Private ruling: Employee Share Scheme
Published: November 2014

Ruling: Q1: Will the irretrievable cash contributions made by Trust A or Company B, to the Trustee of the employee securities trust (EST), to fund the subscription for or acquisition on-market of Company B stapled securities, be treated as a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: No. | Q2: Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Trust A by the amount of the tax benefit gained from the irretrievable cash contributions made by Trust A or Company B to the Trustee of the EST to fund the subscription for or acquisition on-market of Company B stapled securities? | A2: No. The rulings for Questions 1-2 each apply for the following periods: • 1 April 2014 to 31 March 2015 • 1 April 2015 to 31 March 2016 • 1 April 2016 to 31 March 2017 • 1 April 2017 to 31 March 2018 • 1 April 2018 to 31 March 2019 | Q3: Will Company B obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by Company B or any subsidiary member of the Company B tax consolidated group to the Trustee of the EST to fund the subscription for, or acquisition on-market of, Company B stapled securities to satisfy Rights granted pursuant to the Company B Employee Share Plan Rules 20XX and the Company B Employee Share Plan Rules 20YY (the ESP Rules)? | A3: Yes. | Q4: Are irretrievable cash contributions made by Company B or any subsidiary member of the Company B tax consolidated group to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company B stapled securities by the Trustee of the EST to satisfy Rights granted pursuant to the ESP Rules, deductible to Company B under section 8-1 of the ITAA 1997 at the time of the contribution, where the contributions are paid after the acquisition of the relevant Rights? | A4: Yes. | Q5: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company B in respect of the irretrievable cash contributions made by Company B or any subsidiary member of the Company B tax consolidated group to the Trustee of the EST to fund the subscription for or acquisition on-market of Company B stapled securities by the Trustee of the EST? | A5: No. The rulings for Questions 3-5 each apply for the following periods: • 1 July 2014 to 30 June 2015 • 1 July 2015 to 30 June 2016 • 1 July 2016 to 30 June 2017 • 1 July 2017 to 30 June 2018 • 1 July 2018 to 30 June 2019

Relevant facts and circumstances: Company B Stapled Securities A Company B stapled security is a stapled vehicle that is listed on the Australian Securities Exchange (ASX). The economic group to which the Company B stapled vehicle belongs will be referred to in this ruling as the Company B Economic Group. Company B stapled securities consist of the following: • One share in the capital of Company B • One unit in each of the associated trusts The associated stapled trusts are all registered as management investment schemes. Company C is the responsible entity of all of these associated stapled trusts. In mm/yyyy, the Company B stapled securities corporate structure was simplified with the effect that the units in all but one stapled trust were removed from each Company B stapled security. As a result, from dd/yyyy each Company B stapled security consists of: • One share in the capital of Company B, and • One unit in an associated trust. The relevant facts and circumstances of the scheme set subsequent to the restructure are not materially different to those beforehand as set out below with the exception of each Company B stapled security now consisting of interests in only two entities. Company B is also the head company of the Company B tax consolidated group. Trust A, being a wholly owned trust of Company B, is part of the Company B tax consolidated group. Trust A is the employer entity and taxpayer of the Company B Economic Group for the purposes of fringe benefits tax. Company C is also a member of the Company B tax consolidated group. Employee Securities Plan In 20XX, the Company B Economic Group established an employee securities plan (ESP) as part of its long-term strategy of: • remunerating its executives in a way that aligns their personal financial rewards with the risks and returns of the security holders of the Company B Economic Group; • enabling the executives to participate in the growth of the Company B Economic Group by participating in the ESP; • improving business performance by providing financial benefits for executives that are aligned to the rewards experience by Company B's security holders; • remunerating the Company B Economic Group's executives in a way that is competitive, market related, cost-effective for the business, flexible and administratively simple; and • creating a culture of security ownership within the Company B Economic Group. Under the ESP, executives are provided with performance rights (Rights) to acquire Company B stapled securities at a future point in time for nil consideration. The first tranche of Rights were granted in 20XX and vested in mm/yyyy. Performance rights are regarded by the Board of Company C (the Board) as being the most appropriate instrument in the current market. This is because the Board considers they provide a reward in a flat market, are less dilutive than options and do not expose employees to potential adverse implications that can arise where options are used post the 1 July 2009 employee share scheme changes. Division 83A of the ITAA 1997 applies to the Rights provided under the ESP. Employee Securities Plan Rules The ESP will be administered under the Company B Employee Share Plan Rules 20XX and the Company B Employee Share Plan Rules 20YY (together, 'the ESP Rules'). Broadly, the ESP Rules operate as follows: • the Board has general administration powers in relation to the ESP, including: • the discretion to invite Eligible Employees to participate in a grant of LTI Securities (Offer); • the power to implement an employee security trust for the purpose of delivering and holding Company B stapled securities on behalf of Participants in the ESP. • an 'Eligible Employee' is an employee of the Company B Economic Group or any other person who is declared by the Board to be eligible for the purposes of the ESP. • an 'LTI Security' is a Right, Option or Restricted Company B Security as the case may be. • certain information must be provided to Eligible Employees with the offer, including, amongst other things: • the type of LTI Securities being offered; • the number of LTI Securities being offered, or the method by which the number will be calculated; • the amount (if any) that will be payable for the grant of the LTI Securities; • the date that the LTI Securities will be granted; • the circumstances in which LTI Securities or Company B stapled securities will lapse or be forfeited; • any Vesting Conditions that apply, when LTI Securities may vest; • the procedure for exercising an Option, including any Exercise Price payable, following vesting; and • any restrictions on Dealing in relation to Restricted Company B Securities or Company B stapled securities. • acceptance of an Offer must be made in accordance with the instructions that accompany the Offer. This includes situations where Eligible Employees are taken to have accepted an Offer through inaction if the Offer is an 'opt-out' offer. • once an Offer has been accepted by Eligible Employees then the Board must grant or allocate LTI Securities to those Eligible Employees. However, the Board retains the discretion to refuse to allow the participation of an Eligible Employee in a grant of LTI Securities prior to that Eligible Employee being notified that their LTI Securities have been granted. • no payment will be required for a grant of LTI Securities to Eligible Employees unless the Board determines otherwise. • Rights and Options will only vest where each Vesting Condition has been satisfied and the Eligible Employee is notified that those Rights or Options have vested. • at the time of vesting, a Company B stapled security would generally be allocated to the Eligible Employee in respect of a Right or an Option that would become exercisable (subject to other conditions and the Exercise Price determined by the Board). • LTI Securities may vest early in a number of circumstances including: • on the death, disablement or retirement of the Participant; • on the Participant being transferred to work in another country; • in the event of a Takeover Bid, scheme of arrangement, winding-up or similar event; or • on the Board deciding to waive particular terms or conditions in relation to the LTI Securities. • in some circumstances, the Board has the power to satisfy an Eligible Employee's entitlement (on vesting of Rights or Options) through a cash payment in lieu of an allocation of Company B stapled securities. However, the applicant has confirmed that all LTI Securities currently granted, and yet to be granted, are to be settled only in equity rather than cash. • a Restricted Company B Security is a Company B stapled security subject to certain Vesting Conditions and restrictions on Dealing. Restrictions on a Restricted Company B Security will generally cease (and the security will become an ordinary Company B stapled security) where the restriction period ends and each of the Vesting Conditions applicable to that security have been satisfied. • Company B stapled securities or Restricted Company B Securities may be allocated to an Eligible Employee by way of: • issuing those securities to the eligible employee; • procuring the transfer of those securities to the eligible employee; or • procuring the setting aside of those securities for the eligible employee. • a Right or an Option will lapse or a Restricted Company B Security will be forfeited if the Eligible Employee fails to meet a Vesting Condition or any other condition within the prescribed period. Lapse or forfeiture may also occur where: • the Eligible Employee elects to surrender the LTI Security; • in the case of an option - on the expiry date of the option (7 years unless otherwise specified by the Board); • the Eligible Employee Deals with a LTI Security before it has vested (for example, by an attempt to transfer or sell that LTI Security); • the Eligible Employee has engaged in inappropriate conduct (e.g. fraud, dishonesty or criminality); • the Eligible Employee has ceased to be an employee of the Company B Economic Group by reason of resignation, termination for poor performance or termination for cause; • a takeover, scheme of arrangement, winding-up or similar event; or • the Board exercises a relevant discretion under the ESP Rules (e.g. in 'exceptional circumstances'). Employee Securities Trust The Company B Economic Group intends to use an employee securities trust (EST) to support the Rights that have been previously granted but not yet vested and the Rights that may be granted in the future under the ESP Rules. It is also intended that the trust will be available for satisfying the requirements of any future equity plans implemented by the Company B Economic Group, including any Restricted Company B Securities granted under a deferred ESP. The applicant has stated that the EST will not be a member of the Company B tax consolidated group. The Company B Economic Group's reasons for administering the ESP using an EST (rather than directly providing securities to employees) are that an EST: • enables easier administration of the incentive plan; • is the most appropriate vehicle to be used to acquire securities and accumulate dividends and distribution income during the vesting period for the purposes of acquiring further securities, meeting the costs of the plan and distributing to employees; • provides the flexibility to acquire and warehouse securities that will be delivered to employees under the ESP and facilitates the forfeiture of securities when performance hurdles are not met; • provides the opportunity to improve cash flow planning through the flexibility to control the time at which contributions are made to the EST by members of the Company B tax consolidated group (for example, to align with capital management strategies); • enables the securities that will be delivered to employees to be acquired either on market or by subscribing. This is important for the Company B Economic Group's capital management program as the decision between acquiring on market and subscribing for securities can take into account: • the most effective manner to utilise cash and franking credits for shareholder benefit; • dilution pressures on EPS; and • the impact of the general economic cycle; and • gives an employee the knowledge that the securities, and any incidental dividend income, will be held by a Trustee that is independent of the employer. The Trustee will have a fiduciary obligation to act in the interests of its beneficiaries including the employees. Trust Deed The relevant features of the Trust Deed are: • the Trust Deed provides for the Company B tax consolidated group to make contributions to the EST; • the Trustee must use the funds contributed to acquire securities (by way of an on market purchase or by subscribing for Company B stapled securities) in order to allocate or transfer them to employees of Trust A in accordance with the ESP Rules; • the Trust Deed will include an agreement for the Trustee to manage and administer the EST so that it is an employee share trust for the purposes of subsection 130-85(4) of the ITAA 1997; • the beneficiaries of the EST are all Employees, as defined by the Trust Deed, as well as any other employee share trust for the purpose of the ITAA 1997 operated for the benefit of Employees. An Employee includes past employees and associates of employees; • the members of the Company B tax consolidated group have no legal or beneficial entitlement to any of the securities forming part of the EST fund at any time and may not acquire such an interest; • the Trustee has the discretion to distribute any capital receipts, dividends, distributions or other entitlements received in respect of any securities to beneficiaries of the Trust; and • at all times the Trustee must act in accordance with the Trust Deed and in accordance with its fiduciary duty. Nothing in the Trust Deed would allow Company B or any subsidiary member of the Company B tax consolidated group to retrieve any of the contributions made to the EST. Furthermore, neither Company B nor any subsidiary member of the Company B tax consolidated group is a beneficiary under the Trust Deed. As such, the contributions are irretrievable. Operation of the EST Broadly, the EST is intended to operate as follows: • the purpose and sole activities of the EST will be to provide securities to Employees as well as other incidental activities including distributing dividends to employees, reinvesting dividends at the employee's request or in meeting the administrative costs of the EST. • the Trustee will act in accordance with the Trust Deed, in fulfilment of the Trustee's fiduciary duty to beneficiaries and so that the trust will satisfy the definition of employee share trust for the purposes of subsection 130-85(4) of the ITAA 1997 • an initial contribution will be made by the Company B tax consolidated group to the EST in mm/yyyy to meet its obligations under the ESP in respect of Rights granted in 20XX. It is envisioned that the Company B tax consolidated group will continually contribute sufficient funds to the EST so that the EST is able to acquire the number of securities necessary to meet its obligations in relation to LTI Securities granted to Employees; • any funds that the Company B tax consolidated group contributes to the EST are irretrievable as they cannot be refunded, repaid or returned to any members of the Company B tax consolidated group (other than by way of the Trustee paying the issue price when it subscribes for Company B stapled securities). The amount of the contributions made by the Company B tax consolidated group will depend on: • the number of Rights granted to employees; and • the number of securities held at that time by the Trustee; • the Trustee of the EST will buy Company B stapled securities on market, or subscribe for a new issue of Company B stapled securities (in either case at market value). The Trustee's decision to purchase Company B stapled securities on market, or subscribe for new Company B stapled securities, will depend on a number of factors including: • Corporation Law requirements; • relevant brokerage costs; • liquidity of Company B stapled securities at the relevant time; • likely impact on the Company B stapled security price where securities are purchased on market; and • whether the Company B tax consolidated group will facilitate a subscription of securities at the relevant time; • the Company B stapled securities acquired by the Trustee at any time will be registered in the name of the Trustee as legal owner of the securities; and • to the extent that the EST derives interest or dividend income from the holding of securities, that is in excess of the costs of the Trust, such income may be: • used to acquire more Company B stapled securities to deliver to employees; • distributed to employees who have become beneficially entitled to the income (because their Rights have vested but Company B stapled securities have not yet been delivered); or • be distributed to other beneficiaries at the discretion of the Trustee in accordance with the Trust Deed.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Section 83A-205 | Income Tax Assessment Act 1997 Section 83A-210 | Income Tax Assessment Act 1997 Section 83A-335 | Income Tax Assessment Act 1997 Subsection 130-85(4) | Income Tax Assessment Act 1936 Section 177A | Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Section 177F | Fringe Benefits Tax Assessment Act 1986 Section 67 | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision: Summary: The definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include: (ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997); Contributions made by Trust A or Company B to the EST will therefore not be fringe benefits if that EST constitutes an employee share trust for the purposes of the ITAA 1997. An 'employee share trust' is defined in subsection 130-85(4), which states: An employee share trust , for an employee share scheme, 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). ESS Interest An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in a company or a beneficial interest in a right to acquire a beneficial interest in a share in a company. Notably, Division 83A applies in relation to a stapled security in the same way as it applies in relation to share in a company so long as at least one of the ownership interests that are stapled together is a share in the company (section 83A-335). A Company B stapled security contains one share in Company B and so is treated as a share in a company for the purposes of Division 83A. The ESP Rules allow for the provision of: • Rights to acquire Company B stapled securities • Options to acquire Company B stapled securities; and • Restricted Company B Securities. Under the ESP Rules, a Right or an Option granted to an Eligible Employee is a right to acquire a beneficial interest in a share in Company B (as well as one unit each in the associated stapled trusts). Likewise, a Restricted Company B Security allocated to an Eligible Employee under the ESP Rules is a beneficial interest in a share in Company B (as well as one unit each in the associated stapled trusts). Rights provided under the ESP Rules are therefore ESS interests for the purposes of the ITAA 1997. Employee share scheme An employee share scheme is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2)). The ESP is a scheme under which ESS interests (Rights) in the Company B Economic Group are provided to employees of the group in relation to their employment, and is accordingly an employee share scheme. Likewise, a Company B stapled security acquired by the Trustee to allocate to an Eligible Employee under the ESP, is itself provided under the same employee share scheme. Activities of the Trust For the purposes of paragraph 130-85(4)(c), activities which are merely incidental, as set out in 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 Company B Economic Group has established the EST to acquire Company B stapled securities and to allocate those securities to employees in accordance with the ESP. The provisions of the Trust Deed collectively make it clear that the Trustee can only use the contributions received exclusively for the acquisition of Company B stapled securities for Eligible Employees in accordance with the ESP. Likewise, all other duties and powers listed in the Trust Deed are considered merely incidental to these functions of the Trustee. The Trust Deed will also include an agreement for the Trustee to manage and administer the EST so that it is an employee share trust for the purposes of subsection 130-85(4). Therefore, the EST satisfies the definition of an employee share trust in subsection 130-85(4) as: • the EST acquires shares in a company (being Company B stapled securities); • the EST ensures that ESS interests as defined in subsection 83A-10(1), being beneficial interests in those Company B stapled securities, are provided under an employee share scheme, as defined in subsection 83A-10(2), by allocating those stapled securities to the Participants of the ESP in accordance with the ESP Rules; and • 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 EST. Paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the EST from being a fringe benefit. As the contributions are not fringe benefits, Trust A will not be required to pay fringe benefits tax in respect of irretrievable contributions made to the Trustee of the EST to fund the acquisition of Company B stapled securities. Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including section 67 of the FBTAA. Notably, paragraphs 145-148 of PS LA 2005/24 state the following in relation to section 67 of the FBTAA: 145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA. 146. 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(s) to obtain a tax benefit. 147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) [sic] in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose. 148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement: (i) a benefit is provided to a person; (ii) an amount is not included in the aggregate fringe benefits amount of the employer; and (iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into. It is clear, therefore, that the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 under the heading 'Appendix, Question 18' where, on the application of section 67 of the FBTAA , the Commissioner states: …As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement... Further, paragraph 151 of PS LA 2005/24 provides: 151. 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. Under the ESP Rules, if an EST was not used, no fringe benefits tax would be payable and nor is it likely that benefits provided to employees under alternative remuneration plans would result in fringe benefits tax being payable. In addition, under the ESP Rules (including the use of an EST), the benefits provided by way of irretrievable contributions to the EST are excluded from the definition of a fringe benefit for the reasons given in the response to Question 1 above. Therefore, as these benefits have been excluded from the definition of a fringe benefit, no fringe benefit arises and no fringe benefits tax will be payable by using an EST. As there would be no fringe benefits tax payable under the ESP without the use of an EST (and nor likely would fringe benefits tax be payable under alternative remuneration plans), the fringe benefits tax liability is not any less than it would have been but for the arrangement. Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of Trust A in relation to a tax benefit obtained from the irretrievable cash contributions made by Company B or Trust A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company B stapled securities. Subsection 8-1(1) is a general deduction provision. Broadly, it provides an entitlement to a deduction from your assessable income for any loss or outgoing, to the extent that it is: • incurred in gaining or producing your assessable income; or • necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, subsection 8-1(2) prevents such a deduction to the extent that the outgoing is: • capital or of a capital nature; • of a private or a domestic nature; • incurred in gaining or producing exempt income; or • prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936. Loss or outgoing If directed by the Board, the Trustee must acquire Company B stapled securities to enable the Company B tax consolidated group to satisfy its obligations under the terms of the ESP Rules, either at the time or in the future. The Company B tax consolidated group must provide the Trustee with all the funds required to enable it to subscribe for or acquire those Company B stapled securities. Nothing in the Trust Deed requires the Trustee to acquire Company B stapled securities if it does not have sufficient funds to do so out of the property of the EST. The Trustee will hold unallocated Company B stapled securities on trust for the benefit of Participants generally, and will allocate or transfer those stapled securities to particular Participants as directed by the Board in accordance with the ESP Rules. The applicant has stated that contributions made to the Trustee of the EST by the Company B tax consolidated group cannot be refunded, repaid or returned to any members of the Company B tax consolidated group (except where the Trustee subscribes for Company B stapled securities) and are therefore irretrievable contributions. On this basis, it is concluded that the contributions made by Company B or any subsidiary member of the Company B tax consolidated group to the EST are considered to be a loss or outgoing for the purpose of subsection 8-1(1). Relevant nexus For a loss or outgoing to be deductible under subsection 8-1(1), the outgoing must be either incurred in gaining or producing your assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Case law has established that this occurs where there is a sufficient nexus between the loss or outgoing and the derivation of your income (The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288, W. Nevill And Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin No Liability v The Federal Commissioner of Taxation (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147). The objectives of Company B in establishing an EST are to align the interests of Employees with, and to enable Employees to be involved in, the future growth and profitability of the Company B Economic Group (including by administering the current and future ESP Rules adopted by the group). These objectives are primarily achieved by giving Employees the opportunity to acquire LTI Securities, and ultimately Company B stapled securities. Members of the Company B tax consolidated group make irretrievable contributions to the Trustee to enable the Trustee to acquire and hold Company B stapled securities for the benefit of Participants. All the documentation provided indicates that the contributions are made to the Trustee of the EST for the primary purpose of enabling the Trustee to acquire Company B stapled securities for Participants of the ESP Rules in order to remunerate Employees. Accordingly, it is considered that there is a sufficient nexus between the outgoings (contributions made by members of the Company B tax consolidated group) and the derivation of Company B's assessable income. Capital or Revenue Company B will make contributions on a recurring basis from time to time, as and when Company B stapled securities are to be subscribed for or acquired pursuant to the Trust Deed. Two Federal Court decisions concluded that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature ( Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210 and Spotlight Stores Pty Ltd v Federal Commissioner of Taxation [2004] FCA 650; 2004 ATC 4674; 55 ATR 745). This confirms the view expressed in ATO ID 2002/1074 Income Tax - deductibility - irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme , that a company will be entitled to a deduction under section 8-1 for irretrievable contributions made to the trustee of its employee share scheme. In accordance with the Federal Court decisions noted above, we can conclude that the contributions are not capital in nature, but rather outgoings incurred by the Company B tax consolidated group in carrying on its business. Apportionment The combined operation of subsections 8-1(1) and 8-1(2) may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a different nature. A contribution to the trustee of an EST is capital or of a capital nature where the contribution secures for the employer an asset or advantage of an enduring or lasting nature that is independent of year to year benefits that the employer derives from a loyal and contented workforce. Where a contribution is, ultimately and in substance, applied to the trustee of an EST to subscribe for equity interests in the employer (for example, stapled securities), the employer has also acquired an asset or advantage of an enduring nature. Where a contribution is made for the purpose of securing for the employer advantages of both a revenue and capital nature, but the advantages of a capital nature are only expected to be very small or trifling by comparison, apportionment may not be required. In this case, the outgoings incurred by the Company B tax consolidated group by way of contributions to the EST in order to carry on its business are either not capital in nature or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. Finally, nothing in the facts suggests that the contributions are private or domestic in nature, nor incurred in gaining or producing exempt income, nor otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936. For the reasons stated above in the answer to Question 3, irretrievable cash contributions made by members of the Company B tax consolidated group to the Trustee of the EST will be deductible to Company B under section 8-1 of the ITAA 1997. These contributions will be deductible at the time the loss or outgoing is properly incurred unless Section 83A-210 applies to defer the deduction. Section 83A-210 states: If: (a) at a particular time, you provide another entity with money or other property: (i) under an arrangement; and (ii) for the purposes of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and (b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest; then, for the purposes of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time. Section 83A-210 will only apply if there is an arrangement under which there is a relevant connection between the money provided to the trustee and the acquisition of ESS interests (directly or indirectly) by the employee under an employee share scheme in relation to the employee's employment. The deductibility of money contributed to employee share trusts is considered in ATO ID 2010/103 Income Tax - Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust . The facts described in ATO ID 2010/103 are relevant to the ESP and therefore, the reasoning in it is also relevant as explained immediately below. Arrangement The Company B tax consolidated group's adoption of the ESP, the ESP Rules and the establishment of the EST, is considered as constituting an arrangement for the purposes of subparagraph 83A-210(a)(i). Relevant connection For the reasons stated in Question 1, a Participant will acquire ESS interests under an employee share scheme as part of the ESP arrangement (being Rights granted under the ESP Rules). The granting of Rights, the provision of the money to the Trustee under the arrangement, the acquisition and holding of Company B stapled securities by the Trustee and the allocation of those securities to the Participants are all interrelated components of the employee share scheme. All the components of the scheme must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed. Accordingly, the provision of money to the Trustee to acquire Company B stapled securities is considered to be for the purpose of enabling the Participants, indirectly as part of the ESP, to acquire ESS interests (being Rights) in relation to their employment. Timing of the deduction Section 83A-210 will only apply in situations where a contribution is made to the Trustee prior to the time when the ultimate beneficiary acquires the ESS interests. For the purposes of paragraph 83A-210(b), a Participant acquires the ESS interests when the Rights are granted to them. Accordingly, when Company B or a subsidiary member of the Company B tax consolidated group makes cash contributions to the Trustee after the relevant Rights have been granted, section 83A-210 will not apply and the contribution will be deductible under section 8-1 in the income year in which the loss or outgoing is properly incurred. Law Administration Practice Statement 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 his discretion to make a determination 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 must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out; and • having regard to the matters in paragraph 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies (dominant purpose). 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 Company B in respect of the irretrievable contributions that Company B or any subsidiary member of the Company B tax consolidated group makes to the Trustee of the EST to fund the subscription for or acquisition on-market of Company B stapled securities by the EST.

Reasons for decision: All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.