interest in share or a beneficial interest in a right to acquire a beneficial interest in a share) are provided to employees in relation to their employment with Company A.

The ESSs contain a number of interrelated components which include the provision of irretrievable cash contributions by Company A to the Trustee. These irretrievable cash contributions enable the Trustee to acquire Shares for the purpose of enabling each Participant, indirectly through the Plans, to acquire ESS interests.

The deduction for the irretrievable cash contribution made in respect of a Share can only be deducted from the assessable income of Company A in the income year when the relevant beneficial interest in a Share, or beneficial interest in a right to acquire a beneficial interest in a Share, is acquired by a Participant under the Plans.

Shares that are purchased by the Trustee to satisfy its obligations under the Plan, and subsequently allocated to Participants under the Plans are ESS interests for the purpose of section 83A-210.

Indeterminate Rights under the Plans

An Option or a Right provided under the Plans are indeterminate rights for the purposes of section 83A-340. That is because the Rights and Options can be settled by Shares or a Cash Equivalent payment in lieu of Shares, to be determined at a future time, at the discretion of the Board. Therefore, an award of Rights or Options under the Plans are not a right to acquire a beneficial interest in Shares unless, and until the time it is determined by the Board that they will be satisfied by the provision of Shares.

Although an indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate right will, under section 83A-340, be treated as if it had always been an ESS interest.

Section 83A-210 applies equally to contributions made in respect of ESS interests and indeterminate rights. Therefore, an irretrievable cash contribution in respect of an indeterminate right is taken to have been paid at the acquisition time of the ESS interest. If an indeterminate right becomes an ESS interest, deductible contributions made in respect of those rights can be claimed in the income year when the ESS interest is deemed to have been acquired under section 83A-340 (this will be the year in which the indeterminate right was granted to an employee). Once this has been established, such contributions can be matched to ESS interests issued to the employee, and where necessary, the relevant earlier income year assessments can be amended to allow the deduction (Item 28 of subsection 170(10AA)).

It is important to note that an indeterminate right satisfied by the provision of cash never becomes an ESS interest. The contribution to the Trust in respect of that right is permanently deferred. However, where that ESS interest is subsequently issued to another participating employee, that employee becomes the 'ultimate beneficiary'; and the deduction is available in the income year that participating employee acquired that ESS interest.

Once it is determined that Rights or Options will be satisfied by the provision of Shares, section 83A-340 operates to treat these Rights or Options as though they had always been rights to acquire beneficial interest in shares (therefore, an ESS interest) for the purposes of section 83A-210.

If irretrievable cash contributions are provided to the Trustee before these rights are acquired (and they do subsequently become ESS interests by virtue of section 83A-340), section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1 to be the income year in which Participants originally acquired the Rights or Options under the Plans.

For avoidance of doubt, an award of Restricted Shares under the Plan A Rules may only be settled via the issue of Shares and as such are not indeterminate rights. The Commissioner agrees that Restricted Shares constitute ESS interests under section 83A-10(1) at the time they are granted to which Subdivision 83A-C applies. Accordingly, section 83A-210 will apply to irretrievable cash contributions provided to the Trustee, to the extent they relate to Restricted Shares, to modify the timing of the deduction claimed under section 8-1 to the income year in which Participants are granted Restricted Shares under Plan A.

Question 2b

Summary

Irretrievable cash contributions made by Company A (or a member of the Company TCG) to the Trustee, to fund the subscription for, or on-market (or off-market) acquisition of Shares by the Trustee under the Plans, will be deductible to Company A under section 8-1 in the income year when the contributions are made, if the contributions are made after the acquisition of the relevant ESS interests.

Detailed reasoning

Consistent with the analysis in Question 2a (above), where the contributions are made after the acquisition of the relevant ESS interests, irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or on-market (or off-market) acquisition of Shares to satisfy ESS interests issued under the Plans, will be deductible in the income year in which the contributions are made by Company A under section 8-1.

Question 3

Summary

The Commissioner will not seek to make a determination that Part IVA applies to deny, in part or in full, a deduction claimed by Company A in respect of the irretrievable cash contributions made by it to the Trust to fund the subscription for, or acquisition of on-market (or off-market) of Shares by the Trustee, under the Plans.

Detailed reasoning

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

The Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust (EST) where conditions of Division 83A are met.

In the case of awards of Options, Rights and Restricted Shares under the Plans to Participants that are directly employed by members of Company A, the scheme does not contain elements of artificially or unnecessary complexity, and commercial drivers sufficiently explain the entry into the use of the EST arrangement.

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

Question 4

Summary

The provision of Rights, Options or Restricted Shares to employees of Company A (or its subsidiaries) under the Plans will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax.

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

In particular, paragraph (h) of the 'fringe benefit' definition excludes a benefit constituted by the acquisition of an ESS interest under an ESS (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C applies.

As stated above in response to question 2a, the Commissioner accepts that an award of Restricted Shares is an ESS interest under an ESS to which Subdivision 83A-C applies and accordingly, is excluded from the definition of a 'fringe benefit' as defined under subsection 136(1) of the FBTAA.

Indeterminate rights

As discussed above in the response to question 2a, an Option or a Right granted under the Plans that may be satisfied in cash instead of Shares are indeterminate rights.

At the time that Rights or Options are granted under the Plans, it may be unclear if paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA applies because those Rights or Options may be satisfied in cash instead of Shares. Hence, they may not be ESS interests within the meaning of subsection 83A-10(1).

Where the Rights or Options are ultimately satisfied in Shares instead of cash, section 83A-340 will operate to treat those Rights or Options to have always been ESS interests within the meaning of subsection 83A-10(2) because it is a scheme under which ESS interests are provided to employees of Company A in relation to their employment.

Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states:

"This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount."

Under the Plans, Rights or Options are granted for no consideration or payment unless otherwise determined by the Board. Therefore, Subdivision 83A-C applies, where Participants granted Rights or Awards can defer the taxing point.

Accordingly, the provision of Rights or Options under the Plans will not be subject to FBT on the basis that they are acquired by Participants under an ESS (to which Subdivision 83A-B or 83A-C apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of a fringe benefit in subsection 136(1) of the FBTAA.

When Options or Rights granted under the Plans are exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the Option or Right and not in respect of employment (refer to ATO Interpretive Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme).

For completeness, where the Right or Option granted under the Plans is ultimately satisfied with cash instead of Shares, the granting of the Option or Right under the Plans will be viewed as series of steps in the payment of salary and wages, and not a separate benefit to the payment of salary and wages which are excluded from the definition of a fringe benefit by paragraph 136(1)(f) of the FBTAA.

The outcome is consistent with ATO Interpretive Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits.

Question 5

Summary

The irretrievable cash contributions made by Company and by members of the Company TCG to fund the subscription for, or on-market (or off-market) acquisition of Shares under the Plans will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

As stated above in response to Question 4, an employer's liability to FBT arises under section 66 of the FBTAA, which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax.

One benefit excluded from being a fringe benefit, under paragraph (ha) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an EST within the meaning of subsection 130-85(4).

In examining whether the requirements of subsection 130-85(4) are met, it is the activities of the Trustee in relation to a particular trust that are relevant. To qualify as an EST, a Trustee's activities must be limited to:

•         obtaining shares or rights in a company (paragraph 130-85(4)(a))

•         ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the ESS to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph 130-85(4)(b)), and

•         other activities that are merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and (b) (paragraph 130-85(4)(c)).

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

•         the Trust acquires shares in a company, namely Company A

•         as stated above in response to question 2a, the Commissioner accepts that the Plans are each an ESS under which ESS interests are provided to Participants, and

•         the Trust ensures that ESS interests (as defined in subsection 83A-10(1)) are those provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to Participants in accordance with the Trust Deed and the Plans.

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

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'? Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental.

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

Therefore, the irretrievable cash contributions made by Company A to fund the subscription for, or on-market (or off-market) acquisition of Shares under the Plans will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA.