Private ruling: Employee remuneration trust
Date of advice: 27 June 2022
Published: October 2022

Ruling: Q1: Is the Head Company of a consolidated group entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made by the Consolidated Group to the Trust to fund Awards paid under the Plan? | A1: Yes. However, the deduction that relates to the portion of any contribution paid to the trustee of the Trust, which is attributable to contractors is to be spread out over the vesting period of the relevant Plan Rules | Q2: Is the Head Company entitled to a deduction under section 8-1 of the ITAA 1997 for the costs it incurs, other than those which are capital in nature, in relation to the implementation and on-going administration of the Trust? | A2: Yes. | Q3: Will the irretrievable cash contributions made by the Consolidated Group to the trustee of the Trust to fund the payment of the Awards by the Trust for the purposes of the Plan be assessable income of the Trust under section 6-5 or 6-10 of the ITAA 1997? | A3: No | Q4: Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction under section 8-1 of the ITAA 1997 claimed by the Head Company in respect of: a) irretrievable cash contributions made by the consolidated group to the Trust to fund the Plan; or b) costs incurred by consolidated group in relation to the implementation and on-going administration of the Plan and the Trust? | A4: No. | Q5: Will the irretrievable cash contributions made by the Consolidated Group to fund the Plan and the provision of Awards constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A5: No. | Q6: Would the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount to the Consolidated Group by the amount of tax benefit gained from irretrievable cash contributions made by the Consolidated Group to the trustee of the Trust, to fund the granting of Awards in accordance with the Plan. | A6: No. | Q7: Will the trustee of the Trust be required to withhold Pay-As-You-Go (PAYG) taxes on the Award incentive payments made to employees in respect of the Plan in accordance with section 12-35 of schedule 1 of the Tax Administration Act 1953 (TAA) at the time the Award vests and is paid to the Participant? | A7: Yes

Relevant facts and circumstances: The Head Company and the Consolidated Group is in its 'start-up' phase. The Consolidated Group remunerates employees by evaluating comparable positions in similar companies and industries. The remuneration of employees includes the following elements: • fixed remuneration; and • variable remuneration, which includes Awards paid under the Plan. The Consolidated Group engages a number of independent contractors.


Reasons for decision: Summary: Head Company is entitled to an income tax deduction, pursuant to section 8-1 of the ITAA 1997 for the irretrievable cash contributions made by Consolidated Group to the Trust) to fund Cash Awards paid under the the Plan. However, the deduction that relates to the portion of any contribution paid to the trustee of the Trust, which is attributable to contractors of Head Company Group, is to be spread out over the vesting period of the relevant Plan Rules. | Detailed Reasoning - Employee Remuneration Trust (ERT) Arrangement: An employee remuneration trust (ERT) arrangement involves a trust being established to facilitate the provision of payments and/or other benefits to employees of an employer. The trustee provides the benefits at the direction of, or by arrangement with, the employer ( Taxation Ruling TR 2018/7 Income tax: employee remuneration trusts ). The Trust is an ERT. It was established by Head Company for the purpose of providing Awards to its participating employees and contractors, the vesting of which is subject to certain terms and conditions governed by the Plan Rules. The Award is described by the Head Company Group as forming part of an employee's remuneration. | Detailed Reasoning - Section 8-1 of the ITAA 1997: Under section 8-1 of the ITAA 1997, an employer is entitled to a deduction for a contribution paid to the trustee of an ERT to the extent that it is either incurred in gaining or producing the employer's assessable income or is necessarily incurred in carrying on a business for the purposes of gaining or producing the employer's assessable income. However, a deduction is not allowed under section 8-1 of the ITAA 1997 to the extent that the contribution is an outgoing of capital, or of a capital nature, is an outgoing of a private or domestic nature, is incurred in the gaining or producing exempt income or non-assessable non-exempt income or is prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936. TR 2018/7 sets out the Commissioner's view on how the taxation laws apply to an ERT arrangement that operates outside the employee share scheme rules in Subdivision 83A-B or Subdivision 83A-C of the ITAA 1997. As is the case for the Trust. Paragraph 9 of TR 2018/7 provides that a contribution is deductible to the employer under section 8-1 where all the following applies: • it is an irrevocable payment of cash, made at a time when the employer carries on a business for the purposes of gaining or producing assessable income; • it is made because the employer reasonably expects their business to benefit from their contribution via a gaining of producing assessable income; and • it is intended to be permanently and entirely dissipated in remunerating employees of that business within a relatively short period of the contribution being made (other than employees who are wholly engaged in affairs of capital of the busines). | Detailed Reasoning - Has the outgoing attributable to the contribution been incurred?: To qualify for a deduction under section 8-1 of the ITAA 1997, a loss or outgoing must be incurred. The term 'incurred' is not defined in the legislation, however, broadly a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape (seeTaxation Ruling TR 97/7 ). Otherwise, a loss or outgoing is incurred when a taxpayer is definitively committed to the outgoing (see Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492; Coles Myer Finance Pty Ltd v. Federal Commissioner of Taxation 93 ATC 4214). A contribution made to the trustee of a trust is incurred only when the ownership of that contribution passes from an employer to the Trustee and there is no circumstance in which the employer can retrieve that contribution (see Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339; Spotlight Stores Pty Ltd v Commissioner of Taxation [2004] FCAFC 339). Accordingly, it must be established in this case that the contributions paid to the trustee of the Trust are irretrievable and not refundable, otherwise they will not be a permanent outgoing incurred for the purposes of section 8-1 of the ITAA 1997. The Head Company has established the Trust for the purposes of making Awards to participating employees where certain conditions are satisfied. In accordance with this purpose under the terms of the Deed: • contributions are stated to be irretrievable by the contributor, which will by Head Company or its nominee; and • Head Company and members of the Consolidated Group are excluded as beneficiaries of the Trust. The contributions made to the Trust are considered irrevocable and irretrievable to Head Company and the Consolidated Group and that Head Company will incur an outgoing for the purposes of section 8-1 of the ITAA 1997 at the time it, or a member of the Head Company Group, makes such contributions to the trustee of the Trust. Has the outgoing attributable to the contribution been incurred in gaining or producing assessable income, or necessarily incurred in carrying on a relevant business In addition to being incurred, for a contribution to an ERT be deductible it must have either been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business of gaining or producing assessable income. Any contribution made to the Trust is not incurred by Head Company in gaining or producing any assessable income. Accordingly, to be deductible any contribution made by Head Company or a member of the Head Company Group to the Trust, such a contribution must be necessarily incurred by Head Company in carrying on its business. In order to satisfy this requirement, there must be a relevant connection between the outgoing and the business. An expense will have a relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' (see Ronpibon Tin NL and Tongkah Compound NL v. Federal Commission of Taxation (1949) 78 CLR 47; Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation (1980) FCA 150). Paragraph 10 of TR 2018/7 provides that the following considerations are relevant to establishing a sufficient connection between a contribution and the benefit to the employer's business: • the nature and timing of the benefits to be delivered by the employer and the employees; • employee awareness of the scheme; and • whether the scheme and the contribution address (or has the capacity to address) the business-related need or function. In the context of this matter, the objectives of the Plan and the Trust are to: • retain and motivate the Consolidated Group's employees and contractors and align their interests more closely with the interests of shareholders in the Consolidated Group; • to reward employees and contractors on the sustained profitable growth of the business rather than short-term performance; • provide certainty and reassurance to participant employees and contractors that Head Company is committed to the Plan, as the terms of the Deed purport to prevent the Head Company Group from retrieving funds committed to the Plan and arguably protect the funds in the event that the Head Company Group becomes insolvent; and • facilitate the provision of payment of Awards to participating employees and contractors. The Head Company expects that the Plan and the Trust will result in an improvement to employee and contractor performance, morale, efficiency, retention, and loyalty. Employees and Contractors are made aware of the Plan and the Trust via the Plan Rules and the Plan is noted in their contract of employment and their potential benefit from it. Accordingly, the contributions made by the Consolidated Group to the Trust have a sufficient connection with the Head Company Group's business, and will satisfy the nexus of being necessarily incurred in carrying on that business for the purposes of gaining or producing assessable income. | Detailed Reasoning - Is the contribution of a capital or income nature?: Where a contribution satisfies subsection 8-1(1) of the ITAA 1997, it may not be deductible to an employer under subsection 8-1(2) of the ITAA 1997 to the extent that such a contribution is an outgoing of capital, or of a capital nature, is an outgoing or a private or domestic nature, is incurred in gaining or producing exempt income or is prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936. On the facts, nothing suggests that the contributions to the trustee of the Trust in this matter are private or domestic in nature, or are related to producing exempt income or non-assessable non-exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936. Paragraph 16 of TR 2018/7 provides that a contribution is not deductible under section 8-1 to the extent it secures a capital advantage for the employer, unless that advantage for the employer is small or trifling. The nature of an outgoing as either capital or revenue can generally be determined by examining the character of the advantage sought, the manner in which it is to be used, relied upon, or enjoyed and the means adopted to obtain it. When considering the character of expenditure, it is critical to consider the advantage sought by it from a practical and business point of view. Paragraph 19 or TR 2018/7 provides that where a contribution is made to secure any of the following benefits (without limitation), it is likely to be capital expenditure by the employer: • to acquire an asset that is likely to generate an enduring or permanent improvement to employee goodwill; • to provide loans, on a continuous basis, to employees; • to acquire shares and/or equity in the employer or a holding company of the employer in circumstances where it is not intended to divest legal and beneficial ownership of these shares to employees within a relatively short period of the contribution being made; or • to acquire arm's length investments where the intention is to derive a return to be paid to employees, whilst keeping the capital of the trust fund intact. The contributions made to the Trust are of an income nature, this is based on: • The Head Company describing participation in the Plan as part of the employee / contractor's remuneration, accordingly, benefits under the Plan are a reward for services provided (see Sent v Federal Commission of Taxation 2012 ATC 20-318 at [41] to [46); • it is not intended that the Trust will acquire shares in the Consolidated Group, any other assets or provide any loans to participants or Head Company group members; • the contributions made to the trustee of the Trust will be invested in very low risk interest bearing instruments, which would include bank deposits, and it is not to be invested in higher risk instruments. Such low-risk investments should not derive a level of income such that Award will be funded by income of the Trust rather than capital; and • contributions held as capital of the trust fund should dissipate within 5 years of being made to the Trust as the Vesting Date of a given Award is 3 years from the date it is granted to an employee/ contractor, and thus the Award, if payable, should be paid prior to the fifth anniversary of the contribution being made to the trustee of the Trust. The contribution to the Trust by a member of the Consolidated Group should be considered to be of an income nature, such that section 8-1(2) of the ITAA 1997 is not applicable in this case. | Detailed Reasoning - Contributions attributable to shareholders of Head Company: A contribution is not deductible under section 8-1 of the ITAA 1997 to the extent the contribution is intended to be applied for the benefit of the owners, controllers or shareholders of an employer, or their associates (see TR 2018/7). In such situations where deductions are being sought for voluntary payments, consideration needs to be had as to whether the outgoing was reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of that business and if so, whether those responsible for carrying on the business saw it (see Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation 80 ATC 4542). In accordance with the decision of the Federal Court in Essenbourne Pty Ltd v Federal Commissioner of Taxation Essenbourne Pty Ltd V Federal Commissioner of Taxation 2002 ATC 5201 a contribution is of a capital nature where the advantage or benefit sought to be secured from the contribution, from the employer's perspective, is the improvement of the position of the shareholders of Head Company, and thus is of a capital nature. Essenbourne does not stand for the proposition that all contributions to an ERT on behalf of participating employee shareholders will not be deductible. In this case, certain portions of contributions are attributable to a number of participating employee shareholders or their nominees. The Plan and Trust can be distinguished from the Essenbourne case as the Plan and the Cash Trust has a broader application and objectives to incentivise all employees. Unlike Essenbourne , the Plan includes the majority of Head Company employees, not just the shareholders. Having regard to the nature of the scheme and the manner in which it applies to all participants, the Commissioner accepts that the purpose of the Plan is to retain staff and incentivise their performance, including the minority and majority employee shareholders listed above (noting that the employee shareholders can dispose of their shares), and the payments to these employee shareholders are not in lieu of dividends: • The expertise of the employee shareholders is essential to the start-up business • The incentive received by each participant shareholder is commensurate with market remuneration packages for similar roles. • The Plan rewards all employees, including the employee shareholders, for their services with reference to their remuneration. • It is considered that all contributions to the Trust are reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the Consolidated Group and this is visible to all participants. Consequently, the contribution with respect to the employee shareholders are not of a capital nature as the advantage or benefit sought to be secured from the contribution, from Head Company's perspective, is not the improvement of the position of the shareholders of Head Company. | Detailed Reasoning - Prepayment Rules: The prepayment rules contained in section 82KZL of the ITAA 1936 will only apply to the portion of any contribution paid to the trustee of the Trust, which is attributable to contractors of Head Company, to spread out the deduction claimed over an 'eligible service period'. The portion of the contribution attributable to employees will not be subject to the prepayment rules as it will satisfy 'excluded expenditure'. 'Excluded expenditure' under subsection 82KZL(1) of the ITAA 1936, is defined to include among other things an amount of expenditure incurred under a contract of service. Contracts of service are more commonly known as employment contracts, or contracts for salary and wages (see paragraphs 17 to 19 of Taxation Ruling 2005/16 Income tax: Pay As You Go - withholding from payments to employees and Notes of Clause 45 of the Explanatory Memorandum to the Taxation Laws Amendment Act (No. 4) 1988 (Cth) which states with respect to section 82KZL(1) that a contract of service is one that is, for salary or wages). To this end, given that the Cash Awards: • paid to employees of Head Company are considered by Head Company to form part of an employee's remuneration; • are paid in accordance with the Plan Rules and Offer Letter; • are noted in the employee's contract; and • are dependent on continued service of the employee or contractor, the portion of any contribution to the trustee of the Trust attributable to employees is expenditure incurred under a contract of service and thus satisfy the definition of 'excluded expenditure' for the purposes of subsection 82KZL(1) of the ITAA 1936. Accordingly, the portion of any contribution paid to the trustee of the Trust that is attributable to employees will be deductible in the income year in which the contribution is paid to the Trust. Contractors, however, are paid pursuant to a contract for services (see paragraphs 17, 35 to 40 of Taxation Ruling 2005/16 Income tax: Pay As You Go - withholding from payments to employees) and are not paid salary and wages). Therefore, the portion of any contribution paid to the trustee of the Trust attributable to the contractors will not be 'excluded expenditure' and the prepayment rules in subsection 82KZL(1) of the ITAA 1936 will apply to this portion of the contribution. Where the prepayment rules apply, the Head Company will need to spread out the deduction claimed over an eligible service period. "Eligible service period" in relation to an amount of expenditure incurred under an agreement is, broadly, the period (up to a maximum of 10 years) over which the relevant services are to be provided under the agreement in return for the amount of expenditure (see subsection 82KZL(1) of the ITAA 1936) In these circumstances the deduction should be spread over the vesting period of the relevant Plan Rule. | Summary: The Head Company is entitled to an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by the Consolidated Group in relation to the implementation and on-going administration of the Trust. | Detailed Reasoning - Detailed reasoning: Head Company (the Consolidated Group) incurs various costs in relation to on-going administration of the Trust - for example, costs associated with the services provided by the trustee of the Trust. The costs incurred by the Head Company Group in relation to the implementation and on-going administration of the Trust are deductible under section 8-1 of the ITAA 1997 as either: • costs incurred in gaining or producing the assessable income of the Head Company Group; or • costs necessarily incurred in carrying on the business of the Consolidated Group for the purpose of gaining or producing the assessable income of the Consolidated Group. Such costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. The costs are therefore not excluded from being deductible under paragraph 8-1(2)(a) of the ITAA 1997. Accordingly, the Head Company is entitled to an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by the Consolidated Group in relation to the implementation and on-going administration of the Trust. | Summary: Irretrievable cash contributions made by the Consolidated Group to the trustee of the Trust to fund the payment of Awards under the Plan constitute capital receipts to the trustee and are not included in the calculation of the net income of the Trust under section 95 of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Section 95 of the ITAA 1936 defines net income in relation to a trust as follows: 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... Assessable income includes both ordinary income and statutory income according to sections 6-5 and 6-10 of the ITAA 1997. Ordinary income is income according to ordinary concepts. Statutory income is income that is not ordinary income but is included in assessable income because of a specific provision of the ITAA 1997 or ITAA 1936. | Detailed Reasoning - Ordinary income: Section 6-5 of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts. The expression 'income according to ordinary concepts' is not a defined term. However, case law has identified factors which may be relevant t in determining whether a receipt is properly characterised as income according to ordinary concepts. For example, in GP International Pipecoaters v. Federal Commissioner of Taxation (1990) 170 CLR 124, the High Court of Australia found that: To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. The cash contributions made by the Consolidated Group to the trustee of the Trust are irretrievable and non-refundable to Head Company Group in accordance with the Trust Deed as the Consolidated Group members do not have any beneficial interest in the trust assets: the contributions received from the Consolidated Group can only be used to fund the Plan in accordance with the terms of the Deed and the Plan, and under the terms of the Deed, neither the Head Company nor any subsidiary has any security interest, proprietary right, proprietary interest or beneficial interest in any trust property at any time. The general powers granted to the Trustee in the 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 Plan. All funds received by the trustee of the Trust from the Consolidated Group will constitute accretions to the corpus of the Trust and will not be repaid to Head Company Group. The Trust Deed prevents distribution to any Consolidated Group member in the event the Trust is terminated. Therefore the irretrievable contributions received by the trustee of the Trust are capital in nature for the purposes of section 6-5 of the ITAA 1997. | Detailed Reasoning - Statutory income: Section 10-5 of the ITAA 1997 provides a list of provisions of assessable income for the purposes of section 6-10 of the ITAA 1997. None of the provisions apply to a cash contributions made by employers to an employee remuneration trust (or similar transactions). | Detailed Reasoning - Conclusion: The funds provided to the trustee of the Trust in accordance with the Trust Deed and the Plan for the sole purpose funding the payment of Awards constitute capital receipts to the trustee, and are not assessable income under section 6-5 or 6-10 of the ITAA 1997. | Summary: The Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny in part or in full any deduction claimed by the Head Company for the irretrievable contributions made by the Consolidated Group to the trustee of the Trust as the Head Company or Consolidated Group did not enter into the Plan for the dominant purpose of obtaining a tax benefit. | Detailed Reasoning - Detailed reasoning: Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are: • there must be a scheme within the meaning of section 177A of the ITAA 1936; • a tax benefit (as defined in subsection 177C(1) of the ITAA 1936) arises that was obtained or would be obtained in connection with the scheme but for Part IVA of the ITAA 1936; and • having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies. On the basis of an analysis of these requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny in part or in full any deduction claimed by the Company for the irrevocable contributions made to the Trustee of the Trust with respect to the Plan. | Detailed Reasoning - The Scheme: A scheme is defined in subsection 177A(1) of the ITAA 1936 which states: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. It is considered that this definition is sufficiently wide to cover the proposed employee arrangement under the Plans, which consists of the creation of the Trust, including the Trust Deed, and the payment of the irretrievable cash contributions to the Trustee and the payment of Awards. | Detailed Reasoning - Tax Benefit: 'Tax benefit' is defined in subsection 177C(1) of which the relevant paragraph is: Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: ... (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out... In order to determine the tax benefit that would be derived by the taxpayer from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the company might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration. The applicant provided the following as alternate actions: | Detailed Reasoning - Alternative: The Head Company Group could place the funds in a bank account. Under this alternative, placing (or setting aside) funds in a bank account would not be deductible to the Head Company. A comparison between the scheme and alternative 1 would likely reveal a tax benefit because the deductible amounts under both of them would not be the same or similar from the Head Company's perspective. In the event that it is considered a reasonable alternative to entering into the scheme, the Commissioner has considered if the scheme was entered into for the dominant purpose of obtaining a tax benefit. | Detailed Reasoning - Dominant purpose: Pursuant to subsection 177D(1), paragraphs 177D(2)(a) to (h) of the ITAA 1936 set out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit: a.the manner in which the scheme was entered into or carried out; b.the form and substance of the scheme; c.the time at which the scheme was entered into and the length of the period during which the scheme was carried out; d.the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; e.any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; f.any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; g.any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out; h.the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f). Subsection 177A(5) of the ITAA 1936 requires the purpose to be the dominant purpose. Therefore, in considering whether Part IVA applies or not, the necessary comparison to be made in relation to the factors listed in subsection 177D(2) is between the scheme as proposed and the relevant counterfactual. a) The manner of the scheme The Consolidated Group contends that the presence of the Trust provides other commercial benefits. In particular, the benefits of allocating money into the structure for the sole benefit of the employees and contractors provides transparency and security for the employees and contractors with respect to their participation in the scheme. It is accepted that the Trust provides benefits to the operation of the scheme that would not be available if funds were merely set aside in a bank account as in the relevant counterfactual. (b) The form and substance of the scheme The substance of the scheme is the provision of remuneration in the form of Awards to eligible employees or contractors who participate in the Plan. The scheme includes the granting of the rights under the Plan, the provision of funds to the Trust and the holding and/or investment of those funds by the Trustee to satisfy the rights all being interrelated components of the scheme. While the inclusion of the Trust in the scheme confers a tax benefit (when compared to the alternative considered), it cannot be concluded that it is the only benefit provided as outlined above. The Head Company has argued that the form of the arrangement with the Trust provides the scheme with non-tax benefits and this is accepted. (c) The timing of the scheme The scheme has not been established at a time to provide a substantial year-end deduction to the Head Company nor with a contribution sufficiently large to fund the Trust for several years, but by recurring contributions. There is nothing in these facts to suggest a dominant purpose of seeking to obtain a tax benefit in relation to the scheme. (d) The result of the scheme The result of the scheme is to provide the Head Company with allowable deductions for the contributions it makes to the Trust. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of Head Company Group to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances. (e) Any change in the financial position of the company As noted above, the Consolidated Group makes irretrievable contributions to the Trust and those contributions constitute a real expense with the result that the Head Company Group's financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with the Trust as part of the scheme than would be the case if the Head Company invoked the alternative to the scheme, there is nothing artificial, contrived or notional about the Consolidated Group's expenditure. (f) Any change in the financial position of other entities or persons The contributions by the Consolidated Group to the Trust will form part of the corpus of the Trust and must be dealt with by the trustee in accordance with the terms of the Trust Deed i.e. for investment to provide Awards to Participants in the Plans. The Consolidated Group is not a beneficiary of the Trust and its contributions cannot be returned to it in any form. The financial position of Participants in the Plans will change as a result of participating in the scheme. However, this will be the case regardless of the manner in which the Awards are funded/paid. Therefore, the contributions made by the Consolidated Group amount to a real change to the financial position of the Trustee. The financial position of Participants in the schemes will also undergo a real change. There is nothing artificial, contrived or notional about these changes. (g) Any other consequence Not relevant to this scheme. (h) The nature of any connection between the Consolidated Company and any other persons The relationship between the Consolidated Group and the Participants in the scheme is one of employer/employee. The Trustee is independent of the Consolidated Group and is under a fiduciary obligation to act in the interests of the employees and contractors who participate in the scheme and in particular, in this case, the Plan. There is nothing to suggest that the parties are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit. | Detailed Reasoning - Conclusion: The Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny in part or in full any deduction claimed by Head Company for the irretrievable contributions made by the Consolidated Group to the trustee of the Trust. While the Consolidated Group receives a tax benefit by making the contributions under the Plan, the Consolidated Group did not implement the Plan for the dominant purpose of obtaining a tax benefit. | Summary: The irrevocable cash contributions the Consolidated Group makes to the trustee of the Trust, to fund the Awards in accordance with the Trust Deed with respect to employees and the provision of Awards to employees will not constitute a fringe benefit under subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: The term 'fringe benefit' is defined in subsection 136(1) of the FBTAA to include benefits provided by an employer, an associate of the employer or an arranger with the employer, to employees, in respect of the employment of the employee but does not include benefits listed in paragraphs (f) to (s) of the definition. Paragraph (f) of subsection 136(1) of the FBTAA 1986 specifically excludes the following from being a 'fringe benefit': (f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936 | Detailed Reasoning - Contributions to the trustee of the Trust with respect to Awards for employees: As Awards to employee Participants of the Plan are in respect of their employment and in recognition for their services performed for the Consolidated Group, they will be considered to be salary and wages. (Refer to the discussion below - the trustee of the Trust will be required to withhold Pay-As-You-Go taxes from the Cash Awards to employee participants.) Accordingly, the irrevocable cash contributions the Consolidated Group makes to the trustee of the Trust, to fund the Cash Awards and pay Awards in accordance with the Trust Deed will not constitute a fringe benefit under subsection 136(1) of the FBTAA. | Detailed Reasoning - The provision of Cash Awards by the trustee of the Trust: As mentioned above, in general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. As discussed above, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the definition in subsection 136(1) of the FBTAA. Salary and wages are excluded by paragraph 136(1)(h) of the FBTAA. When an employee of the Consolidated Group participates in the Plan, they obtain a right to Awards. When they receive Awards in satisfaction of that right it would be considered salary and wages in respect of employment | Summary: As the benefits under the proposed arrangement are excluded from the definition of a fringe benefit, the fringe benefits tax liability is not any less than it would have been but for the arrangement. Consequently, section 67 of the FBTAA would not apply to the Consolidated Group employee remuneration trust arrangement. | Detailed Reasoning - Detailed reasoning: Section 67 of the FBTAA deals with arrangements to avoid or reduce fringe benefits tax. Relevantly, Practice Statement PS LA 2005/24 explains the intended operation of section 67 of the FBTAA. The Commissioner explains that he 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 151 of PS LA 2005/24 provides that: The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA. As explained above, under the proposed arrangement, the benefits provided to the trustee of the Trust by way of irretrievable contributions to the Trust and to Participants by way of the provision of Awards under the Plan are excluded from the definition of a fringe benefit. | Summary: The Awards granted under the rules of the Plans will fall under the definition of salary and wages when paid to employees, the Trustee as the payee will be required to withhold PAYG from the Award incentive at the time the Award vests and is paid to the Participant. | Detailed Reasoning - Detailed reasoning: In accordance with section 12-35 of schedule 1 of the TAA, an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee. The Award received by the employee in respect of the Plan would be considered an incentive bonus payment as it has a direct nexus to their employment with the Consolidated Group. As the Trustee is making the payment to the employees, rather than the Consolidated Group, the Trustee has the obligation under section 12-35 to withhold PAYG from the Award incentive payments made in accordance with the Plan. The position that the Trustee would be responsible for the PAYG withholding taxes is supported by the ATO in its example at paragraph 69 of Taxation Ruling TR 2018/7. Therefore, the Trustee will be required to withhold PAYG on the Award incentive payment in respect of the Plan. On this basis, as the Awards granted under the rules of the Plans will fall under the definition of salary and wages, the Trustee as the payee will be required to withhold PAYG from the Award incentive at the time the Award vests and is paid to the Participant.

This ruling applies for the following period : XXXX