Edited version of private advice

Authorisation Number: 1052287919659

Date of advice: 23 August 2024

Ruling

Subject: Employee share scheme

Company A is the head company of the Company A income tax consolidated group (TCG). Further references to actions and transactions undertaken by Company A in these questions include actions and transactions undertaken by subsidiary members of the TCG.

Question 1(a)

Will Company A, as head company of the Company A tax consolidated group (TCG) obtain a deduction under section 8-1 of the ITAA 1997 for irretrievable cash contributions it makes to the trustee (Trustee) as trustee of the Employee Share Trust (Trust) to fund the subscription for, or acquisition on-market of ordinary shares in Company A (Shares) in respect of employees of Company A and its wholly owned subsidiary Company B, who are Australian resident (Participants), under the plans listed below (Plans)?

•         The Rights Plan (RP)

•         The Option Plan (OP)

•         The Equity Incentive Plan (EIP)

•         The Tax Exempt Share Plan (TESP)

•         Options granted to Managing Director (MDO).

Answer

Yes.

Question 1(b)

Will irretrievable cash contributions made by Company A to the Trustee of the Trust, to fund the subscription for or acquisition on-market of Shares by the Trust under the Plans, in respect of the Participants, be deductible to Company A under section 8-1 of the ITAA 1997 in the year in which the contributions are made, if those contributions are made in the same (or a later) income year as the acquisition of the relevant ESS interests by Participants under the Plans?

Answer

Yes.

Question 1(c)

Will the irretrievable cash contributions made by Company A to the Trustee of the Trust, to fund the subscription for or acquisition on-market of Shares by the Trust under the Plans, in respect of the Participants, be deductible to Company A under section 8-1 of the ITAA 1997 at a time determined by section 83A-210 of the ITAA 1997, if the contributions are made before the acquisition of the relevant ESS interests by Participants under the Plans?

Answer

Yes.

Question 2(a)

Will Company A obtain an income tax deduction under section 25-5 of the ITAA 1997 in respect of costs it incurs in managing the tax affairs of Company A which relate to the Plans for the Participants?

Answer

Yes.

Question 2(b)

Will Company A obtain an income tax deduction under section 8-1 of the ITAA 1997 in respect of costs it incurs in managing the tax affairs of the Trust which relate to the Plans for the Participants?

Answer

Yes.

Question 2(c)

Will Company A obtain an income tax deduction under section 8-1 of the ITAA 1997 in respect of costs it incurs in relation to the on-going administration costs of the Trust in relation to the Plans for the Participants?

Answer

Yes.

Question 2(d)

Will Company A obtain a deduction under section 40-880 of the ITAA 1997, in respect of costs incurred it incurs in relation to the establishment of the Trust?

Answer

Yes.

Question 3

If the Trust satisfies its obligation under the Plans by subscribing for new Shares, will the subscription proceeds be included in the assessable income of Company A under section 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997?

Answer

No.

Question 4

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

Answer

No.

Question 5

Will the provision of ESS interests under the Plans to the Participants be a Fringe Benefit within the meaning of subsection 136(1) of the FBTAA?

Answer

No.

Question 6

Will the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Shares by the Trust under the Plans, in respect of the Participants, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA?

Answer

No.

Question 7

Will the Commissioner make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company A or Company B by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Shares by the Trust under the Plans in respect of the Participants?

Answer

No.

Questions 1 to 4 - income tax of this ruling applies to the following periods:

Income year ended 30 June 2024

Income year ended 30 June 2025

Income year ended 30 June 2026

Income year ended 30 June 2027

Income year ended 30 June 2028

Questions 5 to 7 - fringe benefits tax of this ruling applies to the following periods:

Fringe benefits tax year ended 31 March 2024

Fringe benefits tax year ended 31 March 2025

Fringe benefits tax year ended 31 March 2026

Fringe benefits tax year ended 31 March 2027

Fringe benefits tax year ended 31 March 2028

The scheme commenced on:

5 August 2024

Relevant facts and circumstances

Company A is a company incorporated in and tax resident of Australia. It is listed on the Australian Stock Exchange.

It carries on a business for the purpose of gaining or producing assessable income.

Company A formed a tax consolidated group (TCG) with its eligible subsidiaries, including company B. Company A and Company B are employing entities with employees in the TCG.

As part of its overall remuneration strategy, Company A offers certain employees and executives payments of both cash and shares in Company A (Shares) upon satisfaction of certain performance conditions or exercise of options. These are implemented through the following plans hereinafter referred to as the Plans:

•           RP which offers eligible participants rights to Shares

•           OP which offers eligible participants options to Shares

•           EIP which offers eligible participants awards in the form of either rights or options to Shares

•           TESP which offers eligible participants Shares, and

•           options granted to Managing Director of Company A (MDO), terms of which are governed by the relevant offer letter.

It is noted that:

•           Rights under the RP and awards under the EIP are granted for nil cash consideration and can be settled by cash at the discretion of the board of Company A (Board) instead of issuance of Shares when they are vested.

•           Vested options under the MDO are granted for nil consideration and can be settled by cash at the discretion of the Board instead of issuance of Shares.

•           Options under the OP are granted for no more than nominal cash consideration (i.e. at a discount) and can only be settled by issuance of Shares.

Company A will incur various costs in relation to the establishment and implementation of the Trust, including but not limited to:

•           legal advice obtained in respect of the implications which may arise for both Company A and its employees in respect of the employee share trust structure and the Plans;

•           legal documents required in respect of the Trust and the Plans; and

•           professional fees associated with the establishment of the Trust including costs associated with the creation and registration of the employee share trust with various authorities.

Company B will also incur various costs in relation to the on-going administration of the Trust. For example, Company A will incur costs associated with the services provided by the Trustee as trustee of the Trust, including but not limited to:

•           Employee plan record keeping;

•           Production and dispatch of holding statements to employees;

•           Provision of annual income tax return information for employees;

•           Costs incurred in the acquisition of Shares on market (e.g. brokerage costs and the allocation of such Shares to Employees);

•           Management of employee termination (i.e. facilitating the payment under relevant plans when an employee is terminated to the extent they have vested interests); and

•           Other trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust.

The Plans

RP

The RP's purpose is to assist in the reward, retention and motivation of eligible participants, and link reward of these people to performance and creation of shareholder value.

Under the RP, the board of Board may at any time establish a trust for the sole purpose of acquiring and holding Shares in respect of which eligible participants to whom rights have been granted under this plan may exercise or have exercised vested rights.

The Board may, from time to time, in its discretion, make written invitation to eligible participants to apply for rights upon the terms set out in the RP. These offers are not assignable, and each right will entitle the holder to be issued one Share (or paid a cash payment in lieu of the issue of one Share). The rights are granted for nil cash consideration.

An eligible participant can accept an offer for rights by signing and returning an application form. Once the Board receives and approves a duly signed and completed application form, it must promptly grant the rights, upon terms as set out in the offer, the application form and the RP and any additional terms as the Board determines, and issue a certificate evidencing the grant of those rights.

Rights granted under the RP vest in accordance with the vesting conditions attached to the rights, and the Board must notify the holder of the rights within 10 business days of becoming aware of any vesting conditions being satisfied. The Board in its absolute discretion can waive any vesting conditions applying to the performance rights.

On vesting, the holder of the rights under the RP can submit a notice to exercise these rights together with the certificate of the rights. The Board will issue Shares, within 10 business days of being provided with a valid notice of exercise for vested rights and the certificate, or alternatively pay the holder a cash payment for the rights exercise.

From the date of issuance of the Shares under the RP, the holder becomes the legal owner of the Shares and will be entitled to dividends and exercise voting rights attached to the Shares.

The Board may, in its absolute discretion, determine at any time up to exercise of the rights, that a restriction period applies to some or all of the Shares issued upon exercise of vested rights, up to a maximum of seven years from the grant date of the rights. The Board may in its discretion decide to waive a restriction period. The holder must not dispose or otherwise deal with any Shares that are subject to a restriction period during that period.

OP

The OP's purpose is to assist in the reward, retention and motivation of eligible participants, and link the reward of these people to performance and the creation of shareholder value.

Under the OP, the Board may at any time establish a trust for the sole purpose of acquiring and holding Shares in respect of which eligible participants to whom options have been granted under this plan may exercise or have exercised vested options.

The Board may, from time to time, in its discretion, make written offer to eligible participants to apply for options upon the terms set out in the OP. These offers are not assignable, and each option will entitle the holder to subscribe for and be allotted one Share. The options are granted for no more than nominal cash consideration. The Board will determine the option exercise price in its absolute discretion.

An eligible participant can accept an offer for options by signing and returning an acceptance form. Once the Board receives and accepts a duly signed and completed acceptance form, it must promptly grant options, upon terms as set out in the offer, the acceptance form and the OP and any additional terms as the Board determines as well as issuing a certificate evidencing the grant of the options.

Options granted under the OP vest in accordance with the vesting conditions attached to these options, and the Board must notify the holder of the options within 10 business days of becoming aware of any vesting conditions being satisfied. The Board in its absolute discretion can waive any vesting conditions applying to the options.

On vesting, the holder of the options under the OP can submit a notice to exercise the options together with the certificate and make payment in respect of the option exercise price (unless utilising the cashless exercise facility). A holder of vested options can choose to exercise their vested options using the cashless exercise facility, which allows them to set-off the exercise price against the number of Shares which they are entitled to receive upon exercise of those options, and receive Shares to the value of the surplus after the exercise price has been set off. The Board will issue Shares, within 10 business days of being provided with a valid notice of exercise for vested options and the certificate.

From the date of issuance of the Shares under the OP, the holder becomes the legal owner of the Shares and will be entitled to dividends and exercise voting rights attached to the Shares.

The Board may, in its discretion, determine at any time up to exercise of the options, that a restriction period applies to some or all of the Shares issued upon exercise of vested options, up to a maximum of seven years from the option grant date. The Board may decide to waive a restriction period. The holder must not dispose or otherwise deal with any Shares that are subject to a restriction period during that period.

EIP

The EIP's purpose is to assist in the reward, retention and motivation of eligible participants, and link the reward of these people to performance and the creation of shareholder value.

Under the EIP, the Board may at any time establish a trust for the sole purpose of acquiring and holding Shares in respect of which eligible participants to whom awards have been granted under this plan may exercise or have exercised vested awards.

The Board may, from time to time, in its absolute discretion, make written invitation to eligible participants to apply for awards upon the terms set out in the EIP. These offers are not assignable, and each award will entitle the holder to be issued one Share. The awards are granted for nil cash consideration unless otherwise required in the offer document.

An eligible participant can accept an offer for awards by signing and returning an application form. Once the Board receives and approves a duly signed and completed application form, it must promptly grant awards, upon terms as set out in the offer, the application form and the EIP and any additional terms as the Board determines as well as issuing a certificate evidencing the grant of the awards.

Awards granted under the EIP vest in accordance with the vesting conditions attached to these awards, and the Board must notify the holder of the awards within 10 business days of becoming aware of any vesting conditions being satisfied. The Board in its absolute discretion can waive any vesting conditions applying to the awards.

On vesting, the holder of the awards under the EIP can submit a notice to exercise the awards together with the certificate and make payment in respect of the award exercise price (unless utilising the cashless exercise facility or where there is no exercise price payable). A holder of vested awards can choose to exercise their vested awards using the cashless exercise facility, which allows them to set-off the exercise price against the number of Shares which they are entitled to receive upon exercise of those awards, and receive Shares to the value of the surplus after the exercise price has been set off. The Board will issue Shares, within 10 business days of being provided with a valid notice of exercise for vested awards and the certificate, or alternatively make a cash payment for the awards exercised.

From the date of issuance of the Shares under the EIP, the holder becomes the legal owner of the Shares and will be entitled to dividends and exercise voting rights attached to the Shares.

The Board may, in its absolute discretion, determine at any time up to exercise of the awards, that a restriction period applies to some or all of the Shares issued upon exercise of vested awards, up to a maximum of five years from the award grant date. The Board may decide to waive a restriction period. The holder must not dispose or otherwise deal with any Shares that are subject to a restriction period during that period.

TESP

The TESP's purpose is to assist in the reward, retention and motivation of participants who have been granted Shares under the plan, and align the interests of these people with shareholders of Company A by providing an opportunity to them to receive an equity interest in Company A.

Under the TESP, the Board may, in its discretion, use an employee share trust or other custodial or trust mechanism for the purposes of holding and/or delivering any Shares under the plan rules.

The Board may make an invitation to an eligible participant on any number of occasions in such form and on terms as the Board decides from time to time. The offer of Shares under this plan is made under section 1100P ('Offers for no monetary consideration') under Division 1A of Part 7.12 (Employee shares schemes) of the Corporations Act.

An eligible participant can accept an offer for Shares under this plan by applying for the Shares in the manner set out in the invitation or be deemed to have accepted the grant of Shares by not opting-out of participating in the plan.

The Board, in its absolute discretion, may accept an application from an eligible participant for grant of Shares, and following receipt (or deemed receipt) of the application (and ancillary documentation if required) issue Shares to the eligible participant. Company A can require such Shares be held on allocated basis in an employee share trust or such other custodian or trust arrangement at the company's election.

A participant who has been granted Shares under this plan is absolutely entitled to dividends declared and paid or payable on these Shares held by them or on behalf of them.

A participant who has been granted Shares cannot transfer, encumber or otherwise dispose of their Shares or take any action or permit another person to take any action to remove or circumvent the disposal restrictions during the holding lock period (This is the period from the grant date until the earlier of (a) the date three years after the grant date of that Share or such date as determined by the Board or (b) the day after the date on which the relevant participant ceases to be an employee of Company A or Company A's group companies).

MDO

Company A granted vested options to the managing director (or their nominee) which are governed by the terms set out in the offer letter (summarised broadly below):

• Each Option entitles the holder to subscribe for and be issued one fully paid ordinary share in the capital of Company A.

• Options will vest immediately on the date of issue.

• Each Option had an exercise price, payable in cash.

• The Options had a set expiry date.

• Options may be exercised, in whole or in part, at any time after the Vesting Date by lodging a Notice of Exercise with Company A, and paying Company A the exercise price in respect of the Options specified in the Notice of Exercise, with exercise only being valid once the funds were cleared.

• When granted the Options were indeterminate rights as they were settleable, at the election of the Board, by either cash or shares as follows:

o   Company A will arrange for the holder to receive the number of Shares to which the holder is entitled for the exercised Option (Equity Settled); or

o   Company A will pay the holder a cash payment per exercised Option equal to the volume weighted average of the Shares recorded on the ASX over the 20 trading days prior to the day on which the Option is exercised less the exercise price payable for that Option (Cash Settled).

• All shares issued upon exercise of the Options will rank equally with other shares which are on issue.

Trust

Company A wishes to establish an employee share trust for the sole purpose of subscribing for, acquiring, holding and transferring Shares in connection with equity incentive plans established by Company A for the benefit of participants in those plans. Company A appoints Trustee as the trustee of this employee share trust (Trust) in accordance with the Trust Deed (Deed).

The Trustee is an unrelated party to Company A and its wholly owned entities.

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

Company A must not establish any new plan which is to be operated by the Trust without consulting with and obtaining written consent of the Trustee.

The Trustee must, following receipt of a dealing notice, either purchase or subscribe for the requisite number (or a proportion of that number determined by the Board) of Shares on behalf of the relevant participant, subject to the relevant plan rules and the relevant terms of participants.

Company A must provide the Trustee of funds required by the Trustee to purchase or subscribe for Shares, and all funds provided to the Trustee for these purposes will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee and may be paid to Company A as consideration for the subscription of Shares provided such Shares are held under the terms of this Deed.

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 Deed as allocated shares. Absent a direction, the trustee must hold these shares as part of other trust asset in accordance with the Deed.

The Trustee must hold a participant's allocated shares on trust under the terms of the Deed, the relevant plan rules and the participant's terms of participation. Each participant will be the beneficial ownership of and absolutely entitled to their allocate shares. The Trustee must hold all other assets on trust for the participants who have one or more trust shares credited to their trust share account from time to time and the employees / director of the Company A group of companies.

The Trustee and each participant must not assign, transfer, sell or grant encumbrances over or otherwise deal with an interest in the allocated share of the participant during any applicable restriction period. After the restriction period expires, a participant may give the Trustee a withdrawal notice to require the Trustee transfer legal title in some or all of the participant's allocated shares to the participant.

A participant is presently entitled to so much of the net income of the Trust attributable to that participant's allocated shares.

If an accretion arises in respect of a participant's allocated share other than by way of dividends, distributions, bonus share or rights issue, the Trustee will transfer or provide the benefits of the accretion to that participant.

Upon sale of any allocated shares, the Trustee shall apply the proceeds of sale firstly in payment of tax liability incurred and secondly in payment of brokerage and other expenses of the sale that the participant has agreed to be deducted from the distribution and thirdly the balance in payment to the relevant participant.

The Trustee must deal with each unallocated share in the manner set out in a dealing notice. If instructed by the Board, the Trustee must dispose of the unallocated share if it is a forfeited share or must participate in any rights issue in respect of the unallocated share. The Trustee may exercise at its discretion and consistent with its fiduciary duties any voting rights in relation to the unallocated share, but only in circumstances where voting is 'merely incidental' to obtaining, holding and providing Shares to participants. The Trustee must hold any bonus shares issued in respect of the unallocated share on trust and may apply any capital receipts, dividends other distributions received in respect of unallocated shares to purchase further Shares to be held on trust. The Board may from time to time specify that certain unallocated shares are to be held by the Trustee for a particular plan, in which case the Board must identify the specified unallocated share which are to be held for a particular plan and must direct the Trustee in writing to hold those shares for that plan.

Trust assets are the asset held by the Trust and include cash, ESS Interest and income of the Trust; Trust share means a Share held by the Trustee subject to the Deed and includes any bonus shares issued in respect of the Share and any Share issued as part of a rights issue; Unallocated share means a Trust share that is not credited to the trust share account of a participant at that time and includes any forfeited shares held by the Trustee.

The Trustee is not entitled to be paid from trust assets any fees or charges for administering the Trust, but may recover from trust assets (excluding allocated shares, unallocated shares and dividends from allocated shares) all reasonable disbursements incurred in performing duties pursuant to the Deed. The Trustee can charge Company A fees, charges, commission and other remuneration (which Company A and the Trustee agree from time to time) and may seek reimbursement of reasonable disbursements incurred for managing the Trust, provided these are not paid directly or indirectly from trust assets.

Nothing in the Deed confers or is intended to confer on Company A any charge, lien or any other proprietary right or beneficial interest in the trust assets. The rights of Company A under the Deed are purely contractual.

Distribution of trust assets on termination of trust, following full repayment of debts and liabilities of the trust, distribution to participants of allocated shares and attributable net income of the trust and application of trust capital, is to either any employee share trust established and maintained for the benefit of employees of the Company A group of companies and any charity with deductible gift recipient status.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 170(10AA)

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

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

Income Tax Assessment Act 1997 Division 12

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 25-5

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

Income Tax Assessment Act 1997 subsection 25-5(4)

Income Tax Assessment Act 1997 section 40-880

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

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

Income Tax Assessment Act 1997 subsection 83A-20(1)

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 section 83A-340

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 subsection 130-85(4)

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 subsection 974-75(1)

Income Tax Assessment Act 1997 section 995-1

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Question 1(a)

The general deduction provision is section 8-1, which states:

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.

Note:

Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.

There is a loss or outgoing that is incurred

To claim a deduction under section 8-1, first there must be a loss or outgoing that is incurred. In this respect, the cash contributions made by Company A to the Trustee must be irretrievable and non-refundable.

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

•           all funds provided to the Trustee will constitute accretions to the corpus of the Trust and are not repayable by the Trustee ;

•           neither Company A nor Company B is a beneficiary of the Trust or has any entitlement to any Shares, trust property forming part of the trust fund or any returns of contributions made to the Trust; and

•           nothing in the Deed confers or is intended to confer onto Company A any encumbrance, proprietary right or interest in the Shares acquired by the Trustee.

Therefore, the contributions to the Trust will be a loss or outgoing that is incurred at the time it is made in accordance with the trust deed and the rules of the Plans.

Loss incurred in producing assessable income or necessarily incurred in carrying on a business

For a loss or outgoing to be deductible under subsection 8-1(1), it must be either incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing that assessable income.

That relevant connection exists between a loss or outgoing and the derivation of income where there is a sufficient nexus; (see, Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56).

The Deed states that Company A wishes to establish an employee share trust for the sole purpose of subscribing for, acquiring, holding and transferring shares in connection with equity incentive plans established for the benefit of participants in those plans. So in this case, the contributions are made by Company A or any other member of the TCG to the Trust to enable Company A to meet its obligations arising from the grant of rights, options and awards under the Plans.

The Commissioner accepts that granting rights, options, awards and TESP Shares under the Plans is to incentivise, remunerate and retain employees of Company A and Company B and in turn, is likely to result in the gaining or production of the assessable income of Company A as a result of the employee's increased performance and productivity.

The Commissioner accepts there is sufficient nexus between:

a)     the irretrievable cash contributions made by Company A to the Trustee to satisfy the granting of rights, options,awards and TESP Shares under the Plans to the Participants, and

b)     Company A's own income earning activities.

Therefore, subsection 8-1(1) is satisfied.

Not capital or of a capital nature

Paragraph 8-1(2)(a) states that a loss or outgoing is not deductible if it is a loss or outgoing of capital, or of a capital nature.

Company A (and relevant member of the TCG) will be making regular, irretrievable contributions, to the Trustee to satisfy right, options and awards granted under the Plans (in accordance with the Deed and the rules of the Plans). These contributions are costs incurred by Company A to fund the acquisition of Shares for the purpose of the Plans.

Therefore, the costs will be an outgoing incurred for periodic funding of a bona fide employee share scheme for the Participants. Costs incurred are likely to be in relation to more than one grant of rights, options and awards (rather than being one-off), and Company A intends to continue satisfying outstanding rights, options and awards using Shares acquired by the Trust. This indicates that the irretrievable cash contributions made by Company A to the Trustee are ongoing in nature, recurrent employment expenses, and are part of the broader remuneration expenditure of Company A.

This is supported by the decisions in Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) FCAFC 339 and Federal Commissioner of Taxation v Spotlight Stores Pty Ltd (2004 FCA 650, which held that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital, or of a capital nature.

The loss or outgoing cannot be incurred in gaining or producing exempt income or non-assessable non-exempt income

Nothing in the facts suggest that the irretrievable cash contributions made to the Trustee are private or domestic in nature, or are incurred in gaining or producing exempt, non-assessable non-exempt income, or are otherwise prevented from being deductible under a specific provision of either the ITAA1936 or ITAA 1997.

Subscription vs on-market acquisition of Shares

The Commissioner accepts that the irretrievable cash contribution made by Company A are deductible under section 8-1 regardless of whether the funds are used to subscribe for news shares in Company A or acquire on-market Company A shares.

Accordingly, Company A will be entitled to deduct an amount under section 8-1 for irretrievable cash contributions it makes to the Trustee to acquire Shares in accordance with the Plans.

Question 1(b)

A deduction under section 8-1 for a loss or outgoing would generally be allowable in the income year in which the loss or outgoing is incurred. However, under certain circumstances, the timing of a deduction is specifically determined under section 83A-210.

Section 83A-210 states:

If:

(a) at a particular time, you provide another entity with money or other property:

(i) under an *arrangement; and

(ii) for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an *ESS interest under an *employee share scheme in relation to the ultimate beneficiary ' s employment (including past or prospective employment); and

(b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the *ESS interest;

then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time.

The effect of section 83A-210 is to deem the timing an employer incurred the outgoing to be the time when the ESS interest is acquired by the ultimate beneficiary, rather than the time when the employer makes the contribution to the trust.

The implementation of the Plans (as set out in the rules of the Plans), the establishment of the Trust and the provision of irretrievable cash contributions by Company A to the Trustee of the Trust, constitute an arrangement for the purpose of subparagraph 83A-210(a)(i).

The term ESS interest, in a company is defined in subsection 83A-10(1) as being either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

Under the Plans, an invitation is made to a Participant (under the relevant rules of the Plans) to apply for beneficial interest in a right to acquire a beneficial interest in a share in Company A or in the case of the TESP, a beneficial interest in a share in Company A.

The term 'employee share scheme' is defined in subsection 83A-10(2) as:

An employee share scheme is a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of:

(a) the company; or

(b) *subsidiaries of the company;

in relation to the employees ' employment.

Note:

See section 83A-325 for relationships similar to employment.

Subsection 995-1(1) defines the term 'scheme' as follows:

"scheme" means:

(a) any arrangement; or

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

Note: The Commissioner may determine that, for the purposes of the debt and equity interest rules in Division 974, what would otherwise be a single scheme is to be treated as 2 or more separate schemes, and that the schemes are not related: see section 974 - 150.

The Plans meet the requirement of an ESS for the purpose of subsection 83A-10(2) as they are schemes under which ESS interests are provided to Participants in relation to their employment or engagement with Company A or Company B.

The ESS contains 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 as part of the Plans, to acquire ESS interests.

The deduction for the irretrievable cash contributions, to the extent they relate to the Participants, 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 / option / award to a beneficial interest in a Share, is acquired by the Participant under the Plans.

This is consistent with the ATO view expressed in ATO Interpretive Decision ATO ID 2010/103 Income Tax - Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust.

It follows that a deduction can be claimed under section 8-1, for irretrievable contributions Company A makes to the Trustee, as follows:

•         Where a Participant is granted the rights / options / awards / TESP Shares in the same income year in which the contributions are made, deduction is available in the income year in which the contributions are made.

•         Where a Participant is granted the rights / options / awards / TESP Shares in an income year before the income year in which the contribution are made, deduction is available in the income year in which the contributions are made.

Indeterminate rights under the Plans

The Commissioner accepts that the following listed items are indeterminate rights for the purposes of section 83A-340:

•         Rights under the RP,

•         Award under the EIP

•         Vested options granted to Company A's management director under the MDO

The RP and the EIP provides for settlement of vested rights and awards by either Shares or by making payment of a cash equivalent amount in lieu of a Share, to be determined by the Board within 10 business days of receipt of notice of exercise for vested right / award. Accordingly, rights under the RP and non-cash awards under the EIP are not beneficial interest in a right to acquire a beneficial interest in a share unless, and until the time it is determined by the Board that they will be satisfied by the provision of Shares.

Vested options granted to Company A's managing director can also be settled by cash payment instead of issuance of Shares, at the discretion of the Board. As such, these options are also not beneficial interest in a right to acquire a beneficial interest in a share 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, for the purposes of section 83A-210.

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 Participant, and where necessary, the relevant earlier income year assessments can be amended to allow the deduction (Item 28 of subsection 170(10AA) of the ITAA 1936).

If irretrievable 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 right under the RP, the award under the EIP or the vested options for Company A's managing director.

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

Question 1(c)

For reasons already outlined in question 1(b) above, Company A can claim an income tax deduction for irretrievable cash contributions it makes to the Trustee of the Trust, to fund the subscription for or acquisition on-market of Shares by the Trust under the Plans, in respect of the Participants, under section 8-1 of the ITAA 1997, at a time determined by section 83A-210 of the ITAA 1997.

If the contributions are made before the acquisition of the relevant ESS interests by Participants under the Plans, then Company A can claim an income tax deduction in the year in which the Participants acquire the relevant ESS interest under the Plans.

Question 2(a)

As Section 8-10 states that if more than one income tax deduction provision applies to an amount, the most appropriate provision should be used (i.e. the specific provision should override the general provision).

Division 12 sets out particular types of deductions that are dealt with by a specific provision of either the ITAA 1936 or the ITAA 1997. Section 25-5 is one such provision listed in Division 12 dealing with tax-related expenses.

Subsection 25-5(1) allows a deduction for tax-related expenses, such as, managing your tax affairs. Subsection 25-5(4) denies deductions under section 25-5(1) for capital expenditure, however, states that expenditure will not be considered capital merely because the tax affairs concerned relate to matters of a capital nature, and provides the following example:

Example: Under this section, you can deduct expenditure you incur in applying for a private ruling on whether you can depreciate an item of property.

Company A will incur tax related costs in managing its own tax affairs in respect of the Plans and the Trust, such as costs incurred in drafting and lodgement of a private ruling application with the Australian Taxation Office. The Commissioner accepts that these amounts, would not constitute capital expenditure due to the operation of subsection 25-5(4).

To the extent Company A incurs costs in managing its tax affairs, including costs arising from the preparation and submission of a private ruling application in relation to its own affairs in respect of the Plans and the Trust, they are tax-related expenses deductible by Company A under subsection 25-5(1).

Question 2(b)

As discussed at Question 1(a), a deduction can be claimed for any loss or outgoing to the extent it is necessarily incurred in carrying on a business for the purpose of gaining or producing the claimant's assessable income, pursuant to subsection 8-1(1), to the extent the loss or outgoing is not capital or of a capital nature (pursuant to paragraph 8-1(2)(a).

Company A will incur costs associated with drafting and lodgement of a private ruling application with the ATO in relation to the Trust's income tax obligations arising from the contributions received and Shares issued in accordance with the Plans.

These costs are in respect of the tax affairs of the Trust and not of Company A's tax affairs, and as such are not deductible under section 25-5.

However, these costs are not capital in nature as the advantage sought is not enduring or structural. They are also necessarily incurred as part of Company A's employee remuneration strategy in carrying on its business.

It follows that these costs are deductible under section 8-1.

Question 2(c)

As discussed at Question 1(a), a deduction can be claimed for any loss or outgoing to the extent it is necessarily incurred in carrying on a business for the purpose of gaining or producing the claimant's assessable income, pursuant to subsection 8-1(1), to the extent the loss or outgoing is not capital or of a capital nature (pursuant to paragraph 8-1(2)(a).

Company A will incur on-going administration costs in operating the Trust and will appoint the Trustee to administer the Trust. In this respect Company A will incur costs associated with the services provided by the Trustee, including but not limited to:

•           Employee plan record keeping;

•           Production and dispatch of holding statements to employees;

•           Provision of annual income tax return information for employees;

•           Costs incurred in the acquisition of shares on market (e.g. brokerage costs and the allocation of such shares to Employees);

•           Management of employee termination (i.e. facilitating the payment under the Plans when an employee is terminated to the extent they have vested interests); and

•           Other trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust.

These are costs necessarily incurred by Company A in administering the ESS while carrying on its business for the purpose of gaining or producing its assessable income. That is there is a sufficient nexus.

Given the loss or outgoing are regular, recurrent and part of the ordinary employee remuneration costs of Company A, they are not treated as capital or of a capital nature (Taxation Determination TD 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an 'employee share scheme').

Accordingly, Company A will be entitled to deduct an amount under section 8-1 in respect of the costs incurred in relation to the on-going administration of the Trust to the extent those costs relate to the Participants.

Question 2(d)

Tax Determination TD 2022/8 "Income tax: deductibility of expenses incurred in establishing and administering an 'employee share scheme'"sets out the Commissioner's views on the deductibility of expenses in establishing and administering an ESS.

Establishment expenses are outgoings associated with the creation of an ESS and include fees and start-up costs incurred to establish or implement the employee share trust (EST) and the ESS plan rules.

In this case, Company A will incur various costs in relation to the establishment and implementation of the employee share trust, including but not limited to:

•           legal advice obtained in respect of the implications which may arise for both Company A and its employees in respect of the Trust structure and the Plans;

•           legal documents required in respect of the Trust and the Plans; and

•           professional fees associated with the establishment of the Trust including costs associated with the creation and registration of the employee share trust with various authorities.

Considering the nature and the intended effect of these costs is to establish a structure to assist Company A with its incentive arrangement in the long term, the advance sought is enduring and structural, and the outlay is incurred once and is not regular outlays directed by obtaining regular returns. These costs are therefore capital in nature, and as such they are not deductible under section 8-1.

Section 40-880 allows deductions for certain business capital expenditure that fall outside the scope of the deduction provisions of the income tax law. It requires the expenditure to be capital and in relation to the business. As this expenditure relates to remuneration of employees of the employer company who work within that business, the expenditure must be incurred in relation to that business.

Section 40-880 contains limitations and exceptions in subsections 40-880(3) to (9) which may prevent a deduction being allowed. Subsection 40-880(3) indicates that the expenditure is only deductible to the extent that the business is carried on for a taxable purpose. The other limitations and exceptions in subsections 40-880(4) to (9) do not prevent the expenses from being deductible under section 40-880.

There is nothing in the facts as submitted that indicate Company A's business is not carried on for a taxable purpose. Therefore the limitations do not apply to prevent these establishment costs from being deductible under section 40-880.

It follows that establishment expenses incurred in relation to the Plans or the Trust, where they relate to the Participants, are deductible in equal proportions over five years under section 40-880 to the extent the business carried on is for a taxable purpose.

Question 3

Section 6-5

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business.

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

The character of the subscription proceeds received by Company from the Trustee of the Trust can be determined by the character of the right or thing disposed of in exchange for the receipt. Where Company A issues the Trust with new shares in itself, the character of the newly issued share is one of capital. Therefore, the receipt of the subscription proceeds takes the character of share capital and is of a capital nature. This view is supported by the reasoning in ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee.

When Company A receives subscription proceeds from the Trustee where the Trustee has subscribed for new shares in Company A to satisfy its obligations to Participants in the Plans, those subscription proceeds received are a capital receipt and will not be treated as ordinary income under section 6-5.

Section 20-20

Subsection 20-20(2) provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year.

Company A will receive an amount for the subscription of shares by the Trustee. There is no insurance contract in this case, so the amount is not received by way of insurance. The amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. Therefore, the receipt of the subscription proceeds does not constitute an assessable recoupment under subsection 20-20(2).

Subsection 20-20(3) provides that an amount received by you as a 'recoupment' of a loss or outgoing, except by way of insurance or indemnity, is an 'assessable recoupment' if you can deduct the loss or outgoing is deductible in the current or a prior income year because of a provision listed in the table in section 20-30.

None of the provisions listed in section 20-30 are relevant to the current circumstances. Therefore, the subscription amount also does not constitute an assessable recoupment under subsection 20-20(3).

Division 104

A capital receipt will only be included as an assessable net capital gain only if it arises as a result of a CGT event (section 102-20).

The only CGT events that may have possible application to the receipt of the subscription proceeds are CGT event D1 (Creating a contractual or other rights) and CGT event H2 (Receipt for event relating to a CGT asset) or both.

Paragraphs 104-35(5)(c) and 104-155(5)(c) respectively provide that CGT event D1 and CGT event H2 do not apply if a company issues or allots equity interest or non-equity shares in the company.

As the Shares constitute an "equity interest" (see subsection 974-75(1)), neither CGT event D1 nor CGT event H2 will occur.

Since no CGT event occurs, the subscription proceeds will not be assessable as a capital gain to Company A.

Question 4

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, 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 deduction may be available where an employer provides money or other property to an EST 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 employee share trust arrangement.

Therefore, having regard to the eight factors set out in paragraph 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 5

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. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided.

No amount will be subject to FBT unless a 'fringe benefit' is provided.

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.

Indeterminate rights

The Commissioner accepts that the Plans meet the requirement of an ESS, and rights, options and awards granted under the Plans are an ESS interest under paragraph 83-10(1)(b), being a beneficial interest in a right to acquire a share in a company.

The Commissioner also accepts that rights granted under the RP, awards granted under the EIP and the vested options granted under the MDO that may be satisfied in cash instead of Shares are indeterminate rights. At the time these rights, awards and vested options are granted, it may be unclear if paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA applies because they 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, awards and vested options are ultimately satisfied with Shares instead of cash, section 83A-340 will operate to treat them to have always been ESS interests within the meaning of subsection 83A-10(1). In these circumstances, the RP, EIP and MDO will each constitute an ESS within the meaning of subsection 83A-10(2) because they are schemes under which ESS interests are provided to employees of Company A and Company B 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.

As the rights, awards and vested options are granted for nil consideration, Subdivision 83A-B will apply to these rights, awards and vested options (unless Subdivision 83A-C applies instead).

Accordingly, the provision of rights under the RP, awards under the EIP and the vested options under the MDO will not be subject to fringe benefits taxes on the basis that they are acquired by Participants under an ESS (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of a fringe benefit in subsection 136(1) of the FBTAA.

When rights under the RP, awards under the EIP and the vested options under the MDO are exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of these rights, awards and vested options and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon the exercise of rights granted under an employee share scheme).

For completeness, where the rights under the RP, awards under the EIP or the vested options under the MDO are ultimately satisfied with cash instead of Shares, the granting of the rights under the RP, awards under the EIP and the vested options under the MDO will be viewed as a series of steps in the payment of salary or wages, and not a separate benefit to the payment of salary or wages which are excluded from the definition of a fringe benefit by paragraph 136(1)(f) of the FBTAA.

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

Question 6

Pursuant to paragraph 136(1)(ha) of the FBTAA, a fringe benefit is defined to exclude:

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

Therefore, for the irretrievable cash contributions to be excluded from the definition of 'fringe benefit', the Trust must be an 'employee share trust' as defined in subsection 130-85(4), which states:

(4) An employee share trust, for an *employee share scheme, is a trust whose sole activities are:

(a) obtaining *shares or rights in a company; and

(b) ensuring that *ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to *associates of employees, of:

(i) the company; or

(ii) a *subsidiary of the company; and

(c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b)

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)

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

In the present case, paragraphs 130-85(4)(a) and (b) are satisfied because:

•           the Trust acquires shares in Company A

•           as stated above in response to question 1(b), the Commissioner accepts that the Plans meet the requirements of an ESS under which ESS interests are provided to Participants

•           the Trustee 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 Shares to Participants in accordance with the Deed and the rules of 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 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'? (TD 2019/13).

Activities that involve 'investing in assets other than shares or rights to shares in the employer company' or that result in employees being provided additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental.

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

Therefore, paragraph 136(1)(ha) of the FBTAA applies to exclude the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition of, Shares by the Trust from being a fringe benefit.

Question 7

Section 67 of the FBTAA is a general anti-avoidance provision of the FBTAA. Subsection 67(1) of the FBTAA is satisfied where a person, or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer, or the eligible employer and another employer, to obtain a tax benefit.

The Commissioner will only make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement.

As stated above in response to question 5, without the provision of a fringe benefit, no amount will be subject to FBT. The irretrievable cash contributions made by Company A to the Trustee (in accordance with the Deed) will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA for the reasons outlined in response to question 5. As these benefits have been excluded from the definition of a fringe benefit, the FBT liability is not any less than it would have been but for the arrangement.

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