Private ruling: Employee Share Trust Schemes
Date of advice: 7 August 2017
Published: November 2017

Ruling: Q1: Will Company A as head entity of the Company A income tax consolidated group (that includes Employer Entities) obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable payments made by Company A or the Employer Entities to the Trustee to fund the acquisition by the Trust of Company A shares either on market or via a new subscription of shares? | A1: Yes. | Q2: Will Company A as head entity of the Company A income tax consolidated group obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by Company A or the Employer Entities in relation to the implementation and on-going administration of the Trust? | A2: Yes. | Q3: Will irretrievable payments made by Company A or the Employer Entities to the Trustee before the acquisition of the relevant Performance Rights or Options by the Participant, to fund the acquisition by the Trust of Company A shares either on market or via a new subscription of shares, be deductible under section 8-1 of the ITAA 1997 to Company A at a time determined by section 83A-210 of the ITAA 1997? | A3: Yes. | Q4: Will irretrievable payments made by Company A or the Employer Entities to the Trustee to fund the acquisition by the Trust of Company A shares (either on market or via a new subscription of shares) in excess of the number required to meet obligations arising in the year of income from the acquisition of the relevant Performance Rights or Options by the Participant, be deductible under section 8-1 of the ITAA 1997 to Company A at a time determined by section 83A-210 of the ITAA 1997? | A4: Yes. | Q5: If the Trust satisfies its obligation under the Plans by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997? | A5: No. | Q6: Will the Commissioner make a determination under section 177F (in respect of a scheme to which section 177D that is within Part IVA of the ITAA 1936 applies) to deny, in part or full, any deduction claimed by Company A as head entity of the tax consolidated group in respect of the irretrievable payments made by Company A or the Employer Entities to the Trustee to fund the acquisition by the Trust of Company A shares either on market or via a new subscription of shares? | A6: No. The rulings for questions 1 to 6 inclusive each apply for the following periods: Income tax year ended 30 June 2017 Income tax year ending 30 June 2018 Income tax year ending 30 June 2019 Income tax year ending 30 June 2020 Income tax year ending 30 June 2021 Income tax year ending 30 June 2022

Relevant facts and circumstances: 1. Company A is an Australian resident company and is the head entity of the Company A income tax consolidated group. It operates employee share plans (the Plans) as part of its remuneration strategy. 2. Company B (the Trustee) is the trustee of Company A Employee Share Trust (the Trust) which will be used to acquire shares to satisfy awards of Performance Rights and Options issued under the Plans. 3. The purpose of the Plans is to reward, retain and motivate employees by providing an opportunity for them to receive shares whilst also aligning them to the long-term goals of the organisation and the creation of shareholder value. 4. The commercial reasons for establishing the Trust include: ● The use of an Employee Share Trust arrangement is sanctioned by the income tax law if the Trust is used for the sole purpose described in subsection 130-85(4) of the ITAA 1997. ● The provision of Company A shares and acquisition by the Trustee on behalf of the Trust assists Company A with meeting its Corporations Law requirements in relation to dealing in its own shares. ● Allows Company A to outsource the operation of its Plans to a licensed Trustee. ● Allows for the operation of disposal restrictions on the Company A shares that vest through the Plans. ● The Trust forms part of Company A’s wider capital management policy and provides capital management flexibility by allowing for on market purchases of shares using cash or a new issue of shares by Company A where cash is retained. ● The Trust provides Company A with an efficient mechanism for the administration and operation of any new employee incentive plans which it introduces in the future. 5. The participants in the Plans are employees and executives (Participants) of Company A and it’s wholly owned Australian subsidiaries (Employer Entities). 6. Employees and executives (including their associates) of Company A’s non-resident subsidiaries will not be Participants in the Plans. 7. All dealings between the Participants, Employer Entities and the Trustee which are conducted in accordance with the rules set out in the Plans and Deed are at arms-length. 8. Under the Plans, eligible employees (Participants) are granted Rights or Options to acquire Company A shares subject to certain conditions are met. 9. The Plans broadly operate as follows: ● The Plans allows Company A to grant Performance Rights and Options to eligible employees to acquire Shares for nil consideration subject to Vesting Conditions as determined by the Board in its absolute discretion and as specified in the Offer for the Performance Right or Option. ● It is at the absolute discretion of the Board of Company A to extend an invitation to grant Performance Rights or Options to eligible employees. ● Accordingly, once all conditions on the Performance Rights or Options, as determined by the Board have been satisfied, the vested Performance Rights or Options may be exercised and Company A will instruct the Trustee to allocate Shares to the Participant’s share account. 10. Company A is not a beneficiary of the Trust and it has no interest in the shares held by the Trustee. 11. The Trust will operate as follows: ● The Trust will be managed and administered so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997). ● The Trust will be funded by contributions from Company A and the Employee Entities for the purchase of Company A shares in accordance with the Plans. ● The funds contributed will be used by the Trustee to acquire Company A shares either on-market or via a subscription for new shares in Company A, based on written instructions from Company A. ● When the Trustee allocates Shares to the Participants share account, the shares will be held as Allocated Shares. At this point, the Participant becomes a beneficial owner of the Shares and is entitled to receive cash dividends in respect of the Shares held by the Trustee on behalf of the Participant. ● Any dividend income received by the Trustee on Unallocated Shares would be treated as assessable income and taxed in the hands of the trustee. ● The Trustee can use the after tax proceeds from dividends received on Unallocated Shares to purchase additional shares in future. ● A dividend on Unallocated Shares cannot be paid to Company A. ● The Trustee cannot pay dividends to participants on Unallocated Shares on the basis there is no present entitlement. 12. The contributions can be made by Company A (or the Employee Entities) to the Trust in respect to all the following scenarios: ● Before or at the same time as the acquisitions of relevant Performance Rights or Options by the Participant and for the purpose of satisfying acquisitions made in the same income year. ● Before the acquisitions of relevant Performance Rights or Options by the Participant and for the purpose of satisfying acquisitions to be made in a future income year (i.e. in excess of the number required to satisfy acquisitions made in the year of income). ● After the acquisitions of relevant Performance Rights or Options by the Participant. 13. Company A will incur various costs in relation to the implementation and on-going administration of the Trust. For example, Company A will incur costs associated with the services provided by the Trustee, including but not limited to: ● Employee plan record keeping; ● Production and dispatch of holding statements to employees; ● Provision of annual income tax return information for employees; ● Costs incurred in the acquisition of shares on market (e.g. brokerage costs and the allocation of such shares to participants); ● Management of employee termination; and ● Other trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust. 14. Company A may pay to the Trustee from its own resources any fees, commissions or remuneration and may reimburse such expenses incurred by the Trustee as Company and the Trustee may agree from time to time. 15. In addition to the services to be provided by the Trustee, Company A has incurred and will incur various costs, including the services provided by Company A’s accounting and legal advisors.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 Division 104

Reasons for decision: Summary: The contribution made by Company A will be irretrievable and non-refundable under the conditions of the Trust Deed, forming the corpus of the Trust and will not be repaid to Company A. Therefore the irretrievable contributions will be incurred as an outgoing. As the irretrievable contribution is made for the purpose of the Plans which is used to incentivise and recognise the ongoing ability of Eligible Employees and their expected efforts and long term contributions to the performance and success of the company it is considered that there is a sufficient nexus between the outgoings (contributions made by Company A to the Trustee) and the derivation of Company A’s assessable income. Therefore, the irretrievable contributions Company A makes to the Trustee of the Trust to fund the acquisition of ordinary Company A shares in accordance with the Deed and the Plans will be an outgoing that is necessarily incurred in the business of the taxpayer for the purpose of gaining or producing assessable income and allowable as a tax deduction to Company A under section 8-1. The employer costs incurred by Company A in relation to the implementation and on-going administration of the Trust are either: ● costs necessarily incurred in gaining or producing the assessable income of Company A; or ● costs necessarily incurred in carrying on the business of Company A for the purpose of gaining or producing the assessable income of Company A. Furthermore, the costs are revenue and not capital in nature on the basis that they are regular and recurrent expenses incurred by Company A in connection with its employees. Therefore, Company A is entitled to an income tax deduction, pursuant to section 8-1, in respect of employer costs incurred by Company A or the Employer Entities in relation to the implementation and on-going administration of the Trust. As the requirements of section 83A-210 are satisfied, where an irretrievable contribution is made to the Trust before the relevant Performance Right or Option is granted, section 83A-210 will apply to determine the timing of the tax deduction. In this case, the irretrievable contribution will only be deductible to Company A in the income year in which the relevant ESS interests are acquired by the Participants. As the requirements of section 83A-210 are satisfied, where a contribution is made to the Trust before the relevant Performance Right or Option is granted and in excess of the number required to satisfy acquisitions in the year of income, section 83A-210 will apply to determine the timing of the deduction under section 8-1. In this case, the contribution will only be deductible to Company A in the income year in which the relevant ESS interests are acquired by the Participants. When the Trustee of the Trust satisfies its obligations under the Deed by subscribing for new shares in Company A, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20-20 and will also not trigger a CGT event under Division 104. Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise his discretion to make a determination pursuant to section 177F to cancel a tax benefit that has been or would be obtained, three requirements must be met: i. there must be a scheme within the meaning of section 177A of the ITAA 1936; ii. a tax benefit (as defined in section 177C) must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred (pursuant to section 177CB), if the scheme had not been entered into or carried out, and iii. 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. Based on an analysis of these three requirements, we do not consider that any party to the scheme has a dominant purpose of enabling Company A to obtain a tax benefit in the form of tax deductions for its irretrievable contributions to the Trust. In particular, there are clear commercial reasons for implementing and operating the Plans through an EST structure. Accordingly, the Commissioner will not make a determination under section 177F of the ITAA 1936 (in respect of a scheme to which section 177D applies) to deny, in part or full, the tax deductions claimed by Company A for the irretrievable cash contributions made to the Trustee to fund the acquisition by the Trust of Company A shares either on market or via a new subscription of shares.

Reasons for decision: All references below are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. | Application of the single entity rule in section 701-1 | The consolidation provisions 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 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 Employer Entities as subsidiary members of the Company A’s income tax consolidated group are treated for income tax purposes as having been undertaken by Company A as the Australian head company of the Company A’s income tax consolidated group.