Private ruling: Employee Share Schemes
Date of advice: 23 August 2016
Published: September 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the irretrievable cash contributions made by Company A or any subsidiary member of the tax consolidated group headed by Company A to the Trustee to fund the acquisition of Company A Shares by the Trust for the purposes of the Option Plan be assessable income of Trust under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will a capital gain or capital loss, that arises for the Trustee at the time when the employees become absolutely entitled to Company A Shares, be disregarded under section 130-90 of the ITAA 1997 if the employees acquire the Shares for the same or less than the cost base of the Shares in the hands of the Trustee? | A2: Yes | Q3: Will contributions by Company A or any subsidiary member of the tax consolidated group headed by Company A to the Trustee to fund the acquisition of Company A Shares by the Trust for purposes of the Option Plan be treated as a deemed dividend within the meaning of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: No

Relevant facts and circumstances: Background 1. Company A and its subsidiaries are private companies for income tax purposes. 2. Company A is an Australian resident for tax purposes. 3. The Trustee, is an independent third party. The Trustee is an Australian resident for taxation purposes. The Option Plan/Scheme 4. Company A's remuneration strategy is designed to attract, retain and motivate appropriately qualified and experienced employees whilst balancing the expectations of shareholders. As part of its remuneration strategy, Company A operates the Option Plan and may operate other long term equity incentive plans from time to time. 5. Company A has established the Option Plan in accordance with the Scheme Rules. 6. Company A's Option Plan operates in the manner in that as soon as reasonably practicable following the end of the financial year, the Board may select the Eligible persons that will be invited to participate in the Option Plan and issue an offer letter which outlines the maximum number of Options to be granted under the Invitation. 7. The eligibility criteria to be used by the Board of Company A is outlined in the Scheme Rules. 8. Following receipt by Company A of an Application, Company A will grant to the relevant Participant, for nil consideration, a number of Options as determined by the Board, up to a maximum number of Options specified in the Invitation. 9. Options granted to a Participant will vest in favour of that Participant as determined by the Scheme Rules. There is no exercise price payable. 10. An Option does not confer on a Participant: a) Any voting rights in respect of Shares or in respect of any other equity securities of the Company; b) The right to participate in new issues of Shares or other equity securities of the Company; c) The right to attend or vote at any general meeting or other meeting of holders of any Shares or other equity securities of the Company; d) The right to receive any dividends or other distributions or to receive or otherwise participate in any returns of capital from the Company; or e) The right to participate in a liquidation or winding up of the Company. 11. Subject to the Options vesting in favour of a Participant the Board in its sole and absolute discretion, will issue the relevant number of Options Shares directly to the Participant, or Procure that the Trustee allocates the relevant number of Options Shares to the Participant to be held by the Trustee on trust for that Participant in accordance with the Trust Deed. 12. All Option Shares will be issued as fully paid, be free of Encumbrances; and rank equally in all respects with the other Ordinary A shares of Company A as at the date of issue and be subject to the Terms of Offer. 13. An Option Share may be forfeited in the circumstances as set out in the Scheme Rules regarding cessation. 14. Subject to the Scheme Rules, if the Participant ceases to be an employee or consultant of Company A under special circumstances (such as being a good leaver or a bad leaver), then Company A has the right to buy-back some or all of the Option Shares. This is deemed to include the right of Company A to purchase, cancel or otherwise require the transfer or forfeiture of the Option Shares. 15. If an Initial Public Offering (IPO) of Company A Shares occurs before all Options capable of vesting in favour of a Participant have vested in favour of that Participant, any unvested Options granted to a Participant will not be accelerated and will continue to vest in favour of a participant in accordance with the requirements of the Scheme Rules, except that - a) the unvested Options will be in respect of unissued ordinary shares in the relevant Company A Group Member that is to be listed on a Recognised Stock Exchange in connection with the IPO (IPO Entity), and b) if applicable, the number of unvested Options held by a Participant will be adjusted (by such amount as determined by the Board in its sole discretion) to take into account any reorganisation that occurs immediately prior to and in connection with the IPO. Company A will procure that the Scheme Rules are varied in a such a way as determined by the Board in its sole discretion which unless such variation is required by or necessitated by law, neither disadvantages nor advantages the Participant nor adversely effects the rights of the other holders of Shares, to account for the effect of the IPO. If the IPO entity is not Company A it will procure including by way of assignment or novation that the IPO entity replaces Company A as a party to the Scheme provided that the IPO entity agrees to assume all rights and obligations of Company A under the Scheme Rules. 16. Subject to Company A's constitution, a Participant must not dispose of Options granted to a participant without the prior written approval of the Board. Following the issue by Company A of Option Shares to a Participant or the allocation by the Trustee of Option Shares to a participant, a Participant must not dispose of its legal or beneficial interest in, and must not direct the Trustee to dispose of its legal interest in such Option Shares without the prior written approval of the Board. 17. A participant must not direct the Trustee to transfer its legal interest in any Option Shares to the Participant without the prior written approval of the Board. 18. All Participants are Australian residents for taxation purposes. Employee Share Trust (the Trust) 19. The Trust operates as follows: • The Trust will be funded by contributions from Company A or a subsidiary member of the Company A tax consolidated group (e.g. for the purchase of Shares in accordance with the Option Plan). • Contributions are made by Company A to the Trustee once the Board resolves to provide a particular Participant a Share as a result of Options having vested and automatically exercised. At the time of each contribution, the Board will provide the Trustee a notice listing Company A's employees, for whom the contribution is being made, i.e. the portion of the contribution and the applicable number of Shares to be acquired in respect of each Participant. • These funds will be used by the Trustee to acquire Shares in Company A either from an existing shareholder, on-market to the extent Company A becomes listed or via a subscription for new Shares in Company A. • Shares acquired by the Trustee will be allocated to the relevant Participants following instructions from Company A. • The Trustee can sell shares on behalf of a Participant where permitted to do so by the Participant, subject to any disposal restrictions set out in the Option Plan. 20. The Trustee will hold the legal title to relevant Option Shares on trust for a Participant in accordance with the Trust Deed. 21. The Trustee is required to act independently. 22. The costs and expenses of establishing, managing and administering the Scheme will be borne by Company A. 23. The Trustee has all the powers in respect of the Trust and Trust Fund that is legally possible for a trustee as a body corporate to have but only for the sole purpose of exercising its powers and discharging its obligations under the Trust Deed and the relevant Scheme Rules. 24. The Trust will be operated such that it satisfies the definition of an 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997. Contributions made by Company A to the Trust 25. Company A will only make irretrievable cash contributions to the Trust in the income year that the Options vest. 26. Company A will not make irretrievable cash contributions to the Trust before the grant of the Options to Participants. 27. Company A will not make irretrievable cash contributions to the Trust at or around the time of the grant of Options to the Participants. 28. Company A will not make large up-front payments that provide for the Trust operations for several years in the future. 29. No contributions have been made to the Trust in respect of the Option Plan to date. 30. The Trustee of the Trust holds all Company A Shares pursuant to the Option Plan on capital account.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 7A in Part III | Income Tax Assessment Act 1936 section 109C | Income Tax Assessment Act 1936 subsection 109C(1) | Income Tax Assessment Act 1936 subsection 109C(2) | Income Tax Assessment Act 1936 section 109ZB | Income Tax Assessment Act 1936 subsection 109ZB(3) | Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 6-10(1) | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Subdivision 83A | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 subsection 83A-20(1) | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 subsection 104-75(1) | Income Tax Assessment Act 1997 subsection 104-75(3) | Income Tax Assessment Act 1997 subsection 104-85(1) | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 subsection 106-50(1) | Income Tax Assessment Act 1997 subsection 106-50(2) | Income Tax Assessment Act 1997 Subdivision 130-D | Income Tax Assessment Act 1997 subsection 130-85(1) | Income Tax Assessment Act 1997 subsection 130-85(2) | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 paragraph 130-85(4)(a) | Income Tax Assessment Act 1997 paragraph130-85(4)(b) | Income Tax Assessment Act 1997 paragraph130-85(4)(c) | Income Tax Assessment Act 1997 section 130-90 | Income Tax Assessment Act 1997 subsection 130-90(1) | Income Tax Assessment Act 1997 paragraph 130-90(1)(a) | Income Tax Assessment Act 1997 paragraph 130-90(1)(b) | Income Tax Assessment Act 1997 paragraph 130-90(1)(c) | Income Tax Assessment Act 1997 paragraph 130-90(1)(d) | Income Tax Assessment Act 1997 subsection 130-90(2) | Income Tax Assessment Act 1997 section 318 | Income Tax Assessment Act 1997 subsection 960-100(2) | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The irretrievable cash contributions made by Company A or any subsidiary member of the tax consolidated group headed by Company A (Company A group) to fund the acquisition of Company A Shares by the Trust will not be assessable income of the Trust under section 6-5 or 6-10. | Detailed Reasoning - Irretrievable cash contributions: It must be determined as a conclusion of fact whether the contributions made by Company A to the Trustee are irretrievable cash contributions. The Trust Deed outlines that the Trustee holds the Trust Fund on trust for all beneficiaries, in the manner required by the Scheme Rules and that it may apply any part of the general trust property for the benefit of the beneficiaries. The Trustee must comply with any direction of the Board to acquire Shares on behalf of a Participant in accordance with the relevant Rules and must apply any amount paid to it by a Group Company or a Participant pursuant to the relevant Rules in accordance with any such direction of the Board. The Trust Deed enables the Trustee to discharge its obligations under the Trust Deed and Scheme Rules and for no other purpose. Accordingly a refund of any contributions by the Trustee would be in breach of the powers of the Trustee under the Trust Deed. The Trust Deed states that Company A and each of its group companies are not beneficiaries of the Trust and have no entitlement to any Shares forming part of the Trust Fund at any time. Accordingly, a contribution made to the Trust will not be refundable or retrievable by Company A. In conclusion, the above clauses support the conclusion that the cash contributions made by Company A to the Trustee are irretrievable cash contributions. | Detailed Reasoning - Assessable income of the Trust under section 6-5 or 6-10: Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) defines net income in relation to a trust as follows, insofar as it is relevant: net income , in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions … Subsection 6-5(1) states: Your assessable income includes income according to ordinary concepts, which is called ordinary income. Subsection 6-10(1) states: Your assessable income also includes some amounts that are not ordinary income. Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5. The irretrievable cash contributions made by Company A to the Trust are unlike those provisions listed in section 10-5. Therefore irretrievable cash contributions made by Company A to the Trust will not be assessable income under section 6-10. They will only be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936 if they are assessable as income according to ordinary concepts under section 6-5. Pursuant to the Trust Deed, all contributions by Company A to the Trust for the purposes of acquiring Company A Shares constitute accretions to the corpus of the Trust. Furthermore, pursuant to the Trust Deed, the Trustee must, when directed by the Board, acquire Company A Shares on behalf of the Participants and use the contributions made by Company A (and the Participants) to do so. The general powers granted to the Trustee in the Trust Deed are specifically restricted so that these powers must be exercised only for the purposes of the Trust and only to give effect to the Option Plan which the Trust supports. To this end, the contributions received from Company A and the Participants must, therefore only be used to acquire Company A Shares in accordance with the terms of the Trust Deed and the Scheme Rules. The Trust Deed states that Company A (and each group company) is not a beneficiary and has no entitlement to any Shares forming part of the Trust Fund at any time. Accordingly, the irretrievable cash contributions made by Company A to the Trustee to acquire Company A Shares will not be assessable income under section 6-5 but constitute capital receipts of the Trustee. Therefore, the irretrievable cash contributions made by Company A to the Trustee of the Trust to fund the subscription for, or acquisition of Company A Shares by the Trust in accordance with Trust Deed of the Trust will not be assessable income of the Trust pursuant to sections 6-5 or 6-10. This accords with the view expressed in ATO Interpretative Decision ATO ID 2002/965 Trustee not assessable on employer contributions made to it under the employer's employee share scheme . The Trust Deed provides that Company A may pay from its own resources any fees, commission or remuneration and reimburse any costs or expenses incurred by the Trustee as Company A and the Trustee may agree from time to time. Note also that income derived by the employment of the property that is the fund of the corpus of the trust and which the Trustee holds on trust will be income according to ordinary concepts. (See Federal Commissioner of Taxation v Everett (1980) 143 CLR; 440; (1980) 10 ATR 608; 80 ATC 4076 for a discussion of the distinction between the trust income and corpus). | Summary: A capital gain or capital loss that arises for the Trustee at the time when the Participants become absolutely entitled to Company A Shares (CGT event E5) or when the Trustee disposes of the Shares to the Participants (CGT event E7) will be disregarded under section 130-90 if the Participants acquire the Shares for the same or less than the cost base of the Shares in the hands of the Trustee. | Detailed Reasoning - Section 130-90: Section 130-90 operates to disregard any capital gain or capital loss made by an employee share trust or a beneficiary of the trust where the specified conditions in subsection 130-90(1) are satisfied. The conditions in subsection 130-90(1) are that CGT event E5 or E7 happens in relation to a beneficial interest in a share acquired by the beneficiary by exercising a right. The beneficiary's beneficial interest in the right must be an ESS interest to which Subdivision 83A-B or 83A-C (about employee share schemes) applies. However subsection 130-90(2) provides that subsection 130-90(1) will not apply if the beneficiary acquired the beneficial interest in the share for more than its cost base in the hands of the employee share trust at the time the CGT event happens. | Detailed Reasoning - Employee share trust: The term 'employee share trust' referred to in subsection 130-90(1) is defined in subsection 995-1 as having the meaning given by subsection 130-85(4). Subsection 130-85(4) provides that an employee share trust for an employee share scheme (having the meaning given by subsection 83A-10(2)) is a trust whose sole activities are: (a) obtaining shares or rights in a company; and (b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of: (i) the company; or (ii) a subsidiary of the company; and (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the option are both ESS interests within the meaning of subsection 83A-10(1). An employee share scheme is defined in subsection 83A-10(2) as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. The Option Plan is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which rights to acquire Shares in Company A are provided to employees in relation to their employment. Company A established the Trust to facilitate the Option Plan by acquiring Company A shares and allocating those shares to Participants, in order to satisfy the Options acquired under the employee share scheme. The beneficial interest in the Company A share is itself provided under an employee share scheme because it is provided under the same Scheme under which the Options to acquire the Company A Shares are provided to the Participant in relation to the Participant's employment, being an employee share scheme as defined in subsection 83A-10(2). Therefore, paragraphs 130-85(4)(a) and (b) are satisfied because: • the Trustee acquires Company A Shares, and • the Trustee ensures that ESS interests as defined in subsection 83A-10(1), being beneficial interests in those Shares, are provided under an ESS, as defined in subsection 83A-10(2), by allocating those Shares to the Participants in accordance with the governing documents of the Scheme. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) will require a trustee to undertake incidental activities that are a function of managing the employee share scheme and administering the trust. For the purposes of paragraph 130-85(4)(c), activities which are merely incidental, as set out in ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities , include: • the opening and operation of a bank account to facilitate the receipt and payment of money; • the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee; • the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; • dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme; • the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares; • the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and • receiving and immediately distributing shares under a demerger. 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 merely incidental. The Trust Deed also states that it 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. The background section of the Trust Deed reinforces this as it states that Company A has established a Trust for the purpose of administering the current and future employee incentive plans established by Company A for the benefit of Participants in those plans. The Trust Deed supports the conclusion that the Trustee can only use the contributions received from Company A for the acquisition of Company A Shares for Participants in accordance with the Option Plan. To this end, all other duties/general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with Company A Shares to be acquired for Participants of the Option Plan. Accordingly, paragraph 130-85(4)(c) is also satisfied because the Trust satisfies the definition of an employee share trust in subsection 130-85(4), as the Trust Deed does not provide for the Trustee to participate in any activities which are not considered merely incidental to a function of managing the employee share scheme and administering the Trust. Therefore, the Trust is an employee share trust, as defined in subsection 995-1(1), as the activities of the Trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) and its other activities (general powers) are merely incidental to those activities in accordance with paragraph 130-85(4)(c). | Detailed Reasoning - Paragraph 130-90(1)(a): CGT event E5 Subsection 104-75(1) provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies), as against the trustee. Subsection 104-75(3) provides that the trustee will make a capital gain if the market value of the asset (at the time of the event) is more than its cost base, but will make a capital loss if that market value is less than the asset's reduced cost base. Subdivision 130-D treats an employee who acquires an ESS interest through an ESS to be 'absolutely entitled' to the share or right to which the ESS interest relates, from the time that they acquire the ESS interest (subsections 130-85(1) and 130-85(2)). Under the Option Plan, where a Participant becomes absolutely entitled to Company A Shares as against the Trustee, CGT event E5 will occur, and pursuant to subsection 104-75(3), the Trustee will make a capital gain or loss. CGT event E5 will happen under the terms of the Option Plan at the time when the Participant becomes absolutely entitled to the Shares in Company A as against the Trustee of the Trust. CGT event E7 Subsection 104-85(1) provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. However, subsection 106-50(1) provides: If you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it. The Participant, on allocation of Company A Shares by the Trustee, becomes absolutely entitled to those Shares. In accordance with the Trust Deed each Participant is absolutely entitled to any allocated Shares held by the Trustee on their behalf, and is entitled to the same rights in those Shares as if he or she was the legal owner of the Shares (subject to the plan and terms of participation). Once the Participants are absolutely entitled to the Company A Shares held on their behalf by the Trust, section 106-50 will deem the disposal of them by the Trustee to be done by the Participants. Therefore, section 106-50 will apply, such that if the Trustee disposes of Company A Shares under the Option Plan (by way of transfer to Participants), the Trustee will not make a capital gain or capital loss under CGT Event E7. | Detailed Reasoning - Paragraph 130-90(1)(b): Subsection 995(1) defines a share to mean a share in the capital of a company. A share held by the Trustee of the Trust and to which a participant is entitled to upon the exercising of an option is a share in the capital of Company A. Accordingly, paragraph 130-90(1)(b) is satisfied as CGT event E5 happens in relation to a share for the purposes of that paragraph. | Detailed Reasoning - Paragraph 130-90(1)(c): Paragraph 130-90(1)(c) is satisfied as a participant will have acquired a beneficial interest in a share in Company A by the exercising of an option granted under the plan. | Detailed Reasoning - Paragraph 130-90(1)(d): Subsection 83A-20(1) of Subdivision 83A-B states: This Subdivision applies to an *ESS interest if you acquire the interest under an *employee share scheme at a discount. The term 'employee share scheme' is defined in subsection 83A-10(2). Subsection 83A-10(2) states: An employee share scheme is a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of: (a) the company;…. in relation to the employees' employment. For the purposes of subsection 83A-10(2), section 995 defines the term 'scheme' as follows: scheme means: (a) any *arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The Option Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a Share of Company A), is provided to eligible employees in relation to their employment in Company A in accordance with the Trust Deed. The options are issued under the Option Plan at no exercise price. The exercise price will not exceed the Share price paid by the Trust to acquire those Shares. Shares will be acquired by the Trust under the Option Plan on behalf of employees, using contributions from Company A. Accordingly, prima facie, Subdivision 83A-B will apply to the Options acquired under the Option Plan as pursuant to subsection 83A-20(1), the ESS interest (i.e. performance rights issued under the Option Plan) will be acquired under an employee share scheme at a discount. It should be noted however that whether a Participant is ultimately taxed upfront on some or all of any discount received (under Subdivision 83A-B) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C), will depend on which of the additional requirements in Subdivision 83A-B or Subdivision 83A-C have been satisfied. Under either circumstance paragraph 130-90(1)(d) will be satisfied. | Detailed Reasoning - Subsection 130-90(2): As the Participant does not acquire the beneficial interest in a Company A Share for more than its cost base in the hands of the Trust at the time that CGT event E5 happens, subsection 130-90(2) will also have been satisfied. | Detailed Reasoning - Conclusion: Accordingly, section 130-90 operates to disregard any capital gain or loss made by the Trustee on the Shares. | Summary: Contributions made by Company A to the Trustee will not be deemed dividends under section 109C of the ITAA 1936, as its operation would be excluded under subsection 109ZB(3) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Division 7A of the ITAA 1936 deals with the circumstances under which certain payments made by a private company will be treated as dividends. | Detailed Reasoning - Payments treated as dividends: Subsection 109C(1) of the ITAA 1936 states that a private company is taken to pay a dividend to an entity if the private company makes a payment to the entity during the year and either: • the entity is a shareholder or an associate of the shareholder in the company at the time of the payment; or • a reasonable person would conclude that the payment was made because the entity has been a shareholder or associate at some time. An entity is defined in subsection 960-100(2) and includes the trustee of a trust. Upon initial set up of the Trust, due to timing events, the Trustee will not hold Shares when contributions are made by Company A. Consequently the contributions would not be deemed to be a dividend under section 109C of the ITAA 1936. However, the contributions made by Company A to the Trustee would satisfy subsection 109C(1) of the ITAA 1936 if the Trustee holds Company A Shares at the time the contribution is made. Subsection 109C(2) of the ITAA 1936 would then apply to treat the amount of the contributions to be a deemed dividend, subject to Company A's distributable surplus for the relevant income year. | Detailed Reasoning - Exception: Certain payments made by a private company to an entity are excluded from the operation of section 109C of the ITAA 1936. Section 109ZB(3) of the ITAA 1936 provides that Division 7A does not apply to a payment made to a shareholder, or shareholder's associate, in their capacity as an employee or an associate of an employee. Subsection 109ZB(3) of the ITAA 1936 appears within a provision designed to set an 'ordering' between Division 7A and the fringe benefits tax provisions in the FBTAA. Specifically, what is meant by 'an employee' for the purpose of this provision takes on the meaning it is given in the FBTAA. Paragraph 253 of TR 2014/D1, states that in considering benefits provided to employees or associates of employees in the context of that Act (specifically, in the definition of a 'fringe benefit'), Edmonds J in FC of T v Indooroopilly Children Services (QLD) Pty Ltd [2007] FCAFC 16 [35] concluded that the reference to an employee is a reference to a particular employee. The Trustee is an associate of any Company A employee who is a beneficiary of the Trust as defined in sections 109ZD and 318 of the ITAA 1936. Contributions are made by Company A to the Trustee once the Board resolves to provide a particular Participant a Share. At the time of each contribution, the Board will provide the Trustee a notice listing Company A's employees, for whom the contribution is being made, i.e. the portion of the contribution and the applicable number of Shares to be acquired in respect of each employee. As the contribution would be made to the Trustee in respect of a particular Company A employee they would satisfy section 109ZB of the ITAA 1936. Therefore, the contributions made by Company A to the Trustee will not be deemed to be dividends under section 109C of the ITAA 1936, as its operation would be excluded under section 109ZB of the ITAA 1936.