Edited version of private advice

Authorisation Number: 1052160126730

Date of advice: 1 December 2023

Ruling

Subject: Employee share schemes

Question 1

Will Company A Limited (Company A) obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of irretrievable cash contributions made by Company A to Trustee Pty Ltd (the Trustee) to fund the subscription for, or acquisition on-market of fully paid ordinary shares in Company A Limited (Company A Shares), to satisfy Employee Share Scheme (ESS) interests issued in respect of the Company A Limited Plans (the Plans)?

Answer

Yes

Question 2a

Will the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of Company A Shares to satisfy ESS interests issued pursuant to the Plans, be deductible under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests by participants under the Plans?

Answer

Yes

Question 2b

Will the irretrievable contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of Company A Shares to satisfy ESS interests issued pursuant to the Plans, be deductible under section 8-1 of the ITAA 1997 in the income year when the contributions are made, where the contributions are made in the same income year or in a year that is after the acquisition of the relevant ESS interests by 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 A for the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of Company A Shares pursuant to the Plans?

Answer

No

Question 4

Will the provision of ESS interests by Company A to its employees 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 to the Trustee, to fund the subscription for, or acquisition on-market of Company A Shares, constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No

The rulings for questions 1-3 inclusive each apply for the following periods

Income tax year ended 30 June 20XX

The rulings for questions 4-5 inclusive each apply for the following periods

Fringe benefits tax year ended 31 March 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below including the following documents, or relevant parts of them, which are to be read with the description:

•                     Company A Limited sample Invitation Letters and Terms of the Offers

•                     Company A Limited Plan A Rules (Plan A Rules) and Company A Limited Plan B Rules (Plan B Rules) (together, the Plan Rules), and

•                     Company A Limited Employee Incentive Trust Deed.

Company A Limited (Company A) is a global company listed on the Australian Securities Exchange.

Company A is the head company of an income tax consolidated group.

As part of its strategy to attract, retain and motivate key talent, Company A operates various employee share schemes (the Plans).

Company A is the Australian resident employer entity which makes contributions to Trustee Pty Ltd (Trustee) for its Australian resident employees.

Company A limited plan A

The Company A Limited Plan A (Plan A) provides employees with the opportunity to acquire an ownership interest in Company A. Plan A assists Company A to attract and retain skilled and experienced senior employees and provide them with an incentive to have a greater involvement with and focus on the longer-term goals of Company A.

Under Plan A, employees (including executives and key management personnel) are granted a right to a fully paid, ordinary share in Company A (Company A Share), and such additional Company A Shares that may be specified in the relevant offer and that is subject to the conditions determined by the Company A Board (Board), calculated on the basis set out in the terms of an offer, which may include a formula for calculating the relevant number of Company A Shares or, in certain circumstances, a cash payment in lieu of the entitlement to Company A Shares. For the avoidance of doubt, an option, a share appreciation right, a performance right and a restricted stock unit all qualify as rights (Rights).

Plan A was reviewed to realign the incentives with Company A's stated ambition to double revenues, whilst simultaneously retaining focus on bottom line returns to shareholders in the form of earnings per share (EPS). Employees are granted a combination of performance rights (Performance Rights) and share appreciation rights (SARs).

A Performance Right is a right to subscribe for a Company A share (Company A Share) for no consideration, subject to the Plan A Rules and the terms of the offer, including any relevant performance hurdles. Performance Rights will continue to be measured on achievement of EPS hurdles.

A SAR is a right to receive a reward value based on the increase in the Company A share price and is aligned to the achievement of revenue growth. Plan A also provides an additional 'Award for Outperformance' in relation to the SARs if certain conditions, as outlined in the terms of the offer.

Performance Rights and SARs granted are tested over a 3-year period.

Plan A broadly operates as follows:

•                     Company A may, in its sole discretion and without prejudice to any other offers, make an offer in respect of any number of Rights, and may refrain from making any offer on any particular date.

•                     An employee may accept an offer, in full or in part, to participate in Plan A by delivering to Company A an acceptance form no later than the last day for acceptance.

•                     A Right becomes a vested right (Vested Right) when all performance, service or other conditions that must be satisfied have been satisfied, or which are otherwise exercisable, in accordance with the Plan A Rules.

•                     A Right, upon becoming a Vested Right, entitles a participant to the right to acquire the number of Company A Shares in accordance with the number specified in the offer and/or that are determined by the formula specified in the offer.

•                     A Right does not entitle a participant to any distribution of dividends or voting rights in Company A and Rights are not quoted on the ASX.

•                     A Vested Right may be exercised by a participant during the exercise period by lodging a signed notice of exercise. Following the valid exercise of a Vested Right, Company A must, within such time as the Board determines, issue, allocate or transfer to, or acquire on market, the number of Company A Shares in respect of which the Vested Right has been exercised, credited as fully paid.

•                     The Board may determine that the Vesting (and, if applicable, exercise) of a Right will be satisfied by Company A making a cash payment in lieu of an allocation of Company A Shares pursuant to the Plan Rules. For the avoidance of doubt, the Board may determine that some or all of an employee's Rights will be settled in this way. The amount of the cash payment referred to in the Plan A Rules will be calculated by multiplying the number of Company A Shares underlying the relevant Rights that the Board determines will be settled by a cash payment, by the current market price as defined in the Plan A Rules.

•                     Where, in the opinion of the Board, a participant amongst other things, acts fraudulently or dishonestly; or is in breach of their obligations to Company A, the Board may determine that an employee's entitlement to Rights or Company A Shares may be reduced or extinguished through lapse or forfeiture; or, a participant must pay or repay to Company A a debt, as the case maybe; or the vesting or disposal restrictions associated with a participant's Rights may be delayed, suspended or extended.

•                     Subject to the Plan A Rules, Rights are personal to the participant and may not be transferred, assigned or exercised by any other person, except on the death of the participant, or in the event that an order is made for the participant's estate to be administered under the laws relating to mental health.

•                     A participant may transfer Rights to the participant's spouse, de-facto partner or a trust of which the participant is a beneficiary, other than a superannuation fund, within 60 days of the date of grant of the Rights, subject to Company A's Securities Trading Policy. If not transferred within that time, Rights will become non-transferrable.

Company A plan B

The Board established the Company A Plan B (Plan B) to be used as an ad-hoc program under which the Board may nominate employees to receive an offer of Rights to acquire an ownership interest in Company A.

Plan B assists Company A to attract and retain skilled and experienced employees and provides them with an incentive to have a greater involvement with and focus on the longer-term goals of Company A and share price appreciation over time.

Under Plan B, employees are granted a Right to a Company A Share, and such additional Company A Shares that may be specified in the relevant offer and that is subject to the conditions determined by the Board, calculated on the basis set out in the terms of an offer, which may include a formula for calculating the relevant number of Company A Shares or, in certain circumstances, a cash payment in lieu of the entitlement to Company A Shares.

Under Plan B, employees are granted Performance Rights, the number of which was determined by dividing the quantum of award by Company A's volume weighted average share price. Performance Rights under Plan B vest in two tranches.

Under Plan B, employees are granted Restricted Stock Units (RSUs), the number is determined by dividing the quantum of award by Company A's volume weighted average share price. RSUs are tested for vesting on the first day of each financial year for a 3-year period.

If performance conditions are met, the RSUs will vest on that date. Subject to Board discretion, unvested RSUs will automatically lapse and be cancelled at the time that the grant no longer becomes capable of being satisfied because the performance conditions cannot be met.

Plan B broadly operates as follows:

•                     Company A may, in its sole discretion and without prejudice to any other offers, make an offer in respect of any number of Rights, and may refrain from making any offer on any particular date.

•                     an employee may accept an offer, in full or in part, to participate in Plan B by delivering to Company A an acceptance form no later than the last day for acceptance.

•                     A Right becomes a Vested Right when all Vesting Conditions have been satisfied or which is otherwise exercisable in accordance with the Plan B Rules.

•                     A Right, upon becoming a Vested Right, entitles a participant to the right to acquire the number of Company A Shares in accordance with the number specified in the offer and/or that are determined by the formula specified in the offer.

•                     A Right does not entitle a participant to any distribution of dividends or voting rights in Company A and Rights are not quoted on the ASX.

•                     A Vested Right may be exercised by a participant during the exercise period by lodging a signed notice of exercise. Following the valid exercise of a Vested Right, Company A must, within such time as the Board determines, issue, allocate or transfer to, or acquire on market, the number of Company A Shares in respect of which the Vested Right has been exercised, credited as fully paid.

•                     The Board may determine that the Vesting (and, if applicable, exercise) of a Right will be satisfied by Company A making a cash payment in lieu of an allocation of Company A Shares pursuant to the Plan B Rules. For the avoidance of doubt, the Board may determine that some or all of a participant's Rights will be settled in this way. The amount of the cash payment referred to in the Plan B Rules will be calculated by multiplying the number of Company A Shares underlying the relevant Rights that the Board determines will be settled by a cash payment, by the current market price as defined in the Plan B Rules.

•                     Where, in the opinion of the Board, a participant amongst other things, acts fraudulently or dishonestly; or is in breach of their obligations to Company A, the Board may determine that a participant's entitlement to Rights or Company A Shares may be reduced or extinguished through lapse or forfeiture; or, a participant must pay or repay to Company A a debt, as the case maybe; or the vesting or disposal restrictions associated with a participant's rights may be delayed, suspended or extended.

•                     Rights are personal to the participant and may not be transferred, assigned or exercised by any other person, except on the death of the participant, or in the event that an order is made for the participant's estate to be administered under the laws relating to mental health.

The total number of Rights outstanding could fluctuate depending on joining or leaving employees.

The company A limited employee incentive trust

Company A established the Company A Limited Employee Incentive Trust (the Trust) as an independent legal entity to facilitate the acquisition, holding, and allocation of Company A Shares to participants in accordance with employee equity plans that Company A operates from time to time (including the Plans).

The reasons for using the Trust include:

•                     Company A is unable to hold its own shares under Australian corporate law. The Trust is a vehicle which enables shares to be held for the purpose of the Plans

•                     the Trust provides an arm's length vehicle for acquiring and holding shares in Company A, either by way of a new issue or acquiring on-market - that is, providing flexibility relating to capital management

•                     the Trust is an efficient structure for giving effect to disposal restrictions (or vesting conditions, where applicable). As the Trustee is the legal owner, employees have no ability to deal in Company A Shares

•                     contributing to the Trust to acquire Company A Shares before awards vest, may enable Company A to hedge against a potential increase in costs to satisfy awards due to share price growth, as well as the potential for insufficient Company A Shares being available on-market immediately prior to vesting, and

•                     the Trust provides the flexibility to acquire and hold Company A Shares that will be allocated to employees under the Plans. When vesting conditions are not met and awards lapse, the Trust enables Company A Shares held for such lapsed awards to be 'recycled' to satisfy other grants of awards.

In determining whether to request the Trustee to subscribe for or purchase Company A Shares on-market (or off-market), Company A's Board may take into account the following matters:

•                     Company A's current capital management strategy

•                     the dilution impact any issue of new Company A Shares will have

•                     the liquidity (trade volume) of Company A's shares

•                     the Board's expectations regarding Company A's share price movements and volatility over the short and longer term, and

•                     trading restrictions or anticipated activity that may prompt restrictions regarding trading of Company A's shares.

Broadly the Trust operates as follows:

•                     The Trustee will enter into and perform its obligations under the Trust Deed and can do so without approval or consent of any other person.

•                     Company A cannot be a beneficiary of the Trust (clause 3 of the Trust Deed). In addition, no member of the Company A Limited group can receive surplus assets that remain in the Trust prior to its termination.

•                     Company A must keep the Trustee in funds necessary to do any act requested by the Board.

•                     The Trustee will acquire, hold, dispose or otherwise deal with on any terms, Trust Assets for the purposes of the Trust Deed.

•                     The Trustee will subscribe for, purchase or otherwise acquire Trust Assets and Company A Shares which the Trustee is authorised to acquire on such terms and conditions as it thinks fit, and do all things incidental to this activity.

•                     The Trustee will sell or otherwise dispose of Trust Assets, and Company A Shares, which the Trustee is authorised to dispose of, and (where relevant) on such terms and conditions as directed by the relevant participant, and do all things incidental to this activity.

•                     The Trustee holds all Trust Assets (including without limitation, any unallocated shares) other than those Trust Assets referred to in clause 3.1(a) of the Trust Deed on trust for and on behalf of the following general beneficiaries from time to time and under the terms of the Trust Deed

(a)          the participants

(b)          the employees, and

(c)          any employee incentive trust established and maintained for the benefit of employees.

• The Trustee must hold the following on trust for and on behalf of a participant under the terms of the Trust Deed, the relevant Plan Rules and the participant's relevant offer (clause 3.1a) of the Trust Deed

                             i.                the participant's allocated shares

                            ii.                prior to their distribution under clause 7 of the Trust Deed, the proceeds arising from any sale by the Trustee of rights under a rights issue relating to the participant's allocated shares, and

                           iii.                all other benefits and privileges related to or arising from the participant's allocated shares.

Each participant will be the beneficial owner of and absolutely entitled to their allocated shares and all benefits and privileges attached to, or resulting from holding, those allocated shares.

•                     On receipt of a valid withdrawal notice in accordance with the Trust Deed, and subject to the Board approving that withdrawal notice, the Trustee must do all things required by it to transfer legal title in some or all of a participant's allocated shares to the relevant recipient and pay to the participant any other monies held on the account for the participant.

•                     The Trustee is precluded from exercising voting rights in relation to unallocated shares and must hold any bonus shares issued in respect of unallocated shares on trust for the purposes of the Trust Deed. The Trustee must apply any capital receipts, dividends or other distributions received in respect of that unallocated share or a Right issued pursuant to a rights issue in respect of that unallocated share to purchase further Company A Shares to be held on trust for the purposes of the Trust.

•                     The Trustee must, if directed by the Board in a Dealing Notice, reallocate any forfeited shares to one or more participants to be held under the Trust Deed as allocated shares. In the absence of such a direction, forfeited shares (or the proceeds of sale of such forfeited shares) must be held by the Trustee.

•                     The Trustee must, if directed by the Board in a Dealing Notice, reallocate any forfeited shares to one or more participants to be held as allocated shares. In the absence of such a direction, forfeited shares (or the proceeds of sale of such forfeited shares) must be held by the Trustee under of the Trust Deed.

•                     The Trustee must establish and maintain a separate Trust Share Account or record in respect of each participant.

•                     On termination of the Trust, if there are any Trust Assets remaining in the Trust following the full repayment of debts and liabilities in relation to the Trust, the distribution to participants of any allocated shares; the distribution of any net income attributable to participants, or the application of Trust capital, such remaining surplus assets must be applied in whole or in part for the benefit of either or both of, any employee incentive trust established and maintained for the benefit of employees, or any charity with deductible gift recipient status.

Contributions to the trust

All funds received by the Trustee from Company A Shares would normally be in the form of irretrievable contributions that will constitute accretions to the corpus of the Trust and no participant will be entitled to receive a distribution of or from such funds. The funds will not be returned or repayable to Company A except where they are used for subscribing for Company A Shares (that is, the contributions will be irretrievable).

In determining the amount of funds to be contributed to the Trust, the Board may take into account the following:

•                     the number of Rights granted to employees under the Plans

•                     the market value of Company A shares at the relevant time

•                     the number of Company A Shares held by the Trust at the relevant time

•                     the likelihood of awards vesting, and

•                     the Board's expectations regarding Company A's share price performance and volatility over the short and longer term.

To the extent the Company A Board elects to make a cash payment, an employee share trust will not be used to settle these awards.

Company A intends to only make contributions to the Trust to fund the acquisition of Company A Shares once Rights have been granted to a participant.

Company A or any member of the Group will not be beneficiaries under the Trust Deed and any funds Company A contributes to the Trust, other than specifically in the form of a loan, may not be refunded, repaid or returned to Company A (or any member of the Group) other than by way of the Trustee paying the issue price where it subscribes for Company A Shares.

Reasons for decision

Question 1

Subsection 8-1(1) allows you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, pursuant to subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature.

Company A operates the Plans as part of its remuneration strategy and reward program for employees.

Under the Plans, Company A grants Rights to participants and makes irretrievable contributions to the Trustee (in accordance with the Plan Rules, offer letters and the Trust Deed) to fund the acquisition of Company A Shares (either on-market or by subscription) by the Trust for allocation to participants on the vesting of their Rights.

Incurred in carrying on a business

Company A must provide the Trustee with all the funds required to act as requested (clause 5.3 of the Trust Deed).

The contributions made by Company A are irretrievable and non-refundable to Company A in accordance with the Trust Deed as all funds provided by Company A are not repayable according to the Trust Deed. Additionally, the Trustee agrees that the Trust will be managed and administered so that it satisfies the definition of an employee share trust in subsection 130-85(4).

The irretrievable cash contributions incurred by Company A are paid to the Trustee for the acquisition of Company A Shares, in satisfaction of the vesting of Rights granted as part of its remuneration and reward program. Therefore, the contributions are part of recurrent expenditure incurred by Company A in the nature of remuneration of employees.

Not capital or of a capital nature

The costs are an outgoing incurred for periodic funding of bona fide ESSs and are likely to be in relation to more than one grant of Rights (rather than being one-off). This further indicates that the irretrievable contributions are ongoing in nature and part of the broader remuneration expenditure of Company A.

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

Accordingly, Company A is entitled to deduct an amount under section 8-1 for irretrievable cash contributions it makes to the Trustee to acquire Company A Shares to satisfy Rights granted pursuant to the Plans.

Question 2a

Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to the Trustee to purchase Company A Shares in excess of the number required to satisfy the relevant Rights granted to the employees in the year of income from the grant of Rights. Further information is available in ATO Interpretative Decision ATO ID 2010/103 Income Tax - Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

The Plans are ESSs for the purposes of subsection 83A-10(2) as they are schemes under which 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) are provided to employees in relation to their employment.

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

The deduction for the irretrievable cash contribution will only be available to Company A in the income year in which the relevant beneficial interest in a Company A Share, or beneficial interest in a Right to a beneficial interest in a Company A Share, is acquired by a participant under the Plans.

Indeterminate rights

Where employees acquire rights and the entitlement to a share or specific number of shares is uncertain, the rights granted to employees are indeterminate rights for the purposes of section 83A-340. In this circumstance, a Right is not a right to acquire a beneficial interest in a share until the time when the Board determines the extent to which the Performance Conditions are satisfied, and the Right vests and become exercisable.

Once it is determined that a Right will be satisfied by provision of a Company A Share, section 83A-340 operates to treat these Rights as though they had always been rights to acquire beneficial interests in that number of Company A Shares.

If irretrievable contributions are provided to the Trustee before Rights are acquired (and they do subsequently become ESS interests), then section 83A-340 operates to deem the Rights to always have been ESS interests. Where this occurs, section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1. In such a case, a deduction for the contribution to fund the Rights would be available to Company A in the income year in which participants acquired the Rights.

Question 2b

Consistent with the analysis in question 2a (above), where the contribution is 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 acquisition on-market of Company A Shares to satisfy the ESS interests granted to participants will be deductible in the income year in which the contribution is made by Company A.

Question 3

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

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

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

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

Question 4

An employer's liability to fringe benefits tax (FBT) arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax.

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

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

(h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83A-B or 83A-C of that Act applies ...

The Commissioner accepts that the Plans are ESSs, the Rights for Company A Shares provided under the Plans are ESS interests and that Subdivision 83A-C applies to those ESS interests.

Accordingly, the provision of Rights 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-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

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

Question 5

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', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an employee share trust within the meaning of the ITAA 1997.

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

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

•                     The Trust acquires shares in Company A, and

•                     The Trust ensures that ESS interests as defined in subsection 83A-10(1) are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to the employees 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 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in 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 activities that the Trustee is permitted to undertake under the Trust Deed are indicative of those required to administer an employee share trust and are merely incidental to the primary purposes stated in paragraphs 130-85(4)(a) and (b). This is consistent with the background of the Trust, namely for the sole purpose of acquiring, holding and transferring shares in connection with equity incentive plans established by Company A for the benefit of participants in the plans. Additionally, the Trust Deed requires the Trustee to administer the Trust so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4).

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