Edited version of private advice

Authorisation Number: 1052324615316

Date of advice: 29 October 2024

Ruling

Subject: Employee share schemes

Question 1

Will Company A as head entity of the Company A tax consolidated group (TCG) obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by Company A or any subsidiary member of the Company A TCG to the Trustee of the Employee Share Trust (Trustee) to fund the subscription for or acquisition on-market of Company A shares by the Employee Share Trust (Trust)?

Answer

Yes.

Question 2A

Will Company A as head entity of the Company A TCG obtain an income tax deduction, pursuant to sections 8-1 of the ITAA 1997, in respect of costs incurred by Company A or any subsidiary member of the Company A TCG in relation to the on-going administration of the Trust?

Answer

Yes.

Question 2B

Will Company A as head entity of the Company A TCG obtain an income tax deduction, pursuant to sections 40-880 of the ITAA 1997, in respect of costs incurred by Company A or any subsidiary member of the Company A TCG in relation to the establishment of the Trust?

Answer

Yes.

Question 2C

Will Company A as head entity of the Company A TCG obtain an income tax deduction, pursuant to sections 25-5 of the ITAA 1997, in respect of costs incurred by Company A or any subsidiary member of the Company A TCG in managing its own tax affairs in relation to the Employee Share Scheme?

Answer

Yes.

Question 3

Will irretrievable cash contributions made by Company A or any subsidiary member of the Company A TCG to the Trustee, to fund the subscription for or acquisition on-market of Company A shares by the Trust, be deductible to Company A at a time determined by section 83A-210 of the ITAA 1997 where contributions are made before the acquisition of the relevant ESS interests?

Answer

Yes.

Question 4

If the Trust satisfies its obligation under the Performance Rights Plan (PRP) by subscribing for new shares in Company A, will the subscription proceeds 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

No.

Question 5

Will the Commissioner seek to make a determination that Part IVA of the 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 or any subsidiary member of the Company A TCG to the Trustee to fund the subscription for or acquisition on-market of Company A shares by the Trust?

Answer

No.

Question 6

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

Answer

No.

Question 7

Will the irretrievable cash contributions made by Company A or any subsidiary of Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA 1986?

Answer

No.

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to Company A or any subsidiary of Company A, 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 Company A shares?

Answer

No.

This ruling applies for the following periods:

Questions 1 to 5

Income tax year ending 30 June 20YY

Income tax year ending 30 June 20YY

Income tax year ending 30 June 20YY

Income tax year ending 30 June 20YY

Income tax year ending 30 June 20YY

Questions 6 to 8

FBT year ending 31 March 20YY

FBT year ending 31 March 20YY

FBT year ending 31 March 20YY

FBT year ending 31 March 20YY

FBT year ending 31 March 20YY

Relevant facts and circumstances

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

1.            PRP Rules provided to the Commissioner on DDMMYYYY, and.

2.            Employee Incentive Trust Deed (Trust Deed) provided to the Commissioner on DDMMYYYY

Background

Company B, is an Australian resident company that was listed.

Company A was incorporated as an Australian public limited company.

Company B announced a redomicile of the Company B group which would be achieved through a restructuring by way of a scheme of arrangement (the Scheme). Upon implementation of the Scheme:

•                     Company B's listing was transferred to Company A;

•                     Company A became the new holding company of the Company B group;

•                     Company A choose that the Tax Consolidated Group will continue with Company A as the head company (the Company A TCG); and

•                     Company B performance rights holders would have their performance rights cancelled and replaced with newly issued performance rights (issued under the PRP) on a 1 for 1 basis.

The Company A group is a provider of services.

New Performance Rights Plan

The objectives of the PRP are:

•                     to align the interest of the PRP participants (the Participants) with the long-term interests of the shareholders of Company A;

•                     to retain key employees whose contributions are essential to Company A's long-term growth and profitability;

•                     to instil loyalty to, and a stronger identification by Participants with the long-term prosperity of, Company A;

•                     to attract potential employees with relevant skills to contribute to the Group to create value for Company A's shareholders; and

•                     to deliver compensation in a manner that drives the long-term performance of Company A.

Broadly, the key terms of the PRP are outlined below:

Grant of Performance Rights

•                     Performance Rights are provided for no consideration upon grant, vesting or exercise.

•                     Company A directors who are duly authorised and appointed by the Company A board of directors (the Board) will administer the PRP (referred to as the Committee). The Committee may grant Performance Rights to Key Senior Executives, as the Committee may select, on an annual basis, typically following the Annual General Meeting, or at any time during the period when the PRP is in force.

•                     The Committee decides on details such as the number, conditions and vesting of performance rights and may amend or waive conditions if deemed fairer.

•                     Participants, will receive an Award Letter from the Committee detailing the performance rights.

•                     Participants are not required to pay for the grant of Performance Rights.

•                     Performance Rights are subject to restrictions such as:

o        non-transferable; and

o        not entitled to vote or receive dividends.

•                     Granting of performance rights must comply with legal and disclosure requirements.

Vesting, Exercising and Major Events

•                     Performance Rights lapse if the Participant leaves due to bankruptcy, misconduct, or breach of Rules.

•                     The Committee, in its discretion, may determine that a Performance Right may vest in cases of retirement, ill health, or redundancy.

•                     The Committee may amend or waive vesting conditions during major corporate events.

•                     Upon vesting, Company A Shares will be promptly allotted or transferred.

•                     The Committee reviews performance conditions, which may be adjusted if necessary, and determines how rights are exercised.

•                     Company A Shares issued to a Participant rank equally with existing Company A Shares.

Administration and Compliance

•                     The Committee may use a Trust to administer the Plan.

•                     The Committee administers the Plan, establishes Trusts, resolves disputes, and their decisions are final.

Modifications and Reporting

•                     The Plan may be modified by the Committee with required approvals, and Participants will be informed of changes.

•                     Participation in the Plan does not affect employment terms or compensation calculations.

•                     The Plan is effective for up to 10 years, with possible extensions subject to shareholder approval. The Committee may terminate the Plan at any time without affecting existing performance rights.

•                     Participants are responsible for taxes on performance rights; the Plan is a tax-deferred scheme for Australian tax purposes.

Employee Share Trust

Trustee A is the trustee of the Employee Share Trust which will be used to acquire shares to satisfy awards under the PRP.

The Trust has been set up for the sole purpose of obtaining shares (either on market or directly from Company A) for the benefit of employees of Company A. Trustee A (the Trustee) is an external trustee acting in an independent capacity on behalf of the beneficiaries of the Trust.

The key operating terms of the draft Trust Deed are outlined below (noting "The Company" is defined as Company A):

•                     Allocated shares acquired by the Trustee must be allocated to the relevant employees and held on trust for them, and on their behalf by the Trustee under the terms of the Trust Deed and the relevant Plan rules.

•                     The Trust was established for the sole purpose of subscribing for, acquiring, holding and transferring Shares in connection with equity incentive plans established by the Company for the benefit of participants in those plans.

•                     The Trustee may only carry out activities that constitute the management of ESS Plans.

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

•                     A Dealing Notice can be issued from time to time. However, these are likely to be issued when the Performance Rights vest to the Participant and are subsequently exercised by the Participant into ordinary shares.

•                     The Trust will be funded by contributions from Company A or a member of the Company A Group (for the subscription or purchase of shares in accordance with the Plans).

•                     These funds will be used by the Trustee of the Trust to acquire shares in Company A either by on market purchase or via a subscription for new shares in Company A based on the Dealing Notice provided by Company A.

•                     Company A or members of the Company A Group are likely to contribute funds, by way of capital contribution to the Trust when written notice (a Dealing Notice) is provided by the Board to the Trustee.

•                     The structure of the Trust and the PRP are such that after the Restriction Period, shares allocated to a Participant can be transferred into the name of the Participant (i.e. legal title) (or to any third party nominated by the Participant) upon a Withdrawal Notice being lodged with and approved by the Board.

•                     No amounts can be repaid to the Company or any Group member.

Associated costs

Company A will incur various on-going costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust, such as:

•                     Employee plan record keeping

•                     Production and dispatch of holding statements to employees

•                     Provision of annual income tax return information for employees

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

•                     Management of employee termination

•                     Bank or other administrative charges

•                     Fees paid to share registry as Trustee of the EST

•                     Preparing the annual audit of the financial statements of the Trust, and

•                     Preparing the annual income tax returns of the Trust.

Company A will/has incurred various costs in relation to the establishment and implementation of the Employee Share Trust, such as:

•                     legal advice obtained in respect of the implications which may arise for both Company A and the Participants of the PRP in respect of the Employee Share Trust structure and the PRP

•                     legal documents required in respect of the Employee Share Trust and the PRP, and

•                     professional fees associated with the establishment of the Employee Share Trust including such costs associated with the creating and registration of the Employee Share Trust with various authorities.

Company A will also incur costs in managing its own tax affairs in relation to the PRP, including:

•                     Tax advisor fees associated with the drafting and lodgment of the private binding ruling application with the ATO

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 20-20

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

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 Division 104

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

Income Tax Assessment Act 1997 section 701-1

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Company A, Company C and Company D.

Legislative references in the following are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997), unless otherwise indicated.

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

The consolidation provisions of the Income Tax Assessment Act 1997 (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. As a consequence, the subsidiary members cease to be recognised as separate entities during the period that they are members of the income tax consolidated group with the head company of the group being the only entity recognised for income tax purposes.

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 TCG.

Questions 6 to 8

The SER in section 701-1 has no application to the Fringe Benefits Tax Assessment Act 1986. The Commissioner has therefore provided a ruling to:

•                     Company A (ultimate parent company),

•                     Company C (main operating company), and

•                     Company D

as the employing entities in the Company A TCG in relation to questions 6 to 8.

Question 1

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

Company A carries on a business providing services. Company A operates an employee share scheme (ESS) as part of its remuneration strategy.

Under the PRP, Performance Rights are granted to employees and Company A makes irretrievable contributions to the Trust (in accordance with the PRP and the Trust Deed) which the Trustee will use to acquire Company A shares (either on-market or by subscription) for allocation to Participants to satisfy their Performance Rights.

Incurred in carrying on a business

Company A must provide the Trustee with all the funds required to act as requested.

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

Company A grants Performance Right under the Plans as part of its remuneration and reward program for Participants. The costs incurred by Company A for the acquisition of Company A Shares to satisfy Performance Rights that arise as part of these remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees.

Not capital or of a capital nature

The costs will be an outgoing incurred for periodic funding of a bona fide employee share scheme for employees of Company A. Costs incurred are likely to be in relation to more than one grant of rights (rather than being one-off). This indicates that the irretrievable contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure of Company A. While the contributions may secure an enduring or lasting benefit for the employer that is independent of the year-to-year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be sufficiently small. Therefore, the payments are not capital, or of a capital nature.

Accordingly, Company A will be entitled to deduct an amount under section 8-1 for irretrievable cash contributions it makes to the Trustee of the Trust to acquire Company A Shares to satisfy ESS interests issued pursuant to the PRP.

Question 2A

Section 8-1 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, incurred in producing exempt or non-assessable non-exempt income or where a provision of the tax law prevents the deduction.

Company A carries on a business providing services. Company A operates an employee share scheme as part of its remuneration strategy. Company A incurs on-ongoing administration costs for operating the Employee Share Scheme (ESS) such as:

•                     Employee plan record keeping

•                     Production and dispatch of holding statements to employees

•                     Provision of annual income tax return information for employees;

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

•                     Management of employee termination

•                     Bank or other administrative charges

•                     Fees paid to share registry as Trustee of the EST

•                     Preparing the annual audit of the financial statements of the Trust, and

•                     Preparing the annual income tax returns of the Trust.

These costs are regular and recurrent employment expenses which are deductible under section 8-1 as they are costs necessarily incurred in running the ESS while carrying on Company A's business for the purpose of gaining or producing its assessable income.

Relevantly, these costs are not capital or of a capital nature as the loss or outgoings are regular and recurrent and are part of the ordinary employee remuneration costs of the company (as confirmed in Taxation Determination TD 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an 'employee share scheme' (TD 2022/8)).

Question 2B

As outlined in TD 2022/8, establishment/implementation expenses are one-off in nature and used in setting up the ESS as part of the employer company's remuneration structure. The character of the advantage sought is the enduring benefit of having the ESS in its business structure to deliver ESS interests. Therefore, the establishment expenses for the Employee Share Trust are capital in nature including:

•                     legal advice obtained in respect of the implications which may arise for both Company A and the Participants of the PRP in respect of the Employee Share Trust structure and the PRP

•                     legal documents required in respect of the Employee Share Trust and the PRP, and

•                     professional fees associated with the establishment of the Employee Share Trust including such costs associated with the creating and registration of the Employee Share Trust with various authorities.

As also outlined in TD 2022/8, section 40-880 allows a deduction for certain business-related capital expenditure such as the implementation costs. Limitations and exceptions are in subsections 40-880(3) to (9). Relevantly, the business needs to be carried on for a taxable purpose and as stated above Company A carries on a business providing services to produce assessable income.

Therefore, as per paragraphs 4 to 9 of TD 2022/8, these costs are deductible to Company A under section 40-880.

Question 2C

Section 8-1 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Section 8-10 states that if more than one provision applies, the most appropriate provision should be used. Division 12 sets out particular types of deductions that are dealt with by a specific provision of either the ITAA 1936 or the ITAA 1997. Section 25-5 is such a provision listed in Division 12 dealing with tax-related expenses.

Subsection 25-5(1) allows a deduction for tax-related expenses, such as, managing your tax affairs.

Company A incurs costs in managing its own tax affairs, including tax advisor fees associated with the drafting and lodgment of this private binding ruling application with the ATO.

These costs are tax-related expenses deductible under subsection 25-5(1).

Question 3

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

The PRP is an employee share scheme for the purposes of subsection 83A-10(2) as it is a scheme under which ESS interests (i.e. a beneficial interest in a share) are provided to employees (i.e., Participants) in relation to their employment with Company A.

The PRP contains a number of interrelated components which includes the provision of irretrievable cash contributions by Company A to the Trustee of the Trust. These contributions enable the Trustee to acquire Company A Shares for the purpose of enabling each Participant to acquire ESS interests as per the PRP.

If the irretrievable cash contributions are made before acquisition of the relevant ESS interests, the contribution can only be deducted from the assessable income of Company A in the income year when the relevant beneficial interest in a Company A Share is acquired by a Participant under the PRP.

Question 4

Ordinary Income

Section 6-5 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In an ESS, where the trustee subscribes to the company for an issue of shares and pays the full subscription price for the shares, the company receives a contribution of share capital from the trustee. The character of the contribution of share capital received by Company A from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, Company A is issuing the Trustee with new shares in itself. The character of the newly issued share is one of capital. Therefore, the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature. This view is supported by the reasoning in ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee. Accordingly, when Company A receives subscription proceeds from the Trustee where the Trustee has subscribed for new Company A Shares to satisfy obligations to Participants, the subscription proceeds received is a capital receipt. That is, it will not be on revenue account and will not be ordinary income under section 6-5.

Section 20-20

Subsection 20-20(2) provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year. Company A will receive an amount for the subscription of shares by the Trustee. There is no insurance contract in this case, so the amount is not received by way of insurance. 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. Subsection 20-20(3) establishes that an amount received by you as 'recoupment' of a loss or outgoing is an 'assessable recoupment' if you can deduct the loss or outgoing for an earlier income year under a provision listed in section 20-30. Recoupment is defined in subsection 20-25(1) to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of a loss or outgoing. The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing. So far as a deduction under section 8-1 allowed for bad debts or rates or taxes is concerned, section 20-30 will apply such that if there was a recoupment of that deduction, that amount would be assessable. However, the receipt by Company A for issuing shares to the Trustee would not be a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes to which section 20-30 could apply. Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20.

Capital Gains Tax

Section 102-20 states that you make a capital gain or loss if and only if a CGT event happens. No CGT events occur when the Trust satisfies its obligations by subscribing for new Company A Shares. The relevant CGT events that may be applicable when the subscription proceeds are received by Company A are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset). However, paragraph 104-35(5)(c) states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, Company A is issuing shares, being equity interests as defined in section 974-75, to the Trustee, therefore CGT event D1 does not happen. In relation to CGT event H2, paragraph 104-155(5)(c) also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Therefore, CGT event H2 does not occur. Since no CGT event occurs, there is no amount that will be assessable as a capital gain to Company A. Therefore, when the Trust satisfies its obligations under the Plans by subscribing for new Company A Shares, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20- 20, nor trigger a CGT event under Division 104.

Question 5

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

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

In this case, the scheme does not contain the elements of artificially or unnecessary complexity and the commercial drivers sufficient explain the entry into the use of the employee share trust arrangement.

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

Question 6

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

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

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

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 of that Act applies.

The Commissioner accepts that the PRP is an employee share scheme. Specifically, the Commissioner accepts that the Performance Rights provided under the Plans are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests as they are provided for no consideration and therefore at a discount.

Accordingly, the provision of Performance Rights under the PRP will not be subject to FBT on the basis that they are acquired by Participants under an employee share scheme by virtue of paragraph (h) of the definition of a fringe benefit in subsection 136(1) of the FBTAA.

Question 7

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

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

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

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

•                     the Trust ensures that ESS interests as defined in subsection 83A-10(1) (being Performance Rights) are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Deed and the PRP.

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

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'?.

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental.

In the present case, the Trust's current activities satisfy the definition of an employee share trust under section 130-85(4) because:

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

•                     the sole purpose being the acquisition, holding, and ongoing administration of holding Company A Shares under the Plans for the benefit of the Participants.

•                     the Trustee may only carry out activities that constitute the management of the Plans established by Company A

•                     the Commissioner accepts that the other activities undertaken by the Trustee will be merely incidental to this purpose 130-85(4)(c)

•                     the Trust 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 those shares to the employees in accordance with the Trust Deed and the PRP

•                     the Trust Deed indicates that Company A and the Trustee agree the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purpose of subsection 130-85(4) (Clause 4.8 of the Trust Deed).

Therefore, the cash contribution made by Company A or its subsidiaries to fund the subscription for or acquisition on-market of Company A shares by the Trust will not be a fringe benefit.

Question 8

PS LA 2005/24 Application of General Anti-Avoidance Rules explains the application of Part IVA or other general anti-avoidance rules to an arrangement, including the operation of section 67 of the FBTAA (refer to paragraphs 185-191).

The Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. Paragraph 191 of PS LA 2005/24 states:

The approach outlined in this practice statement (refer to paragraphs 75 to 150) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant (except that amendments corresponding to the 2013 amendments of Part IVA have not been made to section 67) and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

Irretrievable cash contributions made by Company A or its subsidiaries to the Trust will not be a fringe benefit defined in subsection 136(1) of the FBTAA as explained in the reasons for question 7. As a result, the FBT liability of Company A or its subsidiaries is not any less than it would have been but for the existence of the arrangement.

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