Edited version of private advice

Authorisation Number: 7920145583606

Date of advice: 6 December 2021

Ruling

Subject: Employee share scheme

Question 1

Is Company A entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of irretrievable cash contributions made by Company A to the Trustee of the Company A Employee Share Plan Trust to fund the subscription for, or acquisition of, Company A Shares to satisfy the issue of Shares by the Trustee to Participants pursuant to the Employee Incentive Plan?

Answer

Yes.

Question 2

Will Company A obtain an income tax deduction, under section 8-1 of the ITAA 1997, for costs incurred in relation to the on-going administration of the Trust?

Answer

Yes.

Question 3

Will the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for, or acquisition of, Shares to satisfy Company A obligations with respect to the issue of Shares to Participants pursuant to the Plan, be deducible to Company A at a time determined by section 83A-210 of the ITAA 1997 if those contributions are made before allocation of the Shares to the Participants?

Answer

Yes.

Question 4

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

Answer

No.

Question 5

Will the Commissioner seek to make a determination under section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trust to fund the subscription for, or acquisition of, Shares?

Answer

No.

Question 6

Will the provision of Options or Performance Rights to Participants under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 7

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

Answer

No.

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount 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 of, Shares by the Trustee to satisfy its obligations under the Plan?

Answer

No.

Relevant facts and circumstances

Company A is a public company listed on the Australian Securities Exchange.

Company A is the head company of the Company A tax consolidated group (Company A TCG).

The Plan

Company A currently has the Plan in place which allows Company A to grant the following Awards to Participants:

•         Options: a right to be issued a share in Company A (Share) upon payment of an Exercise Price and subject to the satisfaction of Vesting Conditions

•         Performance Rights: a right to be issued with a Share subject to the satisfaction of Vesting Conditions

Offer

Company A may make an Offer to any Eligible Participant to participate in the Plan. Under the Plan, the Offer must be in writing and include the following terms of issue for the relevant award:

• the name and address of the Eligible Participant to whom the offer is made
• the type and total number of Awards for which the Eligible Participant may accept
• any payment required to be made for the grant of the Award
• the date of the Offer
• any Exercise Period (including the Vesting Date and Expiry Date)
• any Exercise Price
• any Vesting Date
• any Vesting Conditions
• any Disposal Restrictions
• any other terms of the Awards
• any matters required to be specified by the Corporations Act or Listing Rules.

An Eligible Participant must complete, sign and return the Acceptance Form in accordance with the Offer to accept an Offer.

The Board may permit an Eligible Participant to nominate a Permitted Nominee to be granted and hold Awards on behalf of the Eligible Participant.

Options

The Plan states that an Option entitles a Participant to be issued, transferred or allocated one Share by the Trust:

• provided any acquisition of Shares does not breach the Corporations Act or the Listing Rules
• provided any Vesting Conditions have been satisfied
• during the Exercise Period
• for payment of the Exercise Price

•         otherwise in the manner required by the Board and specified in the Offer.

The Vesting Conditions and the Exercise Price will be specified in the Offer.

The Options are granted for no cost, subject to satisfaction of Vesting Conditions, and do not carry voting or dividend rights.

A Participant may exercise an Option at any time in the Exercise Period by delivering a Notice of Exercise and paying the Exercise Price to Company A.

Performance Rights

Each Performance Right entitles the Participant to be issued, transferred or allocated by the Trust, one Share after the Vesting Date:

• subject to the satisfaction of Vesting Conditions
• provided any acquisition of Shares does not breach the Corporations Act or the Listing Rules (if applicable)
• subject to any other requirement contained in the Offer.

The Board has absolute discretion to make a cash payment to the Participant to substitute the issue, transfer or allocation of Shares on the Vesting of Performance Rights.

To the extent Performance Rights are granted and the Board determines that the rights are to be satisfied by way of cash payment, the payment would be made by the Company to the Participant. The Trust will only be used for Awards satisfied by way of a Share issued to Participants.

Issue, transfer and allocation of Shares

Under the Plan, Company A will issue, or procure the Trust to transfer or allocate, Shares to a Participant at the earlier date of either the next Board meeting or within XX business days after:

• in the case of Options, receiving a valid Notice of Exercise and the Exercise Price
• in the case of Performance Rights, the Participant becomes entitled to Shares.

General conditions

Subject to any Disposal Restrictions, Shares acquired under the Plan carry all of the same rights and obligations of other Shares, except for any rights attaching to Shares by reference to a record date prior to the date of issue or transfer and subject to the terms of the Trust.

A Participant will have no interest in Shares, or have the right to participate on dividends on Shares, until Shares are issued, transferred or allocated by the Trust to that Participant, including on the exercise or Vesting of that Award.

A Participant does not have the right to vote in respect of an Option or Performance Right.

Under the Plan, a Participant cannot participate in a new issue of Shares without exercising their Options or being issued, transferred or allocated Shares for their Performance Rights.

If an Offer contains a Disposal Restriction, the Participant must comply with the Disposal Restriction in relation to all Shares issued, transferred or allocated under an Award, on exercise of the Options, or after Vesting of the Performance Rights, for the period specified in the Offer.

The Plan states that except as provided in the Plan or an Offer, or otherwise determined by the Board, a Participant may not Dispose of any interest in a Share issued, transferred or allocated until the earlier of the:

• end of the period of three years (or any longer period specified in an Offer) commencing on the date of issue or transfer of the Share
• date on which the Participant is no longer employed by a Group member
• end of any other period determined by the Board in accordance with relevant law.

Company A may implement any procedure, including a holding lock, it considers appropriate to ensure the Disposal Restriction is complied with for the period specified in the Offer.

Administration of the Plan

The Plan states the Board has the authority to make policy and to delegate its functions and powers under the Plan as it considers appropriate for the operation and efficient administration of the Plan.

Lapse of Awards

Unless the Board decides otherwise or as otherwise specified in an Offer, an Option that has not been exercised on or before the Expiry Date, lapses at 5.00pm Australian Eastern Standard Time on the day after the Expiry Date.

Trust

Company A has established the Trust pursuant to the Trust Deed. The Trust was implemented with a view to:

• providing Company A with greater flexibility to accommodate the long-term incentive arrangements whilst the business continues to expand in terms of operation and employee numbers in future years
• accommodating capital management flexibility for Company A in that the Trust would be able to use contributions from Company A to either acquire shares on-market or subscribe for new Shares
• facilitating a streamlined approach to the administration of the Plan.

The recitals of the Trust Deed state that Company A established the Trust to acquire, hold and transfer Shares and that Trustee has agreed to act as the Trustee and administer the Trust under the terms of the Trust Deed. In the Trust Deed, the activities of the Plan Trustee include:

• receiving funds and holding these funds on trust on the terms of the Trust Deed
• transferring and allocating Shares to Participants under any Plan
• acquiring Shares on the terms of the Trust Deed
• holding Shares on the terms of the Trust Deed
• receiving Income for use on the terms of the Trust Deed
• any ancillary activities related to the above.

Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of section 130-85(4). The Trustee's activities are not intended to be unrestricted and should be read in conjunction with the Trust Deed.

The Trustee is prohibited from being or becoming a Participant or otherwise benefiting under the Trust Deed. Company A and each entity Company A controls is prohibited from benefiting under the Trust Deed.

Acquisition of Shares

To satisfy Company A's obligations in respect of Rights or Shares that have been or are to be issued or granted to Participants under a Plan, Company A may give written notice to the Trustee of the number of Shares that must be acquired by the Trustee and/or allocated to a Participant from Allocated Shares or Unallocated Shares.

Prior to individual Participants becoming beneficially entitled to Shares, they will be held in an unallocated account. As soon as practicable after notification by Company A and, if necessary, the provision of sufficient additional funds, the Trustee must:

• apply the Fund to acquire (by purchase or subscription) the number of Shares specified
• allocate the relevant number of Shares to each Participant and record the allocation in the books of the Trust.

Transfer of Shares

To satisfy Company A's obligations on exercise of an Option by a Participant under a Plan (without any Disposal Restrictions that apply to the Shares) or on the Disposal Restrictions applying to any Allocated Shares ceasing to exist, Company A may give written notice to the Trustee of the number of Shares that must be transferred to a Participant.

As soon as practicable after receiving notice from Company A and payment by Company A of any associated costs, the Trustee must transfer to the Participant the number of Shares specified.

Funding

The Trustee is not remunerated for administering the Trust. Under the Trust Deed, Company A must provide the Trustee with, or procure the provision to the Trustee, of all funds that are required by the Trustee to:

• acquire or transfer the Shares that the Trustee is directed to acquire to transfer under the Trust Deed
• pay any transfer taxes and brokerage fees associated with the acquisition or transfer of Shares
• pay all costs associated with the acquisition or delivery of Shares, and with the administration of the Fund.

Costs associated with the administration of the Fund include brokerage fees, bank charges and other ongoing administrative expenses.

The Trustee or any person who has been a Trustee must not be paid or transferred beneficially from the Fund, or be conferred any direct or indirect benefit out of the Trust.

Restrictions on disposal

The Trustee may only Dispose of Shares under the terms of the Trust Deed and the Plan applying to the Shares.

Unallocated Shares

A Participant has no entitlement to any Unallocated Shares, or any Income deriving from any Unallocated Shares, held by the Trustee.

Where the Trustee receives any Income deriving from Unallocated Shares held, the Trustee can hold or apply this Income for the purposes of meeting the operating costs of operating and administering the Plan, subject to the terms of the Trust Deed.

Rights in respect of Allocated Shares

The Trust Deed provides that subject to its own terms, the relevant Plan and any Disposal Restrictions, a Participant is:

• absolutely entitled to all of their Allocated Shares
• entitled to the same rights in respect of their Allocated Shares as if the Participant was the legal owner of the Allocated Shares, including the right to
  • direct the Trustee how the attached voting rights are to be exercised
  • receive the Income deriving from the Allocated Shares
  • participate in any dividend reinvestment plan operated by Company A in respect of the Allocated Shares.

Reasons for decision

All legislative references are to provisions of the ITAA 1936 or to provisions of the ITAA 1997, unless otherwise indicated.

Question 1

Detailed reasoning

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

Company A operates an employee share scheme (ESS) as part of its remuneration strategy.

Under the Plan, Company A grants Options and Performance Rights to Participants and makes irretrievable cash contributions to the Trustee (in accordance with the Plan and the Trust Deed) which the Trustee will used to acquire Shares for allocation to Participants.

Incurred in carrying on a business

Company A must provide the Trustee with the funds required to enable the Trustee to subscribe for, or acquire, Shares.

The contributions made by Company A are irretrievable as:

• any funds contributed to the Trust, other than specifically in the form of a loan, will not be refunded, repaid or returned to Company A other than by way of the Trustee paying the issue price when it subscribes for Shares
• Company A and each entity Company A controls is prohibited from benefiting under the Trust Deed.

Company A has granted (and will grant in the future) ESS interests as part of its remuneration and reward program for Participants. The costs incurred by Company A for the acquisition of Shares to satisfy grants of ESS interests 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. Therefore, subsection 8-1(1) is satisfied.

Not capital or of a capital nature

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

While the irretrievable cash 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 comparatively small. Therefore, the payments are not capital, or of a capital nature, and paragraph 8-1(2)(a) is not satisfied.

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

Question 2

Detailed reasoning

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 has implemented the Trust for the purpose of facilitating the operation of the Plan and has appointed the Trustee to administer the Trust. The Trust Deed states that Company A must provide the Trustee with, or procure the provision to the Trustee, of all funds that are required by the Trustee to:

• acquire or transfer the Shares that the Trustee is directed to acquire to transfer under the Trust Deed
• pay any transfer taxes and brokerage fees associated with the acquisition or transfer of Shares
• pay all costs associated with the acquisition or delivery of Shares, and with the administration of the Fund (e.g. brokerage fees, bank charges and other ongoing administrative expenses).

These costs outlined above are necessarily incurred by Company A in operating the ESS while carrying on its business for the purpose of gaining or producing its assessable income. These costs are not capital or of a capital nature as the loss or outgoings are regular, recurrent and part of the ordinary employee remuneration costs of Company A (ATO Interpretative Decision ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible).

Therefore, these costs are deductible under section 8-1 as they are incurred in relation to the ongoing administration of the Trust.

Question 3

Detailed reasoning

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 under an ESS. 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 Plan is an ESS 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 or a beneficial interest in a right to acquire a beneficial interest in a share) are provided to employees in relation to their employment with Company A (or the Group).

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

The deduction for the irretrievable cash contribution can only be deducted from the assessable income of Company A in the income year when the relevant beneficial interest in a Share, or beneficial interest in a right to a beneficial interest in a Share, is acquired by a Participant under the Plan.

Indeterminate rights under the Plan

A Performance Right provided under the Plan is an indeterminate right because that right entitles the employee to acquire either a Share or cash, to be determined at a future time at the discretion of the employer. Although the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate right will, pursuant to section 83A-340, be treated as if it had always been an ESS interest.

Section 83A-210 applies equally to contributions made in respect of ESS interests and indeterminate rights. Therefore, an irretrievable cash contribution in respect of an indeterminate right is taken to have been paid at the acquisition time of the ESS interest. If an indeterminate right becomes an ESS interest, deductible contributions made in respect of those rights can be claimed in the income year when the ESS interest is deemed to have been acquired under section 83A-340 (this will be the year in which the indeterminate right was granted to the employee). Once this has been established, such contributions can be matched to ESS interests issued to the employee and where necessary the relevant earlier income year assessments can be amended to allow the deduction (Item 28 of subsection 170(10AA)).

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

Question 4

Detailed reasoning

Section 6-5

Section 6-5 provides that a taxpayer's 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. Under this arrangement, as Company A issues shares in itself to the Trustee in exchange for the subscription proceeds, the character of the newly issued shares is one of capital. Therefore, the receipt, being the subscription proceeds, takes the character of share capital and is of a capital nature. This view is supported by the reasoning in ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee.

Accordingly, when Company A receives subscription proceeds from the Trustee where the Trustee has subscribed for new Shares to satisfy obligations to Participants, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account and it 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 when the Trustee subscribes for Shares. There is no insurance contract in this case, so the amount received is not 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) makes assessable income a recoupment of a loss or outgoing that is deductible in the current income year, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30.

Subsection 20-25(1) defines a recoupment as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described, and a grant in respect of the 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.

To the extent that section 8-1 allows a deduction for bad debts, rates or taxes, section 20-30 will apply such that if there was a recoupment of that deduction, that amount would be assessable. The receipt by Company A is in return for issuing Shares to the Trustee, not as a recoupment of previously deducted expenditure under section 8-1 regarding bad debts, rates or taxes that could be subject to section 20-30.

The subscription proceeds will therefore not be an assessable recoupment under section 20-20.

CGT

Section 102-20 provides that you make a capital gain or loss if, and only if, a CGT event happens. Where the receipt of subscription proceeds does not relate to a CGT event, a capital gain will not arise.

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

However, paragraphs 104-35(5)(c) and 104-155(5)(c) state that CGT events D1 and H2 respectively do not happen if a company issues or allots equity interests or non-equity shares in the company. As Company A is issuing Shares, being equity interests as defined in section 974-75, to the Trustee, CGT events D1 and H2 do not happen.

Given that no CGT event happens, there is no amount assessable as a capital gain to Company A.

Therefore, if the Trustee satisfied its obligations under the Trust Deed by subscribing for new Shares, then the subscription proceeds received by Company A will not be included in the assessable income of Company A under sections 6-5 or 20-20, and a CGT event will not happen under Division 104.

Question 5

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 be obtained but for section 177F, 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 EST where the conditions of Division 83A are met.

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

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

Question 6

Detailed reasoning

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 the 'fringe benefit' definition excludes a benefit constituted by the acquisition of an ESS interest under an ESS (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C applies.

The Commissioner accepts that the Plan is an ESS as an Option or Performance Right granted under the Plan is an ESS interest under paragraph 83A-10(1)(b), being a beneficial interest in a right to acquire a beneficial interest in a share in a company. An Option or Performance Right is also an ESS interest to which Subdivision 83A-B or A-C applies because a Participant acquires the ESS interest under an ESS for nil consideration, which is at a discount.

Accordingly, the provision of ESS interests under the Plan will not be subject to FBT on the basis that they are acquired under an ESS (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA.

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

Question 7

Detailed reasoning

As stated above in response to Question 6, an employer's liability to FBT arises under section 66 of the FBTAA, which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax.

One benefit excluded from being a fringe benefit, pursuant to paragraph (ha) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an employee share trust (EST) 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 are relevant. To qualify as an EST, a trustee's activities must be limited to:

• obtaining shares or rights in a company (paragraph 130-85(4)(a))
• ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the ESS to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph 130-85(4)(b)
• other activities that are merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and (b) (paragraph 130-85(c)).

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

• the Trust acquires shares in a company, namely Company A
• the Trust ensures that ESS interests (as defined in subsection 83A-10(1)) are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust Deed and the Plan.

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

The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'? 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 objects of the Trust are for the sole purpose of undertaking activities that are in line with the definition of an EST under section 130-85(4), including paragraph 130-85(4)(c). The other activities undertaken by the Trustee are merely incidental to managing the Plan.

Therefore, the irretrievable cash contributions made by Company A to fund the subscription for, or acquisition of, Shares by the Trust will not be a fringe benefit.

Question 8

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 stated above in response to Question 7, without the provision of a fringe benefit, no amount will be subject to FBT. The benefits provided to the Trustee by way of irretrievable cash contributions to the Trust and to Participants by way of the provision of Options or Performance Rights under the Plan are excluded from the definition of a fringe benefit for the reasons provided in response to Questions 6 and 7 above. As these benefits have been excluded from the definition of a fringe benefit, the FBT liability is not any less than it would have been but for the arrangement.

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