Edited version of private advice

Authorisation Number: 1052323190727

Date of advice: 25 October 2024

Ruling

Subject: Employee share scheme

Question 1

Will the irretrievable cash contributions made by Company A or any subsidiary of the Company A income tax consolidated group (Company A TCG) to the Trustee of the Employee Share Trust (Trust), to fund the subscription for or acquisition on-market of fully paid ordinary shares in Company A (Shares), for the purposes of its employee share plans (Plans), give rise to a deduction for Company A, under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes - to the extent that the irretrievable cash contributions are made by Company A to satisfy awards granted under the Plans to employees of members of the Company A TCG who engage in activities that derive income assessable in Australia.

Question 2

Are 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 to satisfy Company A's obligations under the Plans be deductible at a time determined by section 83A-210 of the ITAA 1997, if the contributions are made before the relevant employee share scheme (ESS) interests are acquired?

Answer 2

Yes - to the extent that the irretrievable cash contributions are made by Company A to satisfy awards granted under the Plans to employees of members of the Company A TCG who engage in activities that derive income assessable in Australia.

Question 3

Will Company A be entitled to a deduction under section 8-1 of the ITAA 1997 for costs incurred in relation to the ongoing administration of the Plans and the Trust?

Answer 3

Yes - to the extent these costs relate to employees of members of the Company A TCG who engage in activities that derive income assessable in Australia.

Question 4

Will the irretrievable cash contributions by Company A to the Trustee to acquire Shares to be provided to Participants under the Plans result in Company A deriving ordinary income assessable under section 6-5 of the ITAA 1997, at the time the irretrievable cash contributions are made or when the Shares are provided to the Participants?

Answer 4

No

Question 5

Will the subscription for new Shares by the Trustee be included in the assessable income of Company A, under section 6-5 or section 20-20 of the ITAA 1997, or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997?

Answer 5

No

Question 6

Will the provision of Share Rights and Shares by Company A to Participants under the Plans constitute a fringe benefit, within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer 6

No

Question 7

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

Answer 7

No

Question 8

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

Answer 8

No

Question 9

Will the Commissioner make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company A by the amount of tax benefit gained from irretrievable cash contributions, made by Company A to the Trustee, to fund the acquisition of Shares pursuant to the Plans?

Answer 9

No

This ruling applies for the following periods:

This ruling for Questions 1 to 5 and 8 applies for the following periods

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

This ruling for Questions 6, 7 and 9 applies for the following periods

1 April 20XX to 31 March 20XX

1 April 20XX to 31 March 20XX

1 April 20XX to 31 March 20XX

1 April 20XX to 31 March 20XX

1 April 20XX to 31 March 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Company A

Company A is an Australian resident public company listed on the Australian Securities Exchange (ASX) and is the head company of the Company A TCG.

Company A is a diversified company that operates different businesses.

Company A's current employee share plans are:

•                     Plan A

•                     Plan B

•                     Plan C

•                     Plan D

together, the Plans.

Company A grants Shares under the Plan A, Plan B and Plan D. Company A also grants Performance Rights (as defined under the Plan A Rules, being an entitlement to a Share or to a cash payment equal in value to a Share, subject to satisfaction of performance, service and/or other conditions) (Share Rights) under Plan C.

The Plans are a component of Company A compensation and benefits packages and are described as a 'retention and alignment tool (aligning employee behaviour with shareholders' interests)'.

The Plans generally apply to all eligible employees of Company A and its subsidiaries within the meaning of Division 6 of Part 1.2 of the Corporations Act (Group), including non-Australian resident employees.

Plan A

Plan A was introduced in 20XX as the general share plan for Australian resident employees. It is governed by Plan A Rules.

On 28 August 20XX, Plan A Rules were amended and approved. In particular, new Rule X provides the Board with the absolute discretion to apply an adjustment (upwards or downwards) to the number of a Participant's Shares or Performance Rights that vest once the conditionsattached to those awards are satisfied. Where the Board decides to reduce the number of a Participant's Shares or Performance Rights that vest, those Shares or Performance Rights that would otherwise have vested will instead lapse or be forfeited.

Under the Plan A Rules, the Board may, in its absolute discretion, make invitations to Eligible Employees to participate in Plan A to acquire Shares.

An Eligible Employee means a director of Company A, a person employed by a Group Company or other person the Board determines to be eligible to participate.

Shares allocated under Plan A to Eligible Employees are subject to a X-year trading restriction period from allocation date and they are held by the Trustee of the Trust on behalf of the Participants during the trading restriction period.

Participants can choose to leave their Shares in the Trust after the trading restriction period.

Where Shares are forfeited in accordance with the Plan A Rules and the Shares are held by the Trustee, the Participant's rights in the Shares will be extinguished for nil consideration and the Shares will be held as general trust property in accordance with the Trust Deed. The Board may direct the Trustee to hold the Shares for the benefit of a different or new Participant.

Participants are entitled to receive dividends for their allocated Shares.

Company A made the following offers under Plan A:

•                     Tax Deferred Plan - Award

•                     Tax Deferred Plan - Salary Sacrifice

•                     Tax Exempt Plan - Award

•                     Tax Exempt Plan - Salary Sacrifice

Tax Deferred Plan - Award

The Tax Deferred Plan - Award is an award of Shares of a value specified to the employee.

Offers may be made to permanent employees in senior roles each year (subject to age, continuous employment and residency criteria), depending on the performance of the Group and the employee's division.

Shares are allocated on a specified date shortly after an offer is accepted.

Generally, the Shares are subject to a X, X or X year forfeiture period, subject to the following:

•                     if the Participant ceases employment for reasons other than retirement, redundancy, ill health or death, the allocated Shares will be forfeited

•                     if a Participant ceases employment due to retirement, redundancy, ill health, or death during the forfeiture period, the Participant will be entitled to retain the Shares allocated.

If, in the opinion of the Board, the Participant ceases employment because of fraud, theft, or other gross misconduct at any time, all of the Shares allocated will be forfeited.

Tax Deferred Plan - Salary Sacrifice

The Tax Deferred Plan - Salary Sacrifice provides Participants an opportunity to acquire up to $XXXX worth of Shares through a salary sacrifice arrangement, deducted from the Participants' pre-tax salary or wages in equal instalments each pay cycle.

Offers are made to all permanent employees each year (subject to age, continuous employment and residency criteria).

Shares are allocated monthly over X months.

If the Participant ceases employment during the trading restriction period, the trading restriction is lifted.

Rule XX of the Plan A Rules statesthat if the invitation consists of an offer which is a salary sacrifice arrangement where the employee's maximum participation in employee share schemes does not exceed $XXXX, then Subdivision 83A-C of the Tax Act applies to that offer.

Tax Exempt Plan - Award

The Tax Exempt Plan - Award is an award of up to $XXX worth of Shares.

Offers may be made to permanent employees each year (subject to age, continuous employment and residency criteria), depending on the performance of the Group and the employee's division.

Shares are allocated on a specified date shortly after an offer is accepted.

If the Participant ceases employment during the trading restriction period, the trading restriction is lifted.

Shares allocated under the Tax Exempt Plan - Award are intended to satisfy the conditions for tax exemption under section 83A-35 and cannot be forfeited for any reason.

Tax Exempt Plan - Salary Sacrifice

The Tax Exempt Plan - Salary Sacrifice provides Participants an opportunity to acquire either $XXX or $XXXX worth of Shares through a salary sacrifice arrangement, deducted from the Participants' pre-tax salary or wages in equal instalments each pay cycle over XX months.

Shares are allocated monthly over XX months.

Offers may be made to all permanent employees each year (subject to age, continuous employment and residency criteria).

If the Participant ceases employment during the trading restriction period, the trading restriction is lifted.

Shares allocated under the Tax Exempt Plan - Salary Sacrifice are intended to satisfy the conditions for tax exemption under section 83A-35 and cannot be forfeited for any reason.

Plan B

Plan B provides an award of Shares and it is delivered partly in:

•                     Restricted Shares, which are subject to a three-year trading restriction (Restricted Shares), and

•                     Performance Shares, which are subject to performance conditions over four years (Performance Shares).

The number of Restricted Shares and Performance Shares to be allocated are calculated by dividing the value specified in the invitation by the market price of the Restricted Shares and Performance Shares.

Shares are allocated on a specified date shortly after an offer is accepted.

Plan B is also governed by the Plan A Rules. To the extent of any inconsistency, the terms of the Plan B offer letter will prevail, followed by the explanatory notes and the Plan A Rules.

In relation to the Restricted Shares:

•                     They are subject to a three-year forfeiture period from the Grant Date, and a three-year trading restriction, unless the Participant requests a longer restriction period of X, XX or XX years, and

•                     The dividends paid will be distributed by the Trustee directly to the Participants on the payment date.

In relation to the Performance Shares:

•                     They will vest and become unrestricted shares, subject to satisfaction of the performance condition measured over a X-year performance period. The Participants will be notified of vesting outcomes. Any Performance Shares that do not vest will be forfeited.

•                     Dividends paid are subject to the terms of an Escrow Deed entered into between Company A, the Participant, and the escrow agent, whereby the dividends will be held in an interest-free escrow account until the vesting date and then paid to the Participant only to the extent, and at the time the Performance Shares, vest. The following describes the escrow arrangement:

-        Company A and the Participant agree for Company A or the Trustee to deposit the dividend into the interest-free escrow account. Once deposited, the Trustee has no further involvement in the escrow arrangement.

-        Each XX, a portion of the escrowed amount during the previous financial year is released by the escrow agent to the Participant to fund the income tax due on the dividends by the Participant.

-        Following the end of the performance period (in respect of dividends arising on Performance Shares), the remaining escrowed amount is released by the escrow agent to the Participant to the extent that the underlying Share has not been forfeited.

-        If the underlying Share has been forfeited, the remaining escrowed amount is paid to Company A and is treated as assessable income of Company A.

Plan C

Plan C is governed by the Plan A Rules. To the extent of any inconsistency between the terms set out in the Plan C offer letter and the Plan A Rules, the terms in the offer letter will prevail.

Plan C is an award to senior executives subject to the satisfaction of performance measures over a XX-month period. The awards being delivered are Share Rights in the form of Performance Rights (as defined under the Plan A Rules) being rights to receive:

•                     cash for performance up to 'target' (Cash Award), where the senior executives may elect to receive some or all of their Cash Award in the form of Restricted Shares (Additional Shares) rather than in cash. The election to forgo some or all of the Cash Award for Additional Shares is made shortly after an offer is accepted, subject to a subsequent option to revoke this election (closer to the end of the performance period) and

•                     shares in Company A for performance between 'target' and 'maximum' (Deferred Shares), where it is mandatory to receive Shares and the Performance Rights to receive Deferred Shares cannot be settled in cash.

Where the Share Rights to receive Cash Award are settled in cash, the outgoing will not flow through the Trust.

During the Performance Period:

•                     if the Participant resigns or their employment is terminated for cause or for not meeting acceptable standards of performance in connection with employment - the Participant will not be eligible to receive an award under Plan C, unless the Board determines otherwise

•                     if the Participant ceases employment with the Group for any other reason, including redundancy, ill health, death or normal retirement, the Participant will remain eligible to receive a pro-rated amount of their award, which will be awarded entirely in cash.

If the Participant ceases employment after the Performance Period but before they receive any award under Plan C, they will remain eligible to receive the award in full which will be awarded entirely in cash.

In respect of the Deferred Shares and Additional Shares:

•                     they are allocated after the end of the performance period once the performance measures are assessed

•                     they are subject to a three-year trading restriction period, unless the senior executive elects to extend the trading restriction period. If a longer restriction period is elected, the restriction period commences from the start of the performance period and ends on the trading day following the announcement of Company A's half-year results

•                     they will be held by the Trustee during the restriction period

•                     the senior executives are entitled to any dividends paid on the allocated Shares

•                     upon expiry of the restriction period, the Participant may direct the Trustee to sell the Deferred Shares and Additional Shares

•                     participants can choose to leave their Shares in the Trust after the trading restriction period.

In respect of the Deferred Shares:

•                     if, within XX months of the Deferred Shares being allocated, the senior executive resigns or has their employment terminated for cause or for not meeting acceptable performance standards in connection with employment, all of the Deferred Shares may be forfeited at the Board's discretion

•                     if the senior executive ceases employment for any other reason during the XX-month period, or after the XX-month period (but before the end of the mandatory three-year restriction period), the Deferred Shares remain on foot and the trading restrictions will cease to apply, unless the Board determines otherwise.

In respect of the Additional Shares, the voluntary or extended nominated restriction periods end on the date nominated, even where employment may end earlier.

Plan D

Plan D is an award of newly issued Shares to the executives and the award is delivered partly in:

•                     restricted shares, that are subject to a XX-month service condition and a further X, X and X year trading restriction (Deferred Shares) and

•                     performance shares which are subject to performance conditions over X years (Performance Shares).

The number of Deferred Shares and Performance Shares to be allocated to the Participants is set out in the offer letter and they are held by the Trust.

Plan D is governed by the Plan D Rules. To the extent of any inconsistency, the terms of the offer letter will prevail, followed by the explanatory notes and the Rules.

In relation to the Deferred Shares:

•                     they are subject to a XX-month continued service condition, commencing on the Grant Date and ending after XX months (service period).

•                     they will vest at the end of the service period and will be held in trust, subject to a further X, X, and X year trading restriction. Unless an extension is requested by the Participant, the Deferred Shares will be released and available to trade in X equal tranches after X, X and X years on the trading day following the full-year results announcement). The Participant may request to extend the restriction period for X, XX or XX years from the Grant Date and the extension will apply to the full number of Deferred Shares allocated.

•                     If the Participant ceases employment because they:

-        resign during the XX-month service period (during the time which the Deferred Shares are unvested),

-        are dismissed for cause or significant underperformance,

-        breach the restraints clause in their service agreement, or

-        are otherwise dismissed in circumstances determined by the Board in its absolute discretion to justify bad leaver treatment,

any unvested Deferred Shares and vested Deferred Shares subject to a holding lock will be forfeited, unless the Board determines otherwise.

•                     if the Participant ceases employment for any other reason, or if they resign after the service period has ended, unless the Board determines otherwise, their Deferred Shares will remain on foot.

In relation to Performance Shares:

•                     they will vest and become unrestricted shares upon satisfying certain performance conditions over a X-year performance period. The Participants are expected to be advised of the vesting outcome

•                     any Performance Shares that do not vest will be automatically forfeited

•                     if the Participant ceases employment during the performance period because they:

-        resign (except due to death, disability or serious illness)

-        are dismissed for cause or significant underperformance

-        breach the restraints clause in their service agreement or

-        are otherwise dismissed in circumstances determined by the Board in its absolute discretion to justify bad leaver treatment

the Performance Shares will be forfeited, unless the Board determines otherwise:

•                     if the Participant ceases employment for any other reason, unless the Board decides otherwise, the Performance Shares will remain on foot and subject to the original performance conditions and the Plan D Rules, as though the employment had not ceased.

•                     if the Participant ceases employment after the performance period has ended but before the Performance Shares vest, the Performance Shares will be eligible to vest.

Participants can choose to leave their Shares in the Trust after the performance period or trading restriction period (as applicable).

Participants are presently entitled to dividends arising on their Deferred Shares and Performance Shares as against the Trustee:

•                     During the XX-month service period, any dividends referrable to the Deferred Shares will be subject to a deferred payment date. Upon vesting following the end of the service period, Company A will seek quotation of the Deferred Shares and any accrued dividend entitlements will be paid to the Participants to the extent the Deferred Shares are not forfeited.

•                     During the X-year performance period, any dividends referable to the Performance Shares will be subject to a deferred payment date. Following the end of the performance period and confirmation of the vesting outcome, Company A will seek quotation of the Performance Shares and any accrued dividend entitlements will be paid to the Participants to the extent the Performance Shares are not forfeited.

Any distributions (excluding dividends) paid on the Deferred Shares and Performance Shares will be held in escrow and directed to the Trustee to transfer any such funds into the escrow account to be held in accordance with the terms of the Escrow Deed between the Participant, Company A and the Agent for Plan D offer.

Acquisition of Shares by the Trustee

The following describes the share acquisition process under Plan A where Company A makes irretrievable cash contributions to the Trustee to allow the Trustee to either subscribe for Shares or acquire Shares on-market.

•                     Company A makes irretrievable cash contributions on behalf of its wholly owned subsidiaries and other subsidiaries it controls (as defined in the Corporations Act 2001). Company A recovers from those other entities, including foreign entities (via a recharge) the costs of Shares issued to or acquired for its employees, including non-resident employees, including non-resident employees, so that, for accounting purposes, the relevant business accounts for the cost of the plan for its employees.

•                     The Plan Administrator advises Company A of the number of Shares and the value of the irretrievable cash contributions required to satisfy the obligations of Plan A.

•                     Following the completion of the invitation period, in the case of an issue of new Shares by Company A:

-        Company A submits an Appendix 3B to the ASX for the issuance of new Shares. Once submitted, Company A pays the irretrievable cash contributions to the Trustee for Plan A to be administered appropriately.

-        once the irretrievable cash contributions are received by the Trustee (typically the same day as the irretrievable cash contributions is made by Company A), Company A arranges with the Plan Administrator for the issue of new Shares in the name of the Trustee, who then arranges the payment for the Shares to Company A.

•                     Where Shares are to be acquired on-market:

-        the Trustee, via the Plan Administrator, places an order with a nominated broker(s) for the requisite number of Shares to be purchased on-market.

-        Company A can pay the irretrievable cash contributions to the Trustee before or after the acquisition of the Shares. If the Trustee approves, contributions can be made directly to the broker after the acquisition of Shares, on behalf of the Trustee.

-        the broker(s) purchases Shares on-market and advise the Trustee of the total invoice value including brokerage.

-        the Trustee settles the trade with the broker(s) on nominated terms (this can be T+1, T+2 upon the request of Company A).

-        The broker(s) provides the Shares to, and in the name of, the Trustee in accordance with the directions of the Trustee.

The Share acquisition process under Plan B, Plan C and Plan Dis the same as for Plan A as set out above, except for the timing of acquisition.

•                     It is Company A's practice to acquire the Shares for Plan B progressively over the four-year performance period based on the number of Performance Shares expected to vest for each grant.

•                     It is Company A's practice to acquire the Shares for Plan C progressively over the XX-month performance period based on the number of Share Rights (Performance Rights to receive Additional Shares and Deferred Shares) expected to vest for each grant. Share acquisitions usually happen in XXX following full-year results in the financial year subsequent to the invitation and are all acquired in one day.

Trust

In 20XX, Company A appointed the Trustee for the purposes of receiving funds from Company A and acquiring and holding property on trust for the benefit of employees of Company A and its subsidiaries in accordance with the rules of the Plans and the terms and conditions in the Trust Deed.

The Trustee has all the powers in respect of the Trust that is legally possible for a trustee as a body corporate to have for the sole purpose of exercising its powers and discharging its obligations under the Trust Deed and the rules of the applicable Plan.

The Trustee's activities are limited to managing Company A's employee share schemes for the purposes of section 1100S of the Corporations Act 2001.

The Trust Deed sets out a conformed version of the original trust deed and subsequent amendments since that date.

'Beneficiaries' is defined to mean any person who participates in the Plans and any full-time or permanent part-time employee of Company A or its subsidiaries. This includes both Australian tax resident and non-resident employees.

Company A is not a beneficiary of the Trust and has no entitlement to any Shares forming the Trust Fund (being the settlement sum and other property including money or fully paid Shares) at any time.

The Trustee is neither a subsidiary nor a related body corporate of Company A for the purposes of the Corporations Act 2001.

Trustee's obligations and powers

Under the Trust Deed, the Trustee agrees to:

•                     hold the Trust Fund on trust for all beneficiaries (General Trust Property) in the manner required by the rules of the Plans, and

•                     at the request of the Board, set aside and hold some of the Trust Fund for the benefit of identified Participants (Allocated Trust Property).

If Shares are held as part of the General Trust Property (e.g. unallocated shares), the Trustee may apply it for the benefit of Beneficiaries subject to the following matters. The Trustee:

•                     may, with the consent of the Board, or shall if directed by the Board, apply any dividends or other distributions received on those Shares in repaying any loans from a Group Company, acquiring further Shares, defraying the costs and expenses of administering the Trust and managing the Plans and otherwise must hold those amounts on trust for Beneficiaries

•                     must hold bonus issues or other benefits received on those Shares on Trust for the Beneficiaries

•                     may vote or refrain from voting in respect of those Shares in its absolute discretion (if the Trustee is not an associated entity of Company A)

•                     may participate in other corporate actions of Company A (e.g. a rights or bonus issue) in its absolute discretion

•                     may not transfer those Shares to another person

•                     in relation to the Allocated Trust Property (e.g. allocated shares), the Trustee must act at all times in accordance with the rules of the Plans and:

•                     must not deal with any part of Allocated Trust Property otherwise than as set out in the rules of the Plans

•                     must comply with the rules of the Plans, including any requests of the Board so far as is reasonable

•                     is not bound to observe instructions from an Allocated Trust Property Beneficiary except as required by the rules of the Plans

•                     subject to the rules of the Plans, must, at the request of an Allocated Trust Property Beneficiary on whose behalf an identified part of the Allocated Trust Property is held, transfer that part of the Allocated Trust Property to the Allocated Trust Property Beneficiary

If Shares are held on trust for a specified Allocated Trust Property Beneficiary:

•                     the Allocated Trust Property Beneficiary is presently entitled to receive all dividends and other distributions, bonus issues and other benefits payable or provided to the Trust in respect of those Shares

•                     the Trustee may direct Company A to pay any dividends directly to the Allocated Trust Property Beneficiary or distribute the dividends to that Beneficiary upon receipt, or escrow certain dividends on behalf of the Allocated Trust Property Beneficiary and distribute them under the rules of the Plans

•                     any bonus shares issued in respect of those Shares will be issued to the Trustee and held for the Allocated Trust Property Beneficiary on the same terms and conditions as the underlying Shares

•                     the Trustee may vote or refrain from voting in its absolute discretion, in the absence of any direction from the Allocated Trust Property Beneficiary in writing on how to exercise the voting rights attaching to those Shares.

The following applies to Shares held by the Trustee in respect of an Allocated Trust Property Beneficiary under a specified Allocated Trust Property Beneficiary under the Plans (Specified Beneficiary). If Shares forming part of the Trust Fund are held on trust for a Specified Beneficiary:

•                     the Specified Beneficiary is not entitled to receive any dividends and other distributions in respect of those Shares until they are released from any restrictions, unless the rules of the Plans provide otherwise or the Board determines otherwise

•                     the Trustee must hold any such dividends or other distributions until those underlying Shares are released from any restrictions, and to the extent any such Share are forfeited, the dividends or distributions held by the Trustee will form part of the General Trust Property

•                     the Trustee may, with consent of the Board, apply any interest received from the investment of such dividends or distributions to defray the costs and expenses of administering the Trust and managing the Plans, and otherwise must hold those amounts as part of the Trust Fund.

•                     any bonus shares that are issued in respect of those Shares will be issued to the Trustee and held for the Specified Beneficiary on the same terms and conditions as the underlying Shares and transferred to the Specified Beneficiary for no further consideration when the underlying Shares are released from any restrictions.

The investment referred to above is interest payable if the dividend was held in an interest-bearing bank account and all funds held by the Trustee are currently held in non-interest bearing accounts.

The Trustee must comply with any direction from Company A to subscribe for, purchase or accept Shares on behalf of the Beneficiaries in accordance with the rules of the Plans and apply any amount paid to it, whether by way of gift or loan or otherwise, by Company A or any Subsidiary pursuant to the rules of the Plans in accordance with Company A's directions, provided the Company has provided sufficient funds to comply with the direction.

Neither Company A nor any of its subsidiaries currently loan money to the Trustee. Company A only funds the Trustee bank account in advance of shares being acquired to satisfy share awards.

None of the irretrievable cash contributions made by Company A to the Trust will be used to establish or form part of a fund which will be applied to make loans or otherwise provide finance to the Company A group employees.

In the event that the Trust is terminated, clause Y of the Trust Deed provides:

The Trustee must, as soon as practicable after the Termination Date, wind up the Trust and transfer the Trust Fund or the proceeds on sale of the Trust Fund (as appropriate):

(1)           in relation to Allocated Trust Property, to the appropriate Allocated Trust Property Beneficiary;

(2)           in relation to General Trust Property, to the Company in repayment of any outstanding loan from the Company, to a Subsidiary in repayment of any outstanding loan from that Subsidiary, and otherwise at the discretion of the Trustee, having regard to and not being inconsistent with the purpose of this Trust.

Company A's obligations

Under the Trust Deed, Company A agrees to:

•                     pay all the costs and expenses in administering the Trust Deed including all costs and expenses in maintaining the corporate existence of the Trustee or incurred in connection with the acquisition, registration, disposal of or other dealing with Shares and otherwise incurred by the Trustee in carrying out its duties

•                     indemnify the Trustee against all liabilities, costs and expenses and actions, proceedings, costs, claims and demands that may arise out of or in connection with the Trustee acting as Trustee, unless it is proved that the act giving rise to the claim or demand has been committed, made or omitted in bad faith by the Trustee.

Other

Company A incurs ongoing costs in respect to administering the Plans, including:

•                     consulting and offer management costs such as creation and review of offer documents, postage, brokerage

•                     recurring annual fees, such as plan structure maintenance, plan membership fees and administration fees,

•                     professional fees such as tax and legal

•                     other expenses including employee annual statements and telephone expenses.

Relevant legislative provisions

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 subsection 8-1(2)

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

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 subsection 20-20(2)

Income Tax Assessment Act 1997 subsection 20-20(3)

Income Tax Assessment Act 1997 subsection 20-25(1)

Income Tax Assessment Act 1997 section 20-30

Income Tax Assessment Act 1997 section 25-5

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

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

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

Income Tax Assessment Act 1997 subdivision 83A-B

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

Income Tax Assessment Act 1997 subdivision 83A-C

Income Tax Assessment Act 1997 subparagraph 83A-105(4)(a)(i)

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 paragraph 83A-210(a)

Income Tax Assessment Act 1997 subparagraph 83A-210(a)(i)

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 paragraph 104-35(5)(c)

Income Tax Assessment Act 1997 paragraph 104-155(5)(c)

Income Tax Assessment Act 1997 section 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 Division 165

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 section 974-75

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

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

Reasons for decision

Questions 1 to 5 and 8 - application of the single entity rule in section 701-1

The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1, the subsidiary members of an income tax consolidated group are taken to be parts of the head company.

The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997.

As a consequence of the SER, the actions and transactions of the subsidiary members of the Company A TCG are treated, for income tax purposes, as having been undertaken by Company A, as the head company of the Company A TCG.

Questions 6, 7 and 9

The SER in section 701-1 has no application to the FBTAA. The Commissioner has therefore provided a ruling to Company A and each employing company in the Company A TCG in relation to questions 6, 7 and 9.

Question 1

Summary

The irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of, Shares for the purposes of the Plans, will be deductible under section 8-1, to the extent the irretrievable cash contributions are made to satisfy awards granted under the Plans to Participants who are employees of members of the Company A TCG who engage in activities that derive income assessable in Australia.

Detailed reasoning

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

Company A is an Australian resident public company and carries on diverse businesses for the purpose of gaining or producing assessable income. Company A operates an employee share scheme as part of its employee remuneration strategy.

Under the Plans, Company A grants Share Rights and Shares to Participants and makes irretrievable cash contributions to the Trustee to fund the acquisition of Shares by the Trust for allocation to Participants (in accordance with the Plans and the Trust Deed). Where the irretrievable cash contributions are made by Company A to fund the acquisition of Shares by the Trust on behalf of its wholly owned subsidiaries and the subsidiaries it controls (as defined in the Corporations Act 2001), Company A recovers from those entities, including foreign entities (via a recharge), the costs of Shares issued to or acquired for those employees, including non-resident employees.

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

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

•                     all funds received by the Trustee from Company A will constitute accretions to the corpus of the Trust and will not be repayable to Company A, other than as consideration for Shares subscribed for by the Trustee in accordance with the Trust Deed and the Plans or relevant terms of participation

•                     nothing in the Trust Deed confers, or is intended to confer, on Company A any charge, lien or any other proprietary right, or proprietary or beneficial interest in Shares.

It is accepted that the irretrievable cash contributions made by Company A to satisfy Share Rights and Shares granted to Participants under the Plans are incurred for the purposes of section 8-1.

The issue is whether the irretrievable cash contributions are 'incurred in gaining or producing Company A's assessable income' (paragraph 8-1(1)(a)), or are 'necessarily incurred in carrying on a business for the purpose of gaining or producing Company A's assessable income' (paragraph 8-1(1)(b)).

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

Will the irretrievable cash contributions be incurred in gaining or producing Company A's assessable income under paragraph 8-1(1)(a)?

The phrase 'incurred in gaining or producing your assessable income' was considered in the High Court decision of Commissioner of Taxation v Payne[1] The majority concluded that 'incurred in gaining or producing' assessable income means incurred 'in the course of gaining or producing that income' - it does not mean outgoings incurred 'in connection with' or 'for the purposes of' deriving assessable income. The High Court stated that the question that requires consideration is;'... is the occasion of the outgoing found in whatever is productive of actual or expected income?'[2]

In Healy and FC of T, the Administrative Appeals Tribunal suggested that the following may assist in determining whether a loss or outgoing was incurred 'in the course of' gaining or producing actual or expected income:[3]

What is required is an objective:

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

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

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

In Watson as trustee for the Murrindindi Bushfire Class Action Settlement Fund v Commissioner of Taxation, the Full Federal Court held:[4]

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

To the extent the irretrievable cash contributions relate to funding the provision of Shares to Participants under the Plans who are employees of members of the Company A TCG, it is accepted that these expenses are productive of Company A's assessable income and are incidental and relevant to the income earning activity of the Company A TCG as:

•                     they arise as part of the remuneration arrangements for employees of the Company A TCG, and

•                     the irretrievable cash contributions to the Trust are part of an ongoing series of payments in the nature of the remuneration of those employees.

That is, there is sufficient nexus between:

•                     the irretrievable cash contributions made by Company A to the Trustee to satisfy the granting of Share Rights and Shares under the Plans to Participants who are employees of members of the Company A TCG, and

•                     its own income earning activities, where those employees engage in activities that derive income assessable in Australia.

Therefore, paragraph 8-1(1)(a) is satisfied.

However, to the extent the irretrievable cash contributions relate to funding the provision of Shares under the Plans to Participants who are employees of subsidiaries (as defined in the Corporations Act 2001) that do not form part of the Company A TCG, the Commissioner's view is that those irretrievable cash contributions are not productive of Company A's assessable income and are not incidental and relevant to its income earning activities. Therefore, there is not a sufficient nexus between the outgoing and the activities which more directly produce Company A's assessable income and paragraph 8-1(1)(a) is not satisfied.

For completeness, the recharge amounts received by Company A to recover the irretrievable cash contributions incurred in respect of employees of subsidiaries (as defined in the Corporations Act 2001) that do not form part of the Company A TCG is not considered to be assessable income to Company A because it is not income according to ordinary concepts as there is no intention by Company A to make a gain from the recharge transaction and Company A does not charge those subsidiaries any service fee/mark-up.

Will the irretrievable cash contributions be necessarily incurred in carrying on a business for the purpose of gaining or producing Company A's assessable income under paragraph 8-1(1)(b)?

In determining whether those irretrievable cash contributions are otherwise necessarily incurred in carrying on a business, the expense must have been incurred 'in the carrying on' of the business. It must be part of the cost of the trading operations of that business[5] What is required is that the expenditure be appropriate and adapted for the ends of the business carried on.[6]

The Commissioner considered what was meant by the second positive limb in Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 at paragraph 73:

In contrast, for expenditure to be deducted under the second positive limb of section 8-1, it must be incurred in carrying on a business. To satisfy this requirement, the outgoing must have the character of a working or operating expense of the entity's business or be an essential part of the cost of its business operations.

In John Fairfax & Sons Pty Ltd v. FC of T (1959) 101 CLR 30 Menzies J stated at page 49:

... there must, if an outgoing is going to fall within its terms, be found (i) that it was necessarily incurred in carrying on a business; and (ii) that the carrying on of the business was for the purpose of gaining assessable income. The element that I think is necessary to emphasise here is that the outlay must have been incurred in the carrying on of a business, that is, it must be part of the cost of trading operations.

In respect of the irretrievable cash contributions to the Trust relating to employees of members of the Company A TCG, they form part of Company A's employee remuneration strategy to remunerate its employees with equity instruments in Company A. Such expenditure is considered to be appropriate and adapted for the ends of the business being carried on by the Company A TCG.

In respect of the irretrievable cash contributions relating to employees of subsidiaries (as defined in the Corporations Act 2001) that do not form part of the Company A TCG, the connection between the expenses incurred and the carrying on of Company A's business is considered too remote as the relevant expense is not part of the cost of the trading operations of the Company A TCG and as such it does not satisfy paragraph 8-1(1)(b).

Not capital or of a capital nature

The costs incurred by Company A will be an outgoing for the periodic funding of an employee share acquisition plan for the employees of members of the Company A TCG. Costs incurred are likely to be in relation to more than one grant of ESS interests, and Company A intends to continue satisfying the ESS interests using Shares acquired by the Trust. This indicates that the irretrievable cash contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure of Company A.

While the irretrievable cash contributions may be viewed to secure and enduring or lasting benefit for Company A that is independent of the year-to-year benefits that it derives from a loyal and contented workforce, that enduring benefit is not considered to have a lasting quality as the irretrievable cash contributions which form the Trust's funds is permanently dissipated within a relatively short period of the irretrievable cash contributions being made. Therefore, the payments are not capital, or of a capital nature, and paragraph 8-1(2)(a) is not satisfied.

Conclusion

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 to satisfy Share Rights and Shares granted under the Plans, to the extent those irretrievable cash contributions are made for the benefit of the Participants to the Plans who are employees of the members of the Company A TCG that engage in activities which derive assessable income in Australia.

For completeness, provided the irretrievable cash contributions are made at or after the time the relevant Share Right or Share is acquired by the Participant, those irretrievable cash contributions are deductible by Company A under section 8-1 in the income year in which they are made to the Trustee.

Question 2

Summary

The irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of, Shares by the Trustee to satisfy the grant of Shares and Share Rights under the Plans to Participant employees of the Company A TCG are deductible at a time determined by section 83A-210 of the ITAA 1997, if those irretrievable cash contributions are made before the relevant ESS interests are acquired by the relevant Participant.

The effect is that Company A must delay the deduction of the irretrievable cash contributions until the Participant acquires the relevant ESS interests.

Detailed reasoning

The deduction for the irretrievable cash contributions under section 8-1 is generally allowable in the income year in which a taxpayer incurs the outgoing.

However, section 83A-210 modifies this rule in certain circumstances in respect of contributions provided by an employer to a trust to purchase shares under an employee share scheme.

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

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 purposes 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 purposes 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.

Section 83A-210 will only apply if there is a relevant connection between the money provided to the trustee and the acquisition of ESS interests (directly or indirectly) by the employee under an employee share scheme in relation to the employee's employment.

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

A Share granted to a Participant under Plan A, Plan B and Plan D will each be an ESS interest, respectively.

The Plans comprise an employee share scheme under subsection 83A-10(2) as it is a scheme under which ESS interests are provided to the Participants in relation to their employment with the Company A TCG.

The employee share scheme contains a number of interrelated components which include the provision of irretrievable cash contributions by Company A to the Trustee of the Trust. These irretrievable cash contributions enable the Participants (each an 'ultimate beneficiary' as defined in paragraph 83A-210(a)) to acquire, directly or indirectly, an ESS interest under the employee share scheme (the Plans) in relation to their employment.

If the irretrievable cash contributions are made by Company A to the Trustee before the time the Participants acquire the relevant ESS interests (i.e. where the Participants are granted the relevant interests but vesting conditions attaching to those interests (where applicable) have not yet been satisfied), the deduction for the irretrievable cash contributions, to the extent they relate to the employees of members of the Company A TCG, is allowable to Company A in the income year when the relevant ESS interest is acquired by the Participant under the Plans.

For completeness, section 83A-210 will not apply:

•                     to a deduction for irretrievable cash contributions provided by Company A to the Trustee, if the irretrievable cash contributions are made at or after the time the ultimate beneficiaries acquire the beneficial interest in the Share. In these circumstances, the irretrievable cash contributions are deductible by Company A under section 8-1, in the income year in which they are made to the Trustee. This is consistent with the ATO view expressed in ATO ID 2010/103.

•                     to the extent irretrievable cash contributions are made by Company A in respect of Shares granted to employees of subsidiaries (as defined in the Corporations Act 2001) that do not form part of the Company A TCG. This is because section 83A-210 proceeds on the basis a deduction is available under section 8-1 and for the reasons set out in response to Question 1, a deduction is not available under section 8-1.

Indeterminate rights - Shares granted under Plan B and Share Rights granted under Plan C

The Commissioner accepts that the Shares granted under Plan B are indeterminate rights for the purposes of section 83A-340 because they are subject to the exercise of the Board's discretion to adjust (upwards or downwards) the number of a Participant's Shares that vest based on the satisfaction of the performance conditions and the number of Shares that the Participant is entitled to cannot be determined at the time of grant.

Once the number of Shares that the Participant is entitled to is determined under Plan B, section 83A-340 operates to deem the rights to have always been ESS interests (being rights to acquire a beneficial interest in shares).

The Commissioner also accepts that the Share Rights to receive the Cash Award and Deferred Shares granted under Plan C are indeterminate rights for the purposes of section 83A-340 because:

•                     the possibility exists to either deliver a Share or make a payment of a cash equivalent to satisfy the Share Right and

•                     the Board has a discretion to adjust the number of a Participant's Performance Rights that vest based on the satisfaction of the performance conditions.

Therefore, the number of Shares that the Participant is entitled to cannot be determined at the time the rights are granted.

The Share Rights granted under Plan C are not rights to acquire a beneficial interest in a Share unless and until the time when the Share Right will be satisfied by the provision of a Share and the number of Shares that the Participant is entitled to can be determined.

•                     A Share Right to receive the Cash Award under Plan C will be satisfied by the provision of a Share only once it is certain that it will not be satisfied by cash (i.e. when the Participant does not to revoke their original election to receive Shares. In addition, the Participant will receive their Award entirely in cash where they cease employment with the Group during the Performance Period for reasons including redundancy, ill health, death or normal retirement or if they cease employment after the Performance Period but before receiving the award).

•                     Similarly, a Share Right to receive the Deferred Shares under Plan C will be satisfied by the provision of a Share only once it is certain that it will not be satisfied by cash. The Participant will receive their Award entirely in cash, if they cease employment with the Group during the Performance Period for reasons including redundancy, ill health, death or normal retirement or if they cease employment after the Performance Period but before receiving the award.

Once it is clear that the Share Right will be satisfied by the provision of a Share and the number of Shares the Participant is entitled to is determined, section 83A-340 operates to deem the Share Right to have always been an ESS interest (being a right to acquire a beneficial interest in a share).

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 are made in respect of those rights can be claimed in the income year when the ESS 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).

In the present case, if the irretrievable cash contributions are provided to the Trustee before these Share Rights are acquired (and they subsequently become ESS interests because the Participant does not to revoke their election to receive Shares, does not cease employment during the Performance Period (or cease employment after the Performance Period but before the award is received) and the number of Shares the Participant is entitled to is determined), section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1. In such a case, a deduction for the irretrievable cash contribution to fund the Share Rights is available to Company A in the income year in which the Participants are deemed under section 83A-340 to have acquired the Share Rights. Once this has been established, such contributions can be matched to ESS interests allocated 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)).

Where the Share Rights do not become ESS interests because they are ultimately satisfied in cash, the outgoing will not flow through the Trust. If they did flow through the Trust, the Trust would not satisfy the sole activities test for the purposes of subsection 130-85(4).

Question 3

Summary

Company A will be entitled to an income tax deduction under section 8-1 in respect of costs incurred in administering the Company A employee share schemes to the extent those costs relate to the employees of members of the Company A TCG.

Detailed reasoning

As discussed under Question 1, section 8-1 allows a deduction for all losses and outgoings to the extent they are necessarily incurred in carrying on a business for the purpose of gaining or producing the taxpayer's assessable income, except where the outgoings are of a capital nature.

Company A carries on a business of producing assessable income. Company A operates an employee share scheme as part of its remuneration strategy.

Under clause 5(c) of the Trust Deed, Company A will:

•                     pay all the costs and expenses incurred in connection with the acquisition, registration, disposal of or other dealing with Shares and otherwise incurred by the Trustee in carrying out its duties

•                     pay all the costs and expenses in administering the Trust Deed including all costs and expenses in maintaining the corporate existence of the Trustee.

•                     Company A incurs ongoing administration costs for operating the employee share scheme, including:

•                     consulting and offer management costs such as creation and review of offer documents, postage, brokerage

•                     recurring annual fees, such as plan structure maintenance, plan membership fees and administration fees

•                     professional fees such as tax and legal

•                     other expenses including employee annual statements and telephone expenses.

These costs are regular and recurrent expenses and are necessarily incurred by Company A in administering the employee share scheme while carrying on its business for the purpose of gaining or producing its assessable income. Therefore these costs are not capital in nature.

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 who are employees of members of the Company A TCG.

This view is consistent with Tax Determination TD 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an employee share scheme.

Question 4

Summary

The irretrievable cash contributions by Company A to the Trustee to acquire Shares to be provided to Participants under the Plans will not result in Company A deriving ordinary income assessable under section 6-5, at the time that the irretrievable cash contributions are made to the Trust or at the time the Shares are provided to the Participants.

Detailed reasoning

ATO Interpretative Decision ATO ID 2007/217 Income Tax Employee share scheme: whether payments by an employer company to a trustee to acquire shares to be later provided to employees result in the company deriving assessable income considers the issues in this question.

ATO ID 2007/217 states that the circumstances where an employer company provides shares to employees under an employee share acquisition scheme and makes contributions to a trustee of a discretionary trust established for the purposes of the scheme is a pre-funding arrangement that is:

...comparable to a hedge against a future liability where the extent of the liability is uncertain.

[and that]

...It is not possible for the employer company to estimate the extent of any advantage it might gain under the pre-funding arrangement, as that is dependent on the extent to which rights vest and the share price at the time rights are exercised. At the time the payments are made, any gain to the employer company is contingent and unascertainable. It is not capable of being reflected in the company's accounts.

As explained in ATO ID 2007/217, as a whole, for income tax purposes, payments made under the pre-funding arrangement are regarded as being outgoings on revenue account that constitute a business expense of the employer company; they are not treated as payments towards the discharge of its future liability. For these reasons, it was determined that:

... the employer company's payments under the pre-funding arrangement do not result in the company deriving income under section 6-5 of the ITAA 1997, either at the time the payments are made or at the time the trustee discharges the company's liability to employees by providing shares.

Application to the facts

Company A has established a trust to acquire and hold Shares for the benefit of the Beneficiaries. The Plan Administrator will advise Company A of the number of Shares and the value of the irretrievable cash contributions required in order to satisfy the obligations under the Plans. Company A will pay the irretrievable cash contributions to the Trustee, who will either arrange with the Plan Administrator for the issue of new Shares in the name of the Trustee, or will place an order with nominated broker(s) for the requisite number of Shares to be purchased on-market.

The irretrievable cash contributions made by Company A should be made on the same day as the Trustee arranges for the issue of new Shares or places an order for Shares to be purchased on-market (subject to a delay based on T+2 where Shares are purchased on-market), and therefore Company A does not enter into any hedge type arrangements in relation to its Plans.

In accordance with ATO ID 2007/217, the irretrievable cash contributions made by Company A will not result in Company A deriving ordinary income assessable under section 6-5, either at the time that the irretrievable cash contributions are made to the Trust or at the time the Shares are provided to the employees.

Question 5

Summary

The subscription for new Shares by the Trustee will not be included in Company A 's assessable income under section 6-5 or section 20-20, nor trigger a CGT event under Division 104.

Detailed reasoning

Section 6-5 of the ITAA 1997

Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. The term 'income according to ordinary concepts' is not defined. However, there are a number of cases that assist in determining whether a receipt should be characterised as income according to ordinary concepts.

Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not received in the course of carrying on a business.

In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124, the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

In an employee share scheme, where the trustee subscribes to the company for an issue of Shares and pays the full subscription price for the Shares, the company receives an irretrievable cash contribution to its share capital from the trustee. The character of the subscription proceeds received by the company from the trustee can be determined by the character of the right or thing disposed of in exchange.

As Company A issues the Trustee with new Shares in itself in exchange for the subscription proceeds, the character of the newly issued Shares is one of capital. Therefore, the receipt of the subscription proceeds takes the character of share capital, and is of a capital nature.

When Company A receives subscription proceeds from the Trustee where the Trustee has subscribed for new Shares to satisfy obligations to Participants under the Plans, the subscription proceeds received by Company A from the Trustee 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 the Shares from the Trustee. There is no insurance contract in this case, so the amount is not received by way of insurance. Further, 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) of the ITAA 1997.

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 in the current or an earlier income year because of a provision listed in the table in section 20-30.

Recoupment is defined in subsection 20-25(1) as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing.

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

Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20.

Capital gains tax

Section 102-20 provides that a capital gain or a capital loss is made if and only if a CGT event happens.

CGT events for which you can make a gain or loss are specified in Division 104. The CGT events that may have possible application to the receipt of the subscription proceeds received by Company A from the Trustee of the Trust are CGT event D1 (creating contractual or other rights) and CGT event H2 (receipt for event relating to a CGT asset).

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

As Company A issues Shares to the Trustee and the Shares constitute equity interests under section 974-75, neither CGT event D1 nor CGT event H2 happen.

As no CGT event happens, the subscription amount will not be assessable as a capital gain to Company A.

Question 6

Summary

The provision of Share Rights and Shares to Participants under the Plans will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

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

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

Paragraph (h) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA excludes a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C applies.

The Commissioner accepts that the Plans are an employee share scheme under subsection 83A-10(2) as:

•                     the Shares granted under Plan A, Plan B and Plan D and Share Rights granted under Plan C (provided they are ultimately satisfied with Shares and not with cash) are ESS interests under subsection 83A-10(1), being a beneficial interest in a share in a company, and a beneficial interest in a right to acquire a beneficial interest a share in a company, and

•                     these ESS interests are provided to employees of the Company A TCG in relation to their employment.

The Commissioner also accepts that the Share Rights granted under Plan C that may be satisfied in cash instead of Shares are indeterminate rights pursuant to section 83A-340. At the time that Share Rights are granted under Plan C, it may be unclear if paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA applies because those Share Rights may be satisfied in cash instead of Shares. Hence, when Share Rights are granted, they may not be ESS interests within the meaning of subsection 83A-10(1).

Where the Share Rights are ultimately satisfied with Shares instead of cash, section 83A-340 will operate to treat those Share Rights to have always been ESS interests within the meaning of subsection 83A-10(1). In these circumstances, they will constitute the acquisition of ESS interests acquired under an employee share scheme within the meaning of subsection 83A-10(2).

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 Participants may acquire Shares and Share Rights under the Plans at a discount or for nil consideration, they are ESS interests to which Subdivision 83A-B will apply (unless Subdivision 83A-C applies instead).

Further, awards which involve the sacrifice of an amount of pre-tax salary or fees, are also ESS interests to which Subdivision 83A-B or 83A-C applies because they are acquired at a discount as part of a salary sacrificing arrangement in return for a reduction in the employees' salary or wages (in line with subparagraph 83A-105(4)(a)(i)) (Taxation Ruling TR 2001/10: Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements).

Accordingly, the provision of Share Rights and Shares to employees of Company A under the Plans will not constitute a 'fringe benefit' by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

In addition, when Share Rights granted under Plan C to acquire Shares granted are later exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the Share Right and not in respect of employment (refer to 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). Therefore the provision of Shares in satisfaction of Share Rights will also not be a fringe benefit.

For completeness, where the Share Right granted under Plan C is ultimately satisfied with cash instead of Shares, the granting of the Share Rights under Plan C 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 the ATO Interpretative Decision ATO ID 2010/142 Fringe benefits tax employee share scheme: indeterminate rights not fringe benefits.

Question 7

Summary

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

Detailed reasoning

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

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

One benefit excluded from being a fringe benefit pursuant to paragraph (ha) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA is '(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)'.f

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).

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 employee share trust, a trustee's activities must be limited to:

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

•                     ensuring that ESS interest in the company that are beneficial interests in those shares or rights are provided under an ESS to employees, or 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(a)(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 6, we accept that the Plans comprise an employee share scheme 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 employee share scheme (as defined in subsection 83A-10(2)) by allocating Shares to Participants in accordance with the Trust 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(a) and (b). The phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'.

Our 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 result in employees being provided with additional benefits (such as the provision in 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 paragraphs 130-85(4)(a) and (b).

We considered the other activities undertaken by the Trustee are merely incidental to managing the Plans under paragraph 130-85(4)(c).

Therefore, the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Shares under the Plans, will not constitute a 'fringe benefit' by virtue of paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA.

Question 8

Summary

The Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in any part or in full, any deduction claimed by Company A in respect of irretrievable cash contributions made by Company A to fund the subscription for, or acquisition on-market of, Shares by the Trust pursuant to the Plans.

Detailed reasoning

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

The Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust where the conditions of Division 83A of the ITAA 1997 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 paragraph 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 9

Summary

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

Detailed reasoning

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 discussed in the answer to Question 6, 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 (pursuant to the Trust 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 7. 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.

Therefore, the Commissioner will not make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company A by the amount of tax benefit gained from irretrievable cash contributions, made by Company A to the Trustee, to fund the acquisition of Shares pursuant to the Plans.

[1][2001] HCA 3 at [9]; (2001) 202 CLR 93 at [9], per Gleeson CJ, Kirby and Hayne JJ, applied in Watson as trustee for the Murrindindi Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 at [32], per Kenny, Davies and Thawley JJ.

[2] Commissioner of Taxation v Payne [2001] HCA 3 at [11]; (2001) 202 CLR 93, per Gleeson CJ, Kirby and Hayne JJ; see also Federal Commissioner of Taxation v Day [2008] HCA 53 [31]; (2008) 236 CLR 163 at 179 [31], per Gummow, Hayne, Heydon and Keifel JJ.

[3] [2013] AATA 281 at [92] to [95]

[4] [2020] FCAFC 92 at [33]

[5] John Fairfax & sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 at 49.

[6] Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 55-56.