Private ruling: Employee Share Schemes
Date of advice: 22 March 2017
Published: August 2017

Ruling: Q1: Will Company A, as the head entity of the Company A income tax consolidated group, be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) for irretrievable cash contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group), to the Trustee of the Employee Share Trust (the Trust) to fund the subscription for, or acquisition on-market of, ordinary Company A (Shares) to satisfy Employee Share Scheme (ESS) interests issued pursuant to the Plans? | A1: Yes. | Q2: Will the irretrievable cash contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group), to the Trustee to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the Plans be deductible to Company A under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests? | A2: Yes. | Q3: Will the irretrievable contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group), to the Trustee to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the Plans be deductible to Company A under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the acquisition of the relevant ESS interests? | A3: Yes. | Q4: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applies to deny, in part or in full, a deduction claimed by Company A for the irretrievable contributions made to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plans? | A4: No. | Q5: Will the provision of rights, options and shares by Company A to employees and Directors of the Group (or a subsidiary member of the Company A income tax consolidated group) under the Plans constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (Cth) (FBTAA)? | A5: No. | Q6: Will the irretrievable cash contributions made by Company A (or a subsidiary member of Company A income tax consolidated group) to the Trustee to fund the subscription for, or acquisition on-market of, Shares pursuant to the Plans constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | A6: No.

Relevant facts and circumstances: Company A's shares were first listed on the Australian Securities Exchange. Company A is the head entity of an income tax consolidated group. All references to assessable income or allowable deductions of Company A refer to assessable income or allowable deductions of Company A as head entity of the income tax consolidated group. Employee Share Plan Company A established the Employee Share Plan (Plan) under which participants are granted rights (Rights) and/or options (Options) to acquire ordinary shares in Company A. This Plan operates in accordance with Subdivision 83A-C of the ITAA 1997. Generally, participants' rights may vest subject to the achievement of performance and/or service conditions, and on vesting are automatically exercised at no cost to the participant. Upon the valid exercise of Rights, participants are allocated one fully-paid Share for each Right exercised. Subject to the particular grant terms, participants' Options may either immediately vest, or may be subject to the achievement of performance and/or service conditions. Upon vesting, Options may be exercised by participants at the prescribed exercise price. Once Options are validly exercised and the prescribed exercise price is paid, participants are allocated one Share for each Option exercised. The Plan makes clear that awards will only vest once the Board, in its direction, determines any relevant conditions have been satisfied. Furthermore, provided that the discretion for cash settlement is stated in the Invitation Letter, vested or exercised awards may be satisfied, at the discretion of the Board, in cash rather than Shares, by payment to the participant of the cash equivalent amount. Rights and Options do not carry dividend and voting rights. As soon as practical after vesting and compliance with the exercise procedure, the Board must procure the transfer of Shares to the participant in satisfaction of the vested and exercised Rights and Options. Employee Share Trust The Employee Share Trust will be used to facilitate the satisfaction of future grants under the Plan. The Trust is an independent legal entity and is not a part of Company A income tax consolidated group. Company A cannot be a beneficiary of the Trust and cannot receive any income or capital from the Trust. The Trust Deed allows the Trustee to acquire, hold, and allocate Shares to the eligible employees and Directors participating in equity plans operated by Company A from time to time. The Trust was established to provide for the delivery of Shares to employees with the sole activities of the Trust being obtaining Shares (or Rights/Options) and providing those Shares (Rights/Options) to the employees and Directors. Under the Trust Deed, the activities that the Trustee is permitted to undertake are merely incidental to the primary purposes stated in paragraphs 130-85(4)(a) and (b). The Trust Deed provides that Company A and the Trustee will be managed and administered so that it satisfies the sole activities test in section 130-85(4) of the ITAA 1997. Contributions to the Trust All funds received by the Trustee from Company A or the subsidiary members of the Company income tax consolidated group (employing entities) will constitute accretions to the corpus of the Trust. No participant will be entitled to receive a distribution of or from such funds. Any funds it contributes to the Trust cannot be refunded, repaid or returned to the employing entities other than by way of the Trustee paying the issue price where it subscribes for Shares in Company A (i.e., the contributions will be irretrievable). The employing entities will have no interest in the Shares held by the Trust. The Trustee will, in accordance with instructions received and pursuant to the Plan rules, acquire, deliver and allocate Shares to participants provided that the Trustee receives sufficient payment from the taxpayer to subscribe for or purchase Shares and/or has sufficient unallocated Shares available in the Trust. Shares will not be allocated to participants under the Trust and no interest in the Shares will arise until the relevant conditions are met, and a Right/Option has vested and been exercised. Company A and the subsidiary members of Company A income tax consolidated group may make irretrievable contributions to the Trust as required. Allocating Shares to the Trust The Trustee will not be permitted to acquire any shares or deliver any Share to any participant, if to do so would contravene applicable law. It will not be permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the Trust in accordance with the Plan Rules. It will not be permitted to carry out activities which result in the participants being provided with additional benefits other than the benefits that arise under the Plan Rules.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 section 66 | Fringe Benefits Tax Assessment Act 1986 section 67 | Fringe Benefits Tax Assessment Act 1986 subsection 67(1) | Fringe Benefits Tax Assessment Act 1986 subsection 67(2) | Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(h) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(ha) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 177A | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 83A-340 | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 section 701-1

Reasons for decision: Summary: The general deduction provision in section 8-1 states: (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) It is incurred in gaining or producing your assessable income; or (b) It is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) It is a loss or outgoing of capital, or of a capital nature; or (b) It is a loss or outgoing of a private or domestic nature; or (c) It is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or (d) A provision of this Act prevents you from deducting it. (e) A loss or outgoing that you can deduct under this section is called a general deduction. Losses or outgoings Under the Trust Deed, the Trustee must, if directed by the Board, acquire the Shares for the purpose of enabling Company A to satisfy its obligations to allocate the Shares under the terms of a company plan either at that time or in the future. The Board must in a notice offer the Trustee to have Company A provide funds for the purpose of acquiring shares and/or request the Trustee to apply some of the capital of the Trust for the purposes of acquiring shares. The Trustee is not required to acquire the shares if it does not have sufficient payment from Company A or if it does not have sufficient funds to do so out of the property of the Trust. The Trust Deed further elaborates that all funds received by the Trustee from Company A will not be repaid to Company A. The Trustee will hold the allocated shares on behalf of the participant and when instructed by Company A in writing the Trustee must transfer the legal, and if applicable the beneficial, title in the relevant shares to the participant in accordance with the plans and the Trust Deed. The contributions made to the Trustee will be irretrievable and non-refundable to Company A. On termination of the Trust, the Trustee must transfer the Shares as directed by Company A (but not for the benefit of Company A). Under the terms of the Trust Deed, contributions made to the Trustee will be irretrievable and will therefore be considered as a loss or outgoing for the purpose of subsection 8-1(1). This is consistent with the outcome in ATOID 2007/217 Income Tax: Employee share scheme: whether payments by an employer company to a trustee to acquire shares to be later provided to employees result in the company deriving assessable income. Sufficient nexus In order for a loss or outgoing to be deductible under subsection 8-1(1) of the ITAA 1997, it must be incurred in gaining or producing assessable income so as to satisfy paragraph 8-1(1)(a) or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income so as to satisfy paragraph 8-1(1)(b). In the event one paragraph is satisfied, the other need not be satisfied. A sufficient nexus will exist between a loss or outgoing and the gaining or production of assessable income where the loss or outgoing is incidental and relevant to the income earning activities. A line of authorities have established that there will be a link between a loss or outgoing and the derivation of income where there is a sufficient nexus. ( The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295; W Nevill and Co Ltd v FC of T (1937) 56 CLR 290) The irretrievable contributions here are a part of Company A's overall remuneration strategy to retain critical staff members in order to continue the income earning ability of Company A. In these circumstances, the Commissioner is of the view that there will be a sufficient nexus between the irretrievable cash contributions and the production of assessable income for the purposes of paragraph 8-1(1)(a) of the ITAA 1997. Once paragraph 8-1(1)(a) is satisfied, it is not necessary to consider paragraph 8-1(1)(b) of the ITAA 1997. Capital or Revenue Paragraph 8-1(2)(a) operates to prevent a loss or outgoing that is capital or of a capital nature from being deductible. In Spotlight Stores Pty Ltd v Federal Commissioner of Taxation (2004) 55 ATR 745, it was determined that the payments by an employer company to an employee share trust established for the purpose of providing incentive payments to employees were on revenue account, not capital or of a capital nature. This outcome was affirmed by the Full Federal Court in Pridecraft Pty Ltd v Commissioner of Taxation [2004] FCAFC 339. Relevantly, paragraphs 58 to 71 of the judgment in Spotlight Stores stated the following: 'The Commissioner, however, relied upon the decision of the House of Lords in British Insulated and Helsby Cables, Limited v Atherton [1926] AC 205 (“Atherton”) to contend for the contrary view. In Atherton, the taxpayer established a pension fund for its salaried employees who, with the taxpayer, were expected to contribute to the fund. The dispute in Atherton related to the deductibility of the substantial lump sum payment made by the taxpayer, which formed the nucleus of the fund and provided the amount necessary to enable past years of service senior staff to rank for pension. The payment was made out of current year profits and was calculated on the basis that the sum would ultimately be exhausted when the object for which it was paid was attained. The House of Lords was divided on the deductibility of the payment for income tax purposes. Viscount Cave LC (at 213-214) regarded the payment as one which was made, “not only once and for all, but with a view to brining into existence an asset or advantage for the enduring benefit of a trade” and therefore considered that “in the absence of special circumstances leading to an opposite conclusion” there was very good reason for treating the expenditure as properly attributable to capital. … The lasting advantage found to been secured by the “once and for all” outgoing in Atherton as the provision of the nucleus of a fund that would secure and retain the services of a contended and loyal staff throughout the taxpayer's business life. The advantage, which as to “endure the whole of the life of the company”. (see BP Australia at 397), may be contrasted with the advantage secured by Spolitlight's contribution in the present case. The contribution was to be used to enable the payment of bonuses falling due to Spotlight's employees over the ensuring five years and was to be drawn upon and thereby diminished progressively throughout that period. Rather than the contribution being “once and for all payment” which provided a “nucleus” for a fund supplemented by annual contributions as was the case in Atherton, Spotlight's contribution was in substitution for the annual contributions it would otherwise have had make over the ensuing years. The Incentive Trust Fund, not having a nucleus, had to be replenished by further contributions from time to time as the need for such contributions arose. Spotlight's contribution can be fairly described as made to meet a continuous demand which must be answered out of the returns of trade (see Sun Newspaper at 362) and was enduring only to the extent that for a good number of years it was expected to relieve Spotlight of a revenue payment (see Tucker at 686). Further, as explained above, the advantage to be obtained was giving staff an incentive to greater effort from year to year and was thereby related to the profitability of the taxpayer from year to year (see Heather at 220) In summary, the $15 million contribution was to pay future, not past, annual bonus entitlements and cannot be characterised as the “nucleus” of a fund that was to endure for the whole life of the company.' Whilst a contribution by an employer to the Trustee is considered to be capital or of a capital nature in part where the contribution is made for a purpose of securing a capital advantage by way of being ultimately and in substance, applied by the Trustee to acquire a direct interest in the employer, the contribution itself is deductible under section 8-1 of the ITAA 1997 to the extent that the contribution is incurred for the primary purpose of being applied, within a relatively short period of time, to the direct provision of remuneration of employees (who are employed in the ordinary course of the employer's business carried on for the purpose of gaining or producing assessable income). In this case, similar to the circumstances in Spotlight Stores, the irretrievable contributions to the Trustee of the Trust will not “endure the whole of the life of the company.” Rather, continuous contributions will be made to the Trustee of the Trust upon the vesting of equity awards as set out in the Plans for eligible employees and directors, and within a relatively short period of time, these eligible employees and directors will be remunerated for their services to Company A (or a subsidiary member of the Company A income tax consolidated group). Therefore, despite the fact that the contribution maybe capital or of a capital nature in whole or in part, the contribution itself may be deductible under section 8-1 of the ITAA 1997. 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. This would be relevant, for example, in the circumstances where contributions made by Company A to the Trustee as trustee of the Trust for the purposes of administering the Trust are used to subscribe for Shares in Company A. A contribution to the trustee of an employee share trust 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 the year to year benefits that the employer derives from a loyal and contented workforce. Where a contribution is, ultimately and in substance, applied by the trustee of an employee share trust to subscribe for equity interests in the employer (for example shares) 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, it is considered that the advantages of a capital nature are expected to be very small or trifling by comparison. Therefore, apportionment is not required. Nothing in the facts suggests that the contributions will be of a private or domestic nature, will be incurred in gaining or producing exempt income, or will be otherwise prevented from being deductible under a specific provision of the ITAA 1936 or the ITAA 1997. The irretrievable cash contributions to the Trustee of the Trust to fund the acquisition of the Shares pursuant to the Plans will be an allowable deduction to Company A as the head entity of the Company A income tax consolidated group under section 8-1 of the ITAA 1997. Division 83A of the ITAA 1997 provides the rules for taxing employee share schemes. The objects of the division are stated in section 83A-5 as follows: The objects of this Division are: (a) To ensure that benefits provided to employees under employee share schemes are subject to income tax at the employees' marginal rate under income tax law (instead of being subject to fringe benefits tax law); (b) To increase the extent to which the interests of employees are alighted with those of their employers, by providing a tax concession to encourage lower and middle income earners to acquire shares under such schemes; and (c) To increase the number of new entrepreneurial companies in Australia by assisting them to attract and retain employees by providing those employees with a tax concession for acquiring shares under such schemes. There are five subdivisions within Division 83A and Subdivision 83A-D in particular is concerned with the timing of deductions for the employer. Relevantly, section 83A-210 provides the following: If: (a) At a particular time, you provide another entity with money or other property: (i) Under an arrangement; and (ii) For the purpose 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 purpose 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. Broadly, section 83A-210 of the ITAA 1997 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contribution provided to a trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme in relation to the employee's employment and the contributions are made before the acquisition of the ESS interests. Subparagraph 83A-210(a)(i) of the ITAA 1997 Company A's adoption of the Plans under which rights and options are acquired by the eligible employees and directors, the establishment of the Trust, and Company A's provision of money to the Trustee for the purchase of Shares, are considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i). Subparagraph 83A-210(a)(ii) of the ITAA 1997 An ESS interest, in a company, is defined in section 83A-10 of the ITAA 1997 as “a beneficial interest in: (a) a share in the company; or (b) a right to acquire a beneficial interest in a share in the company.” A Right or Option granted to a participant is an ESS interest if it is a right to acquire a beneficial interest in a share in Company A. An employee share scheme is defined in subsection 83A-10 as “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; or (b) subsidiaries of the company; in relation to the employees' employment.” A scheme means “any arrangement” or “any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise” under subsection 995-1(1). In this case, the granting of the beneficial interests in the Rights and Options which are ESS interests, the provision of money to the trustee under the arrangement, the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees and directors pursuant to the Plans 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. Therefore, if the irretrievable contributions are provided before the Rights and Options are acquired by the participants, section 83A-210 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1. In this instance the contribution will only be deductible to Company A in the income year when the relevant Rights or Options are granted to the participants (once the Board determines the proportion of Rights and options that will be satisfied by the provision of Shares). This result is consistent with the outcome in ATO Interpretative Decision ATO ID 2010/103. Indeterminate rights Rights and Options acquired which could be satisfied by the provision of cash or Shares are indeterminate rights for the purposes of section 83A-340. They are not considered to be a right to acquire a beneficial interest in a share unless and until the time when the proportion of the Rights and Options that will be satisfied by the provision of Shares is determined by the Board. Once this proportion is determined, section 83A-340 operates to treat the Right and Option as though it had always been a right to acquire a beneficial interest in a share. If the money is provided to the Trustee before the Right and Option is acquired (and the Right and Option does subsequently become an ESS interest), then section 83A-340 operates to deem the Right and Option to always have been an ESS interest. Where this occurs, section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1. In such a case a deduction to fund the exercise of the Right and Option would be available to Company A in the income year in which the Right and Option was acquired by the employees and directors. Note: where the Rights and Options do not become an ESS interest because they are ultimately satisfied in cash, the outgoing should not flow through the Trust. This is because the Trust would not be satisfying the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997. As discussed in Question 2, the irretrievable cash contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group), to the Trustee to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the Plans will be deductible to Company A under section 8-1 of the ITAA 1997 (once the Board determines the proportion of Rights and Options that will be satisfied by the provision of Shares) at the time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests. Accordingly, section 83A-210 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Shares to satisfy the rights and options, where the contribution is made after the acquisition of the relevant rights and options. In such a situation, the irretrievable contributions will be deductible under section 8-1 in the income year in which the irretrievable contributions are made. Part IVA gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This power is found in subsection 177F(1). Paragraph 177F(1)(b) specifically provides the following: Where this Part applies to a scheme in connection with which a tax benefit has been obtained, or would but for this section be obtained, the Commissioner may: (c) In the case of a tax benefit that is referable to a deduction or part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income. 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 the discretion under subsection 177F(1) of the ITAA 1936, the following three requirements must exist: ● There must be a scheme within the meaning of section 177A of the ITAA 1936; ● There must be a tax benefit that was obtained or would be obtained in connection with the scheme, but for section 177F of the ITAA 1936; and ● Having regard to the matters in paragraph 177D(b) 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 Company A in respect of the irretrievable contributions made to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plans. Broadly, subsection 136(1) of the FBTAA 1986 defines 'fringe benefit' as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. Certain benefits are excluded from the definition of 'fringe benefit' by paragraphs (f) to (s) in subsection 136(1) of the FBTAA 1986. The provision of rights and options Relevantly, paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 states that a fringe benefit does not include: (h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997 ) to which Subdivision 83A-B or 83A-C of that Act applies; or According to subsection 83A-10(1) of the ITAA 1997, an ESS interest, in a company, is a beneficial interest in: “(a) a share in the company; or (b) a right to acquire a beneficial interest in a share in the company.” 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) of: (a) the company; or (b) subsidiaries of the company; in relation to the employees' employment.” For the purposes of subsection 83A-10, subsection 995-1(1) defines a scheme to mean “any arrangement” or “any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.” At the time the options or rights are granted, it may be unclear if paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA applies because those rights and options may be satisfied in cash instead of shares, hence, they may not be ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997. However, where they are ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate rights will; pursuant to section 83A-340 of the ITAA 19976, be treated as if they had always been ESS interests. In these circumstances, they will constitute the acquisition of ESS interests acquired under an employee share scheme within the meaning of subsection 83A-10(2) to which Subdivision 83A-C of the ITAA 1997 applies, and accordingly, they will be excluded from the definition of fringe benefit by paragraph 136(1)(h) of the FBTAA. Alternatively, where an employee's indeterminate rights are ultimately satisfied with cash instead of shares, the granting of the rights (or options) will be viewed as one of a series of steps in the payment of salary or wages; and will not be viewed as a separate benefit to the payment of salary or wages which are excluded from the definition of fringe benefit by paragraph 136(1)(f) of the FBTAA. This outcome is consistent with ATO Interpretative Decision ATOID 2010/142. The provision of shares In general terms, a fringe benefit is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee (being a person who receives, or is entitled to receive, 'salary or wages') or an associate of the employee by the employer or an associate of the employer in respect of the 'employment' of the employee. When an employee accepts an offer to participate in the Plans, they obtain a Right or an Option and this Right or Option constitutes an ESS interest. When this Right or Option is subsequently exercised, any benefit received would be in respect of the exercise of the Right or Option, and not in respect of employment. This outcome is consistent with ATO Interpretative Decision ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme. Therefore, the benefit that arises to an employee upon the exercise of a vested right or option (being the provision of a share) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee. Broadly, subsection 136(1) of the FBTAA 1986 defines 'fringe benefit' as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. Certain benefits are excluded from the definition of 'fringe benefit' by paragraphs (f) to (s) in subsection 136(1) of the FBTAA 1986. Relevantly, paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 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 ) An employee share trust is defined in subsection 130-85(4) of the ITAA 1997 to mean as follows: An employee share trust, for an employee share scheme, is a trust whose sole activities are: (a) obtaining shares 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). Based on the facts provided, paragraphs 130-85(4)(a) and (b) are satisfied because: ● The Trust acquires Shares in Company A; and ● The Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the Shares), are provided under an employee share scheme by allocating those Shares to the employees in accordance with the Trust Deed and the relevant Plan. Paragraph 130-85(4)(c) of the ITAA 1997 Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) of the ITAA 1997 may require the Trustee to undertake incidental activities that are a function of managing the Plans. 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 sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997. The activities that the Trustee is permitted to undertake under the Trust Deed are merely incidental to the primary purposes stated in paragraphs 130-85(4)(a) and (b). Consequently, paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) excludes the contributions to the Trustee from being a fringe benefit. Accordingly, the irretrievable cash contributions made by Company A (or a subsidiary member of Company A income tax consolidated group) to the Trustee, to fund the subscription for or acquisition on-market of Shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Reasons for decision: Questions 1 to 4 - application of the single entity rule in section 701-1 | The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 of the ITAA 1997 the subsidiary members of a consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period they are members of the consolidated group with the head company of the group being the only entity recognised for certain income tax purposes. | The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 . As a consequence, for the purposes of this ruling, the actions and transactions of the subsidiary members of the Company A income tax consolidated group are treated for income tax purposes as having been undertaken by the Australian head company of the Company A income tax consolidated group.