Private ruling: Employee Share Scheme
Date of advice: 10 February 2017
Published: August 2017
Date scheme commenced: Year ended 30 June 2016

Ruling: Q1: Will A1 Company, as the head entity of the A1 Company income tax consolidated group (the Group), be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by A1 Company (or a subsidiary member of Group), to the trustee (Trustee) of the employee share trust (the Trust) to fund the subscription for, or acquisition on-market of, ordinary A1 Company shares (Shares) to satisfy Employee Share Scheme (ESS) interests issued pursuant to the Employee Share Option Plan (the Plan)? | A3: Yes. | Q2: 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 A1 Company for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Shares by the Trustee of the Trust, pursuant to the Plan? | A4: No. The ruling for questions 1 to 3 inclusive applies for the following periods Year ended 30 June 2017 Year ended 30 June 2018 Year ended 30 June 2019 Year ended 30 June 2020 Year ended 30 June 2021 | Q3: Will the irretrievable cash contributions made by A1 Company (or a subsidiary member of the Group), to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the Plan, be treated as a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A5: No. The ruling for question 4 applies for the following periods Year ended 31 March 2017 Year ended 31 March 2018 Year ended 31 March 2019 Year ended 31 March 2020 Year ended 31 March 2021

Relevant facts and circumstances: 1. A1 Company is the head entity of the Group of which A1 Company Subsidiary is a member. A1 Company Employee Share Option Plan 2. A1 Company currently operates the Plan. The Plan allows A1 Company to grant Options to an 'eligible person' of the Group. An eligible person (Eligible Person or the Employee) is an employee of A1 Company or A1 Company Subsidiary including salaried Directors. 3. Under the Plan, A1 Company offers Options to an Eligible Person or his/her nominee (Permitted Nominee) at the discretion of A1 Company's Board (the Board). A Permitted Nominee is a person or an entity permitted by the Board to accept an offer on behalf of the Eligible Person. Although the Plan allows the Board to offer Options at any time, A1 Company intends to offer Options annually to selected employees subject to vesting and performance conditions. 4. The Plan allows A1 Company to offer Options under the plan for no monetary consideration. Once the specified vesting conditions have been met, the employee can exercise the Options and acquire Shares by paying the exercise price as set out in the terms of grant. The employee or holder of the Option is able to acquire one Share for each Option that vests and is exercised, subject to the employment and performance vesting conditions that apply. A Holder in relation to an Option is an Eligible Person, a Permitted Nominee or their legal personal representative. 5. Under the Plan, Options will lapse at the first to occur of: a. The expiry date (meaning the end of the period during which Options can be exercised) b. In case of unvested Options, the date of cessation of employment, or when it is determined vesting conditions have not been met c. In case of vested Options, shortly following cessation of employment (180 days of cessation) d. In case of death or Total and Permanent Disablement of the Holder, 180 days of the Holder's date of death or date of disablement e. Upon bankruptcy, commencement of winding up or deregistration of the Holder (as appropriate). Employee Loan Scheme 6. The Plan includes an Employee Loan Scheme that permits the Company to grant financial assistance to Holders by way of a loan to enable them to exercise Options and acquire Shares. The Holders of Options are able to apply for a loan, which may be interest bearing, as determined by the Board. The loan would have a maximum term of four years from the date the Options are exercised subject to early repayment in the event the employee ceases to be employed by the Company or when the employee sells the Shares acquired using the loan funds. In the event the aggregate of the loan and any interest is greater than the sale proceeds from the Shares, the Holder will only be required to repay the loan and any interest to the amount of the sale proceeds (i.e., the loan is a limited recourse loan). A1 Company Employee Share Trust 7. A1 Company is in the process of establishing an employee share trust which will be governed by the terms of the A1 Company Employee Share Trust deed (Trust Deed). 8. The Trust Deed will allow the Trustee to acquire, hold and allocate Shares to the Holder. The Trust is being established to assist the company with capital management for the Plan. Under the Trust Deed, the sole activities of the Trust will be to acquire and hold Shares in A1 Company for the purpose of providing them to Participants of the Plan on vesting and exercise of their Options, and administration of the Trust. 9. The Trust will be an independent legal entity and will not be part of the Group. Under the draft Trust Deed, A1 Company (or any other member of the Group) cannot be a beneficiary of the Trust. A1 Company will have no interest in the Shares held by the Trust. 10. A1 Company (or a subsidiary member of the Group) will make irretrievable contributions in the form of cash to the Trustee of the Trust, and the Trustee will use this money to acquire Shares (either through subscription for newly issued Shares or through on-market purchase) to satisfy grants of Options made by A1 Company to the Group's employees, in accordance with the terms of the Trust Deed (once executed), the Plan Rules, and the Option grants. 11. Where Shares are to be acquired on-market, contributions may be made to the Trustee of the Trust at any time to satisfy existing or future grants to Participants. Where Shares are to be newly issued, contributions will typically be made around the time Options vest (or are expected to vest) and/or when Options are exercised (or are expected to be exercised). Whether contributions are to be applied to the on-market purchase of Shares or to newly issued Shares will be determined on a contribution-by contribution basis per written instructions from A1 Company. 12. A1 Company intends for the Trust to be used to administer A1 Company's awards under the Plan. The existing Plan incorporates the use of the Trust to facilitate the provision of Shares in respect of grants which have previously been issued to Holders and are currently held, as well as new grants made in the future.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 section 66 | Fringe Benefits Tax Assessment Act 1986 section 136 | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Impact of the single entity rule (SER): Questions 1-3 The consolidation provisions allow certain groups of entities to be treated as a single entity for income tax purposes. Under the 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 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, the actions and transactions of the subsidiary members of the Group are treated for income tax purposes as having been undertaken by A1 Company as the Australian head company of the Group. Question 4 The SER has no application to the FBTAA. Accordingly the Commissioner has provided a ruling to A1 Company and A1 Company Subsidiary as the employing members of the Group in relation to question 4. | Detailed Reasoning - Question 1: Will A1 Company, as the head entity of the Group, be entitled to deduct an amount under section 8-1 of the ITAA 1997 for irretrievable cash contributions made by A1 Company (or a subsidiary member of the Group), to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the Plan? | Detailed Reasoning - Detailed reasoning: The general deduction provision in section 8-1 of the ITAA 1997 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. Losses or outgoings To claim a deduction under section 8-1 of the ITAA 1997 contributions made to the Trustee of the Trust by A1 Company must be irretrievable and non-refundable. The Trustee must hold the assets of the Trust for the benefit of the Beneficiaries of the Trust in accordance with the Plan, any applicable option grants, and Board requests that are consistent with the Plan. A1 Company (or a subsidiary member of the Group) cannot be a beneficiary of the Trust, and will have no interest in the Shares held by the Trust. Any income accrued by the Trust must accumulate in the Trust Fund for the general purpose of the Trust or be distributed by the Trustee to a trust established for the benefit of the Beneficiaries nominated by the Trustee. A1 Company (or a subsidiary member of the Group) must provide the Trustee with funds necessary to perform its obligations in accordance with the Plan, including the reasonable costs and expenses associated with doing so including maintaining the corporate existence of the Trustee. The terms of the Deed when read together with the Plan demonstrate that contributions made by A1 Company (or a subsidiary member of the Group) to the Trustee of the Trust will be irretrievable and non-refundable and made only for the purposes of the Deed and therefore these contributions are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997. Sufficient nexus In order for a loss or outgoing to be deductible under section 8-1 of the ITAA 1997 it must be either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. A line of authorities has 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; (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 and Co (W.A.) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147). A1 Company established the Trust for the sole purpose of facilitating the Plan. The contributions made by A1 Company (or a subsidiary member of the Group) to the Trustee of the Trust are part of the overall employee remuneration costs of A1 Company. The benefits provided to employees under the Plan are intended to reward, retain and motivate employees and to encourage participation by employees of A1 Company through share ownership. The facts and circumstances of this case confirm that A1 Company (or a subsidiary member of the Group) makes the contributions to the Trustee of the Trust solely to enable the Trustee to acquire Shares for Participants in accordance with the Plan in order to remunerate and retain employees. Accordingly, it is considered that there is a sufficient nexus between the outgoings (contributions made by A1 Company (or a subsidiary member of the Group) to the Trustee of the Trust) and the derivation of A1 Company assessable income. Capital or revenue A1 Company (or a subsidiary member of the Group) will make periodic contributions to the Trustee of the Trust for the purpose of acquiring and subscribing for ordinary Shares pursuant to the Plan. ATO Interpretative Decision 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 states that irretrievable contributions to a Trust paid in respect of an employee share scheme are deductible under section 8-1 of the ITAA 1997, being part of the overall remuneration costs of the employer and thus revenue. In Spotlight Stores Pty Ltd v. Federal Commissioner of Taxation (2004) 55 ATR 745 and Pridecraft Pty Ltd v. FC of T [ 2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210 ( Pridecraft) payments by an employer company to an employee share trust, established to provide incentive payments to employees, were held to be on revenue account and were not capital or of a capital nature. Apportionment The combined operation of subsections 8-1(1) and 8-1(2) of the ITAA 1997 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 in the circumstances where the Trustee of the Trust uses contributions made by A1 Company (or a subsidiary member of the Group) to the Trustee of the Trust for the administration of the Plans to subscribe for Shares. 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 the trustee of an employee share trust, ultimately and in substance, uses a contribution from the employer 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 secures for the employer advantages of both a revenue and capital nature, but the expected advantages of a capital nature are very small or trifling by comparison, apportionment may not be required. In this case, the outgoings incurred by A1 Company (or a subsidiary member of the Group) by way of the irretrievable contributions it makes to the Trustee of the Trust in order to carry on its business are either not capital in nature or any capital component is considered to be sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. Private or domestic in nature, exempt income and non-assessable non-exempt income Nothing in the facts suggest that the irretrievable contributions made by A1 Company (or a subsidiary member of the Group) to the Trustee of the Trust are private or domestic in nature, are incurred in gaining or producing exempt income, are incurred in gaining or producing non-assessable non-exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1936 or ITAA 1997. Conclusion The irretrievable contributions A1 Company (or a subsidiary member of the Group) makes to the Trustee of the Trust to fund the acquisition of Shares in accordance with the Deed and the Plan will be an allowable deduction to A1 Company under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 2(a): Will the irretrievable contributions made by A1 Company (or a subsidiary member of the Group), to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the Plan, be deductible to A1 Company 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? | Detailed Reasoning - Detailed reasoning: The deduction for the irretrievable cash contributions under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which A1 Company (or a subsidiary member of the Group) incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997. Section 83A-210 of the ITAA 1997 states that 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. Therefore, section 83A-210 of the ITAA 1997 applies under an arrangement where there is a relevant connection between the irretrievable cash contributions, provided to the Trustee of the Trust, 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. Arrangement The implementation of the Plan, establishment of the Trust and provision of money by A1 Company (or a subsidiary member of the Group) to the Trustee of the Trust, are considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i) of the ITAA 1997. ESS interest Options under the Plan qualify as ESS interests in a company, defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Employee share scheme Subsection 83A-10(2) of the ITAA 1997 defines 'employee share scheme' 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(2) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 defines the term 'scheme' as follows: (a) any arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The Plan is an employee share scheme for the purposes of Division 83A of the ITAA 1997 as it is an arrangement, which provides an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a share) to a Participant in relation to their employment by A1 Company. An A1 Company share acquired by the Trustee to satisfy a right, provided under an employee share scheme, to an employee in relation to the employee's employment, is itself acquired under the same employee share scheme. Relevant connection The making of an offer and the granting of an Option under the Plan, the provision of irretrievable cash contributions to the Trustee of the Trust under the arrangement, the acquisition and holding of the Shares by the Trustee and the allocation of Shares to Participants are all interrelated components of the Plan. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee of the Trust, must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee of the Trust necessarily allows the scheme to proceed. Accordingly, the provision of money to the Trustee of the Trust to acquire Shares is for the purpose of enabling Participants, indirectly as part of the Plan, to acquire relevant rights (that is ESS interests). If A1 Company (or a subsidiary member of the Group) provides irretrievable contributions to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the Plan before a Participant acquires the relevant ESS interests, then section 83A-210 of the ITAA 1997 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1 of the ITAA 1997. In this instance, the contribution will only be deductible to A1 Company in the income year when the relevant ESS interests are provided to Participants. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust . | Detailed Reasoning - Question 2(b): Will the irretrievable contributions made by A1 Company (or a subsidiary member of the Group), to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the Plan, be deductible to A1 Company under section 8-1 of the ITAA 1997 at the time the contributions are made, if the contributions are made after the acquisition of the relevant ESS interests? | Detailed Reasoning - Detailed reasoning: The deduction for the irretrievable cash contributions under section 8-1 of the ITAA 1997 will generally be allowable in the income year in which A1 Company (or a subsidiary member of the Group) incurred the outgoing. The following general rules from Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions , settled by case law, assist in most cases in defining whether and when a loss or outgoing has been incurred: (a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum; (b) a taxpayer may have a presently existing liability, even though the liability may be defeasible by others; (c) a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities); (d) whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise; (e) in the case of a payment made in the absence of a presently existing liability(where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid. For the purposes of section 8-1 of the ITAA 1997 it is sometimes not enough that a loss or outgoing has been incurred. The outgoing must also be properly referable to the year of income in which the deduction is sought, see Coles Myer Finance Pty Ltd v. FC of T 93 ATC 4214 at 4222; (1993) 25 ATR 95 at 105. The matter of the taxpayer's accounting system may be indicative, but not determinative of the income year to which an outgoing is properly referable. A1 Company is not able to deduct an irretrievable contribution at the time an Option is granted to a Participant under the Plan, if no contribution has been made with regard to that Option. Granting an option to a Participant under the Plan will not constitute a presently existing liability as the liability is both contingent and pending. Where an Option has been granted to a Participant under the Plan and A1 Company (or a subsidiary member of the Group) makes a contribution in regard to that Option at a later time, A1 Company is definitively committed and incurs the liability at the time the irretrievable contribution is made. | Detailed Reasoning - Question 3: Will the Commissioner seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by A1 Company for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of ordinary Shares by the Trustee of the Trust, pursuant to the Plan? | Detailed Reasoning - Detailed reasoning: Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules 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: (1) there must be a scheme within the meaning of section 177A of the ITAA 1936 (2) 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 (3) 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. The Scheme The word 'scheme' is defined in subsection 177A(1) of the ITAA 1936 as follows: "scheme" means: (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 Plan, which utilises payments made to the Trustee (in accordance with the Deed) to fund the acquisition of Shares on behalf of Participants by the Trustee. Tax Benefit The words 'tax benefit' are relevantly defined in subsection 177C(1) of the ITAA 1936 as follows: 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: (a) … (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; or (c) … Determination of whether A1 Company will derive a tax benefit from this scheme requires a consideration of subsections 177CB(2) and (3) of the ITAA 1936. These provisions provide two alternative bases upon which it may be demonstrated whether the tax effect (that is, whether a deduction is allowable where the whole or a part of that deduction would not have been allowable if the scheme had not been entered into or carried out) has occurred or might reasonably be expected to have occurred. Subsection 177CB(2) of the ITAA 1936 states: A decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme). Subsection 177CB(2) of the ITAA 1936 requires that a decision that a tax effect 'would have' occurred if the scheme had not been entered into or carried out, must be made solely on the basis of a postulate comprising all of the events or circumstances that actually happened or existed, other than those that form part of the scheme. When postulating what would have occurred in the absence of the scheme, there is an assumption, the scheme did not happen and it must be 'annihilated' or extinguished. However, the alternative postulate must incorporate all the events or circumstances that actually happened or existed. Subsection 177CB(3) of the ITAA 1936 states: A decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme. Subsection 177CB(3) of the ITAA 1936 requires that a decision that a deduction 'might reasonably be expected not to have been allowable' if the scheme had not been entered into or carried out, must be made on the basis of a postulate that is a reasonable alternative to the scheme. Subsection 177CB(4) of the ITAA 1936 requires that in order for a postulate to be a reasonable alternative to a scheme under subsection 177CB(3) of the ITAA 1936 it must be worked out having particular regard to the substance of the scheme and its results and consequences for the taxpayer, and disregarding any potential tax results and consequences. As the scheme achieves a number of non-tax commercial consequences for A1 Company it is not appropriate to determine the existence of a tax benefit by applying subsection 177CB(2) of the ITAA 1936. Rather, subsection 177CB(3) of the ITAA 1936 provides the most appropriate method for determining whether a tax benefit has occurred or would be expected to occur if the scheme had not been entered into or carried out. Postulate 1 - A1 Company could fund purchase of Shares on-market via a broker A1 Company could have funded the purchase of Shares on-market via a broker in the name of the Participant once an Option vests or becomes exercisable. Under this alternative arrangement, a tax deduction would be available to A1 Company for the purchase price of the Shares. Postulate 2 - A1 Company could remunerate its employees in the form of increased salary, bonuses or deductible superannuation payments A1 Company could provide remuneration to Participants in the form of payments of increased salary, bonuses or superannuation payments. Under this alternative arrangement, a tax deduction would be available to A1 Company in respect of the total remuneration provided. Postulate 3 - A1 Company could issue Shares directly to Participants on an Option vesting or becoming exercisable A further alternative postulate is that A1 Company could issue Shares directly to Participants on an Option vesting or becoming exercisable. However, under the general income tax law an employer cannot deduct any amount for directly providing shares or rights to shares in itself to its employees. That is because the issue of share capital would not be a loss or outgoing (as it merely creates a dilution of the existing share capital) even though it relates to the remuneration of its employees. However, under this alternative a deduction may be available, capped at $1,000 per employee, for the cost of issuing and transferring the shares under section 83A-205 of the ITAA 1997. There is a requirement to contrast the deduction under section 83A-205 of the ITAA 1997 with the deduction that the scheme would obtain. That is, a deduction limited to $1,000 per employee compared to a deduction for the amount of irretrievable cash contributions (which are equivalent to the market value of the shares). The third alternate postulate reveals that a tax benefit has occurred and can be expected to occur for the purposes of subsection 177C(1) of the ITAA 1936 in relation to the scheme as a result of the greater deductions that will be allowable for contributions to the Trustee of the Trust under section 8-1 of the ITAA 1997. Dominant purpose Subsection 177D(2) of the ITAA 1936 sets out certain factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit. Subsection 177A(5) of the ITAA 1936 requires obtaining a tax benefit to be the 'dominant purpose' for undertaking a scheme in order for there to be an application of Part IVA of the ITAA 1936. Based on the facts and circumstances of this case, the Commissioner accepts that the scheme was not entered into for the dominant purpose of obtaining a tax benefit. On the basis of an analysis of these three requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by A1 Company for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, acquisition on-market or off-market purchase of, Shares. | Detailed Reasoning - Question 4: Will the irretrievable cash contributions made by A1 Company (or a subsidiary member of the Group), to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the Plan, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | Detailed Reasoning - Detailed reasoning: In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee, but 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 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides that 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) An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. As previously established, the Plan is an employee share scheme under this definition, and an Option under the Plan is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997. The incidental activities referred in paragraph 130-85(4)(c) of the ITAA 1997 are defined by ATO Interpretative Decision ATO ID 2010/108 Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities which provides the following as qualifying activities: (a) the opening and operation of a bank account to facilitate the receipt and payment of money; (b) the receipt of dividends in respect of shares held by the EST on behalf of an employee, and their distribution to the employee; (c) 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; (d) 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; (e) 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; (f) 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 (g) receiving and immediately distributing shares under a demerger. The Deed states that the sole purpose of the Trust is acquiring and holding A1 Company Shares, providing the ESS interests to beneficiaries under the Plan, and conducting other incidental activities, in a manner consistent with the definition of employee share trust in section 130-85 of the ITAA 1997. As such the Trust satisfies paragraphs 130-85(4)(a),(b), and (c) of the ITAA 1997 and is an employee share trust for the purposes of subsection 136(1) of the FBTAA. Accordingly, the irretrievable cash contributions made by A1 Company (or a subsidiary member of the Group) to the Trustee of the Trust 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.

ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme | Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 58 ATR 210