Edited version of private advice

Authorisation Number: 1052297015913

Date of advice: 4 November 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 1a

Will Company A, as head company of the Company A tax consolidated group (TCG) obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (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 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 Share and Option Plan (SOP)

•         The Equity Incentive Plan (EIP).

Answer

Yes.

Question 1b

Will irretrievable cash contributions made by Company A directly 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 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?

Answer

Yes.

Question 1c

Will irretrievable cash contributions made by Company A directly 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 deductible to Company A under section 8-1 of the ITAA 1997 in the income year in which the contributions are made, if the contributions are made either in the same income year or in an income year that is after the acquisition of the relevant ESS interests?

Answer

Yes.

Question 2a

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 made by Company A to the Trustee to fund the subscription for or acquisition on-market of Shares by the Trust under the Plans?

Answer

No.

Question 2b

Will the Commissioner make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by Company A with respect to costs incurred by Company A in relation to the ongoing administration of the Trust?

Answer

No.

Question 3

Will the provision of ESS interests by Company A to the Participants under the Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 4

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, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA?

Answer

No.

Question 5

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 Trustee under the Plans?

Answer

No.

Questions 1 to 2 - 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 3 to 5 - 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:

1 April 2023

Relevant facts and circumstances

All legislative references are to the Income Tax Assessment Act 1997, unless stated otherwise.

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 and Company C. Company A and Company B are employing entities with employees in the TCG.

Company A established the Trust and appointed Company C as the Trustee of the Trust. The Trust operates under the terms of the trust deed (Deed), to facilitate the acquisition, holding of, and allocation of Shares to participants in accordance with the Plans.

As part of its overall remuneration strategy, Company A offers employees of Company A and Company B Shares or options under the SOP, which it intends to retire and replace with the EIP. The SOP and EIP are referred to as the Plans.

Under the SOP, either Shares or options are granted and options when vested entitle the holder to Shares. Under the EIP, awards are granted for nil consideration as below:

•         Exercisable awards which are rights, options or share appreciation rights, that can be settled by issuance of Shares or cash. Each exercisable award entitles the participant to receive the relevant number of Shares as set out in the invitation letter.

•         Cash awards gives participants entitlement to receive cash payment subject to applicable conditions being satisfied, and

•         Restricted shares are Share that are subject to the satisfaction of certain conditions, disposal restrictions and terms and conditions determined by Company A's board (Board).

The Plans

SOP

The SOP's purpose is to help Company A recruit, reward, retain and motivate eligible persons (i.e. directors, employees and contractors of the Company A group of companies).

Under the SOP, the Board may, from time to time, in its discretion, make written invitation to these eligible persons to apply for Shares and options upon the terms set out in the SOP. The invitation must set out, in terms of shares, any price payable on acceptable of the application, or in terms of options, exercise price and exercise conditions, and total number of Shares or options being made available. The Board can reject any application without assigning a reason. On acceptance of an application, the Board must notify the applicant accordingly, and the applicant becomes bound by the terms and conditions of the plan and the invitation and Company A must allocate Shares or options, and in the case of options, issue an option certificate evidencing the grant of options.

Each option granted under the SOP entitles the holder to one Share credited as fully paid, at the exercise price, on exercise of the option, unless otherwise specified in the terms and conditions of grant of the options. Options could also be settled (at the discretion of the Board) by a cash payment of equivalent value.

Upon satisfaction of the conditions of exercise, an option that has not otherwise lapsed can be exercised once the holder lodges a signed notice of exercise with Company A's share registry. Payment is required to exercise vested options by cash or by utilising the cashless exercise facility. Company A must allocate Shares, following exercise of options, as soon as practicable.

The Board, in its discretion, can allow an option holder to exercise the options, even if the exercise conditions have not been satisfied, and irrespective of whether the options would otherwise have lapsed, provided certain conditions are met.

The Board is conferred a range of powers to administer this plan, and may do so in conjunction with a share trust that it establishes. The Board may determine the manner in which any costs associated with the share trust and the costs incurred in the course of performance by the trustee of its roles and duties are to be borne. The Board has absolute discretion to make determination, decision, approval or opinion required under the rules of this plan.

Entitlement to dividends and other distributions arising from the Shares and voting rights attached to the Shares arise only when the Shares have been allocated and the holder is a registered holder of the Shares before the date for determining the relevant entitlement.

EIP

The EIP's purpose is to attract, motivate, retain and reward employees, contractors and directors of Company A and its group companies, and align the interests of these individuals with shareholders of Company A.

An award under this plan can be made in the form of an exercisable award (i.e. right, option or share appreciation right) which entitle the holder to Shares or restricted shares in Company A. An award can also be made in the form of a cash award where the holder is entitled to cash payment. And lastly an award can be made in the form of a restricted share that is subject to conditions and disposal restrictions.

The Board, in its discretion, may invite employees, contractors and directors of Company A and its group companies to acquire awards under this plan. The invitation letter will outline the type of award being made available, number or value of the awards to be granted, manner of exercise if exercisable awards are being offered, and other relevant information. No consideration is required for granting an award unless otherwise stated in the invitation letter. The Board may reject a valid application for awards. Also nothing limits the Board's ability to treat the conduct of an applicant as valid acceptance of the grant.

For exercisable awards that are unvested, the holder is not entitled to vote or receive dividend or distributions, or have any shareholder rights, until these awards vest and are exercised and Shares are allocated. For cash awards granted, a holder is not entitled to vote, receive dividends or distributions, or have any rights of a shareholder. For restricted shares, a holder is entitled to vote, receive dividends and distributions, and have all rights of an ordinary shareholder (noting disposal restrictions apply). And for all awards, unless the Board determines otherwise, an award is not transferable without written consent of the Board. If a holder of an award transfers the award without Board consent or enter into a scheme which may alter the economic benefit to be derived from the award, then the Board may determine the award lapses immediately.

Awards vest when the Board (in its discretion) determines that relevant conditions have been satisfied. The Board determines the period at the end of which vesting conditions will be tested, and following testing will determine if and when the awards vest and become exercisable (for exercisable awards) and notify the holder accordingly. The Board may determine an award vests prior to the end of the relevant period for a testing purpose. Awards will lapse to the extent that the Board determines conditions for vesting have not been satisfied.

Exercisable awards which have vested and been exercised are settled either in Shares (unless otherwise set out in an invitation letter), or in cash (at the discretion of the Board). If settled in cash, the payment is made inclusive of any statutory superannuation contribution that Company A is required to make. For restricted shares, once they vest, disposal restrictions are lifted.

The plan rules do not form part of any contract between the holder of an award and Company A, and granting awards in one year does not create any rights of granting awards in future years. The Board has absolute discretion to exercise any power or discretion in administering the plan and may delegate such power to any person, determine appropriate procedures for administering the plan, establish and operate a share trust and other relevant matters. In respect of a share trust, the Board may establish such a trust to acquire and hold Shares under the plan. Company A will procure and provide amounts required by the trustee of the share trust to acquire Shares, and the trustee will use the funds to acquire share either by subscribing for new Shares, purchasing existing Shares or via off-market transfer.

Trust

The Trust was established for the sole purpose of acquiring, holding, transferring Shares, and providing beneficial interest in those Shares, in accordance with the SOP and any other employee, executive or director equity plan (including the EIP) operated by Company A from time to time.

Company A appointed Company C as the Trustee of the Trust. Company C is a member of the TCG. It should be noted that whilst the trustee is a member of the TCG (in its legal capacity as a subsidiary company, the actual employee share trust settled by the Deed is not a member of the TCG).

In respect of general trust property, the Trustee holds the settlement sum and all other property that may be paid, transferred or credited to the Trust (including any accretions to the Trust) on trust for all beneficiaries. In respect of property held by the Trustee that is Shares, the Trustee holds all dividends and other distributions and may apply these amounts for certain specified purposes.

The Trustee has full power (in reasonable discretion) to do all things a trustee is permitted to do by law in respect of the Trust and the property it holds on trust.

The Trustee must act as trustee of the trust until it resigns or is removed. The Trustee must not acquire Shares during any periods when such an acquisition is not permitted by any statute, regulation or code applicable or adopted by Company A. The Trustee agrees to comply with the rules of the Plans and terms of any invitation made by Company A under the rules of the Plans. The Trustee must comply with reasonable written directions of any Company A group company to subscribe for, purchase or accept Shares on behalf of an applicant. A direction from Company A to the Trustee to subscribe for or purchase Shares is only effective if the Trustee has been provided with sufficient funds for the acquisition.

Company A will make available to the Trustee full facilities and information to ensure compliance with the Deed, and keep the Trustee in funds necessary to do any acts requested by the Board, and pay all costs and expenses in administering the Trust.

Company A will indemnify the Trustee in respect of liabilities, costs and expenses incurred by the Trustee arising from the Trustee performing its obligations.

Company A may by resolution of the Board remove or accept the resignation of the Trustee and appoint a new or additional trustee.

On termination of the Trust, the Trustee must wind up the Trust and transfer the trust property or proceeds on sale of the trust property to the appropriate beneficiaries (in relation to allocated trust property), and for general trust property, transfer Shares to one or more beneficiaries at the discretion of the Trustee (having regard to request from the Board), sell remaining investments of the trust, pay out debts of the trust and remaining balance to be distributed at the discretion of the Trustee having regard to the object of the Trust. Company A and its group companies are not beneficiaries of the Trust nor have entitlement to any part of the trust property (that includes Shares that form part of the trust property).

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 170(10AA)

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 8-1

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

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

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

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

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

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 subparagraph 83A-210(a)(i)

Income Tax Assessment Act 1997 section 83A-340

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

Income Tax Assessment Act 1997 paragraph 130-85(4)(a)

Income Tax Assessment Act 1997 paragraph 130-85(4)(b)

Income Tax Assessment Act 1997 paragraph 130-85(4)(c)

Income Tax Assessment Act 1997 section 701-1

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

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 67(1)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(f)

Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(ha)

Reasons for decision

Question 1a

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 Trustee are non-refundable in accordance with the Deed, as:

•        On termination of the Trust, Company A and members of its group do not have any entitlement to any part of the trust fund, including any shares that form part of the trust fund, at any time; and

•        Company A may not acquire any interest in the Capital (or corpus) or be entitled to any Income of the Trust.

Company A will incur an outgoing on the day the irretrievable contributions are made to the Trustee. Company A has a legal obligation to provide Shares to the Participants in accordance with the rules of the SOP and the EIP, and if those Shares are to be satisfied from the Trust, to fund the Trust for that purpose.

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 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).

Company A established the Trust for the sole purpose of facilitating the SOP and any other employee (including executive or director) equity plans (including the EIP).

So in this case, the contributions, when they are made, are made by Company A to the Trust to enable Company A to meet its obligations arising from the grant of Shares, options and awards under the Plans.

The Commissioner accepts that granting Shares, options and awards 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 also accepts there is sufficient nexus between:

a)    the irretrievable cash contributions made by Company A to the Trustee to satisfy the granting of Shares, options and awards 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 makes and will continue to make regular, irretrievable contributions, to the Trustee to satisfy Shares, 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 Shares, options and awards (rather than being one-off), and Company A intends to continue satisfying outstanding Shares, 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 the Income Tax Assessment Act 1997.

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 1b

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, which 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. It is noted the EIP offers cash awards, exercisable awards, and restricted shares. In terms of cash awards which gives a Participant an entitlement to receive a cash payment subject to the satisfaction of any applicable conditions, these awards are not ESS interests.

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 or beneficial interest in a Share.

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 right 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 ESS interest 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 ESS interest in an income year before the income year in which the contribution is made, deduction is available in the income year in which the contributions are made.

•         Where a Participant is granted the ESS interest in an income year after the income year in which the contributions are made, deduction is available in the income year in which the granting of the ESS interest occurs.

Indeterminate rights under the Plans

The Commissioner accepts that exercisable awards granted under the EIP are indeterminate rights for the purposes of section 83A-340. Similarly, options granted under the SOP which can be cash settled (at the discretion of the Board) are also indeterminate rights.

Accordingly, exercisable 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. Similarly, options granted under the SOP which can be settled in cash at the discretion of the Board are not beneficial interest in a right to acquire a beneficial interest in a share unless, and until the time the Board determines these options will be settled 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 exercisable award under the EIP or the options under the SOP whichever is the case.

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 1c

For reasons outlined in response to Question 1a 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, and as further outlined in response to Question 1b above, the timing of this deduction is, under some circumstances determined by section 83A-210.

If the contributions are made in the same income year or in a year after 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 contributions are made.

Question 2a

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.

As already discussed at Question 1a above, the Commissioner generally accepts that an income tax 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 2b

As discussed at Question 1a, 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 may incur on-going administration costs in operating the Trust and has appointed the Trustee to administer 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.

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.

As discussed, the Commissioner generally accepts that an income tax deduction may be available for cost incurred by an employer in administering an EST.

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 3

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 which Subdivision 83A-B or 83A-C applies to).

Indeterminate rights

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

The Commissioner also accepts that exercisable awards granted under the EIP which may be satisfied in cash instead of Shares, and options granted under the SOP which can be settled in cash, are both indeterminate rights. At the time these awards and 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 these awards and 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 EIP and SOP will 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 awards and options are granted for nil consideration, Subdivision 83A-B will apply to them (unless Subdivision 83A-C applies instead).

Accordingly, the provision of exercisable awards under the EIP and options granted under the SOP (which can be cash settled) 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 the exercisable awards under the EIP are exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of these 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 exercisable awards under the EIP and the options under the SOP are ultimately satisfied with cash instead of Shares, the granting of the awards and options 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 4

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

(a)    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 1b, 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 or any member of the TCG to the Trustee to fund the subscription for, or acquisition of, Shares by the Trust from being a fringe benefit.

Question 5

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 3, without the provision of a fringe benefit, no amount will be subject to FBT. The irretrievable cash contributions made by Company A or any member of the TCG 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 4. 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 seek to 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.