Private ruling: Employee Share Trust
Published: July 2012
Ruling period: Income Tax: | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Fringe Benefits Tax: | Year ending 31 March 2013 | Year ending 31 March 2014 | Year ending 31 March 2015
Date scheme commenced: Year ending 30 June 2012

Ruling: Q1: Are irretrievable cash contributions by the Company to the Trustee of an employee share trust (EST) to fund the acquisition of Company shares ("Shares") an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Part A:- Is the deduction for the Company in respect of the irretrievable contributions to the Trust allowed in the same year of income when the contribution is made to the Trust provided it is in respect of Shares that have been granted to employees or Rights to acquire Shares that have previously been granted to employees pursuant to section 83A-210 of the ITAA 1997? Part B - Is the deduction for the Company in respect of the irretrievable contributions to the Trust allowed at the time when any excess payment is applied to the subsequent grant of Rights to acquire Shares pursuant to section 83A-210 of the ITAA 1997? | A2: Part A : Yes. Part B : Yes. | Q3: Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the arrangement where irretrievable contributions are made to the Trustee of the EST to fund the acquisition of Shares? | A3: No. | Q4: Is the provision of Shares to employees pursuant to the Performance Rights Plan Rules (PRP) arrangements subject to fringe benefits tax (FBT) within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A4: No. | Q5: Are irretrievable contributions of money to the Trustee of the EST to fund the acquisition of Shares subject to FBT within the meaning of subsection 136(1) of the FBTAA? | A5: No. | Q6: Will the Commissioner seek to apply section 67 of the FBTAA to the proposed arrangements? | A6: No.


Relevant legislative provisions: section 8-1 of the Income Tax Assessment Act 1997 | subsection 83A-10(1) of the Income Tax Assessment Act 1997 | section 83A-20 of the Income Tax Assessment Act 1997 | section 83A-210 of the Income Tax Assessment Act 1997 | subsection 130-84(4) of the Income Tax Assessment Act 1997 | subsection 995-1(1) of the Income Tax Assessment Act 1997 | section 177A of the Income Tax Assessment Act 1936 | section 177C of the Income Tax Assessment Act 1936 | section 177D of the Income Tax Assessment Act 1936 | section 177F of the Income Tax Assessment Act 1936 | section 67 of the Fringe Benefits Tax Assessment Act 1986 | subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision: Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. It provides: You can deduct from your assessable income any loss or outgoing to the extent that: · it is incurred in gaining or producing your assessable income; or · it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Subsection 8-1(2) of the ITAA 1997 then provides: · However, you cannot deduct a loss or outgoing under this section to the extent that: · it is a loss or outgoing of capital, or of a capital nature; or · it is a loss or outgoing of a private or domestic nature; or · it is incurred in relation to gaining or producing your exempt income or your non- assessable non-exempt income; or · a provision of this Act prevents you from deducting it. The Company has established an EST as a separate vehicle for the sole purpose of acquiring ordinary shares for the benefit of eligible directors and employees (Participants) under the Company's employee equity plans. Under the Company's existing long term incentive structure, Participants receive Performance Rights under the Company's Performance Rights Plan Rules (the "PRP") as part of its remuneration policy with the intention of attracting and retaining suitable employees in its business. In Pridecraft Pty Ltd v. FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; FC of T v. Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745, 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. It should be noted that although the Court held that the payments were deductible under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936), it found that subsection 177F(1) of Part IVA of the ITAA 1936 applied to cancel the tax benefit arising from the deduction. This was due to elements associated with prepayments to fund future bonuses, and a loan back that are not applicable in the present context. The court decision confirmed the opinion expressed in ' ATO Interpretative Decision ATO ID 2002/174 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 of the ITAA 1997 for irretrievable contributions made to the trustee of its employee share scheme. The cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition of Shares by the Trust are irretrievable and non-refundable under the Trust Deed. The irretrievable cash contributions are incurred to improve the group operating performance and to motivate and retain high quality staff. The irretrievable cash contributions made to the Trustee under the Plan are directed to enhancing the profitability of the group's business and producing assessable income. Nothing in the facts suggests that the irretrievable cash contributions are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936. Accordingly, the irretrievable cash contributions made to the Trustee to acquire Shares are allowable deductions. Furthermore, it is noted, that the Company will incur costs associated with the services provided by the Trustee of the EST and various implementation costs. These costs are part of the ordinary recurring cost to the Company of remunerating its employees and are therefore deductible under section 8-1 of the ITAA 1997. This agrees with the ATO view expressed in ATO Interpretative Decision ATO ID 2002/ 961 Income Tax: employer costs for the purpose of administering its employee share scheme are deductible However, unlike the irretrievable contributions made to the EST to acquire shares, these payments do not form part of the corpus of the EST, but are assessable income of the Trustee. | Detailed Reasoning - Question 2: Part A: - Is the deduction for the Company in respect of the irretrievable contributions to the Trust allowed in the same year of income when the contribution is made to the Trust provided it is in respect of Shares that have been granted to employees or Rights to acquire Shares that have previously been granted to employees pursuant to section 83A-210 of the ITAA 1997? Part B:- Is the deduction for the Company in respect of the irretrievable contributions to the Trust allowed at the time when any excess payment is applied to the subsequent grant of Rights to acquire Shares pursuant to section 83A-210 of the ITAA 1997? | Detailed Reasoning - Advice/Answers: Part A:- Yes. Part B: -Yes. | Detailed Reasoning - Detailed reasoning: The provision of money to the trustee of an employee share trust by the employer for the purpose of remunerating its employees under an employee share scheme is an outgoing in carrying on the employer's business and is deductible under section 8-1 of the ITAA 1997(see question 1 above). 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 the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997. | Detailed Reasoning - Section 83A-210: If: (a) at a particular time, you provide another entity with money or other property: · under an arrangement; and · 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. Thus, section 83A-210 of the ITAA 1997 determines when a deduction is allowable under the circumstances set out in Question 1 in relation to ESS and ESS interests. An ESS 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) of the ITAA 1997). An ESS interest is a beneficial interest in a share in a company or a right to acquire a beneficial interest in a share in a company (subsection 83A-10(1) of the ITAA 1997). The PRP is an ESS and the Rights are ESS interests, being rights to acquire a beneficial interest in the share of a company (i.e. Rights to acquire Entity X shares). The adoption of the PRP; the creation of the EST; the granting of beneficial interests in the rights; the provision of the money to the Trustee; the acquisition and holding of the shares by the Trustee and the allocation of shares to the Participants, are all interrelated components of the ESS that constitute the arrangement in these circumstances for the purposes of paragraph 83A-210(a)(i) of the ITAA 1997. The provision of money to the Trustee necessarily allows the scheme to proceed. The Company will provide money to the Trustee of the EST to enable the Trustee to acquire Company shares for the purposes of satisfying the grant of Rights under the PRP. As noted above, the Rights are ESS interests which the Participants will acquire upon being granted them by the Company. The acquisition time for the purposes of section 83A-210 of the ITAA 1997 occurs when the Rights to the Shares are granted to the Participants. Part A: Accordingly, under section 83A-210 of the ITAA 1997, the cash contributions that the Company makes to the Trustee will be deductible in the income year in which the acquisition time arises for the Rights. 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', supports this view. Therefore, when the makes a cash contribution to the Trustee in an income year before the income year in which the acquisition time for the Rights occurs, it will be allowed a deduction under section 83A-210 of the ITAA 1997 in the income year in which the ESS interests (Rights) are granted (acquired). Part B: However, section 83A-210 of the ITAA 1997 will not apply if the Company makes a cash contribution in an income year that is later than the income year in which the Rights are granted. In this case, the cash contribution will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is incurred i.e. in the later income year. Finally, it should be noted that if any amount of money is used by the Trustee to purchase excess Shares intended to meet a future obligation arising from a future grant of Rights, the excess payment will occur before the employees acquire the relevant Rights (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to Entity X in the year of income when the relevant Rights are subsequently granted to Plan participants. Question 3 Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the arrangement where irretrievable contributions are made to the Trustee of the EST to fund the acquisition of Shares? Advice/Answers No. | Detailed Reasoning - Detailed reasoning: 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 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 arises that was obtained or would be obtained in connection with the scheme but for Part IVA; and · having regard to the matters in paragraph 177D(b) of the ITAA 1936, the scheme is one to which Part IVA applies. The Scheme A scheme is defined in subsection 177A(1) of the ITAA 1936 which states: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct It is considered that this definition is sufficiently wide to cover the proposed employee arrangement under the Plan, which consists of the creation of the EST, including the Trust Deed, and the payment of the irretrievable contributions to the Trustee. Tax Benefit 'Tax benefit' is defined in subsection 177C(1) of which the relevant paragraph is: Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; In order to determine the tax benefit that would be derived by the Company from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the company might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration. However, another alternative postulate, it is considered that if Company issued new shares directly to employees (rather than via the EST), they may not receive a deduction for the amount incurred in issuing the shares. Therefore, by using an EST, a tax benefit is created, through the deduction they will receive under section 8-1 of the ITAA 1997 for the irretrievable cash contributions they make to the Trustee. Dominant purpose Paragraph 177D(b) of the ITAA 1936 sets out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit: · the manner in which the scheme was entered into or carried out · the form and substance of the scheme · the time at which the scheme was entered into and the length of the period during which the scheme was carried out · the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme · any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme · any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme · any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out · the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi). Subsection 177A(5) of the ITAA 1936 requires the purpose to be the dominant purpose. Therefore in considering whether Part IVA applies or not, the necessary comparison to be made in relation to the factors listed in paragraph 177D(b) is between the scheme as proposed and the relevant counterfactual. (i) The Manner of the Scheme The inclusion of the EST in the scheme does give rise to a tax benefit, but the Company contends that the presence of the EST provides other commercial benefits. These benefits include · it is an arm's length vehicle for acquiring and holding shares in the company, either by way of new issue or acquiring on market; · the trust will be an efficient structure for giving effect to disposal restrictions / vesting conditions; · as the trustee is the legal owner, employees have no ability to deal in shares; · the trust provides the flexibility to acquire and hold shares that will be allocated to employees under its employee rights plans and facilitates the forfeiture of rights when performance hurdles are not met. The trust is more able to hold shares for reallocation. This enables easy recycling of shares; · the trust will provide one single vehicle for the administration of the group's employee rights plan; · the trust establishes independent records and accounts for participating employees; and · a trust is the most appropriate vehicle to be used to acquire shares and manage dividend income during the vesting period. Further, it is noted that the arrangement is being contemplated in being undertaken on an ongoing basis. It is accepted that the EST provides benefits to the operation of the scheme that would not be available if the shares were provided directly by the Company as in the relevant counterfactual. (ii) The Form and Substance The substance of the scheme is the provision of remuneration in the form of Shares to eligible employees who participate in the Plan (as well as any employees who participate in future employee share equity plans). It takes the form of payments by Company to the Trustee who acquires the Shares and transfers them to Participants. While existence of the EST confers a tax benefit, it cannot be concluded that it is the only benefit provided as outlined above. Company has argued that the form of the arrangement with the EST provides the scheme with multiple non-tax benefits and this is accepted. (iii) The Timing of the Scheme The scheme has been established for the purpose of incentivising, motivating and remunerating staff and increasing the efficiency of Company on an ongoing basis. This view is supported by the fact that the scheme operates to offer Rights to eligible Participants, with vesting over a two to three year period and then only on the basis that performance hurdles are met within the time period of 2 or 3 years. There is nothing in this factor to suggest a dominant purpose of seeking to obtain a tax benefit in relation to the scheme. (iv) The Result of the Scheme The result of the scheme is to provide Company with allowable deductions for the contributions it makes to the EST. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of the company to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances. (v) Any Change in the Financial Position of the Company As noted above, Company makes irretrievable contributions to the EST and those contributions constitute a real expense with the result that the company's financial position is changed to that extent. (vi) Any Change in the Financial Position of other Entities or Persons The contributions by the Company to the EST will form part of the corpus of the EST and must be dealt with by the Trustee in accordance with the terms of the Trust Deed i.e. for the acquisition of Shares to provide to Participants in employee share schemes. The company is not a Beneficiary of the EST and its contributions cannot be returned to it in any form except where the Trustee acquires shares from the company by subscribing for new issues at market value. Therefore, the contributions made by the company amount to a real change to the financial position of the Trustee. The financial position of Participants in the scheme will also undergo a real change. (vii) Any Other Consequence Not relevant to this scheme. (viii) The Nature of any Connection between the Company and any Other Persons The relationship between the Company and the Participants in the scheme is one of employer/employee. The Trustee is independent of the Company and is under a fiduciary obligation to act in the interests of the Beneficiaries who participate in the employee share schemes, and in particular, in this case, the Plan. The contributions made by the Company to the Trustee are commensurate with the Company's stated aim of encouraging employees to share in the ownership and the long-term success of the company. There is nothing to suggest that the parties to the employee share schemes are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit. | Detailed Reasoning - Conclusion: A consideration of all the factors referred to in paragraph 177D(b) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the Company's employees who participate in the scheme in a form that promotes the Company's business objectives, rather than to obtain a tax benefit. Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made to the Trustee to acquire Shares by the Trustee or the costs incurred by the Company in relation to the implementation and on-going administration of the Plan and the Trust. Question 4 Is the provision of Shares to employees pursuant to the Performance Rights Plan Rules (PRP) arrangements subject to fringe benefits tax (FBT) within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? Answer | Detailed Reasoning - Detailed reasoning: A 'fringe benefit' will only arise under subsection 136(1) of the FBTAA where benefits are provided by employers to employees or associates of employees. Under the definition of 'fringe benefit', a benefit must also be provided 'in respect of the employment of the employee'. No amount will be subject to FBT unless a 'fringe benefit' is provided. Paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include: 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; The terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10 of the ITAA 1997. The Commissioner accepts that the PRP described in the applicant's private ruling application is an employee share scheme under which relevant ESS interests (being rights to acquire shares) are acquired by employees of the Company (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to those employees' employment. The shares acquired by the trustee under the PRP to satisfy rights to acquire shares are also provided to employees under that same employee share scheme. The Commissioner also accepts that the PRP is an employee share scheme under which the relevant ESS interests (being the beneficial interests in the shares) are acquired by employees of the Company (or 'associates of those employees'), and the acquisition of those ESS interests is in relation to those employees' employment. Therefore, the granting of rights to acquire shares under the PRP and the granting of shares under the PRP to employees will not be subject to FBT because they are specifically excluded from being a 'fringe benefit'. However, Shares granted to employees under the PRP to satisfy Rights to acquire Shares are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies pursuant to subsection 83A-20(2). Subsection 83A - 20(2) of the ITAA 1997 states: 83A-20(2) However, this subdivision does not apply if the ESS interest is a beneficial interest in a share that you acquire as a result of exercising a right, if you acquired a beneficial interest in the right under an employee share scheme. Therefore, the providing of these Shares will not be specifically excluded from the definition of 'fringe benefit' under paragraph (h) of the definition in subsection 136(1) of the FBTAA. Essentially, this means that Shares granted under the Plan, to satisfy Rights, are not ESS interests acquired under an employee share scheme. Consequently, the acquisition of the Shares (as a result of exercising Rights), is not excluded from being a fringe benefit by virtue of the definition of fringe benefit in subsection 136(1) of the FBTAA. However, for a benefit to be a fringe benefit, it must be provided in respect of the employment of the employee. The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. The court at ATC 4158 said: Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, casual connection or relationship between the benefit and the employment. The situation is similar to that which existed in FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The full Federal Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years. When an employee accepts to participate in the plan, they obtain a Right to acquire a beneficial interest in a Share in the Company and this Right constitutes an ESS interest. When this Right is subsequently exercised, any benefit received would be in respect of the exercise of the Right, and not in respect of employment. Therefore, the benefit that arises to an employee upon the exercise of a Right under the incentive plan will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee. | Detailed Reasoning - Question 5: Are irretrievable contributions of money to the Trustee of the EST to fund the acquisition of Shares subject to FBT within the meaning of subsection 136(1) of the FBTAA? Answer No. | Detailed Reasoning - Detailed reasoning: Paragraph (ha) of 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); An employee share trust (EST) 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 EST for an employee share scheme (having the meaning given by subsection 83A -10(2) of the ITAA 1997) is a trust whose sole activities are: · obtaining shares or rights in a company; and · 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: · the company; or · a subsidiary of the company; and · other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). A payment of money by the Company to the EST is therefore not subject to FBT provided that the sole activities of the Trust are obtaining Shares or Rights to acquire Shares in the Company. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85)4)(b) of the ITAA 1997 will also require that the Trustee undertake incidental activities that are a function of managing the PRP and administering the EST. For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, ATO ID 2007/179 sets out the Commissioner's views on when an employee share trust satisfies the sole activities test. In particular, the Commissioner considers that activities that are a necessary function of managing an employee share scheme and administering a trust will satisfy the sole activities test. Such activities include: · the opening and operating of a bank account to facilitate the receipt and payment of money; · the receipt of dividends in respect of shares held by the EST on behalf of an employee, and their distribution to an 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 purpose 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. · 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 sole purpose of the trust is to acquire and hold plan share pursuant to the PRP for the benefit of Participants. It is accepted that the EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997. The functions of the Trustee of the EST (acquiring, holding and allocating ESS interests) are limited to those activities mentioned in paragraphs 130-85(4)(a) and (b) of the ITAA 1997, or are merely incidental activities as referred to in paragraph 130-85(4)(c) of the ITAA 1997. As 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, the Company will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the EST to fund the acquisition of Company shares in accordance with the Trust Deed. | Detailed Reasoning - Question 6: Will the Commissioner seek to apply section 67 of the FBTAA to the proposed arrangements? | Detailed Reasoning - Advice/Answers: No. | Detailed Reasoning - Detailed reasoning: Law Administration Practice Statement PS LA 2005/24 (PS LA 2005/24) has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 provide as follows: 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) 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 FBT 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, 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. In this case, benefits provided to the Trustee of the EST by way of irretrievable contributions to the EST, and to eligible employees by way of Rights and Shares under the PRP are excluded from the definition of a 'fringe benefit' for the reasons given in the response to questions (4) and (5) above. Therefore, as these benefits have been excluded from the definition of a 'fringe benefit' and there is also no FBT currently payable under the PRP, nor likely to be payable, the FBT 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 the Company in relation to a tax benefit obtained under the PRP from irretrievable cash contributions made by the Company to the Trustee of the EST to fund the acquisition of Shares in accordance with the Trust Deed.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The following documents form part of the relevant facts: | Application for Private ruling | Performance Rights Plan Rules ("PRP" or "Rules"). | Performance Rights Plan Trust Deed ("Trust Deed") | Financial reports for the year ended 30 June 2010 and 2011. | Sample offer letters of invitation to employees including performance hurdles schedule and acceptance form. | The Company's Remuneration and Incentive Programmes: The design of effective remuneration packages is a key aspect of the Company's strategy to retain and attract high-quality staff. As the Company has grown, it has faced increased competition in attracting and retaining staff, particularly from larger or listed competitors. | The Company is focused on rewarding staff performance by enabling the staff to participate in its future growth and profitability in order to facilitate an increase in shareholder value. | As part of this growth strategy the Company has a long term incentive plan in place, providing grants of performance rights to eligible staff. | Under the Company's existing long term incentive structure, eligible directors and employees ("Participants") receive Performance Rights under the Company's Performance Rights Plan Rules ("PRP"). | The Performance Rights ("Rights") are issued in accordance with the guidelines established by the Company's Remuneration Committee. | Operation of the Plan: The Company, at the sole discretion of the board, may issue invitations to an eligible employee to participate in the plan and thereby become a "Participant" in the Plan. | On acceptance of the invitation by the Participant, the board, at its sole discretion, may issue Rights to the Participant. | The Rights will vest to the extent that performance hurdles are met during the performance period at which point all or a portion of the Rights will be convertible into Company shares ("Shares"). | Performance Rights are granted to eligible Participants for nil consideration. | Operation of the Trust: An employee share trust (EST) has been established as a separate vehicle for the sole purpose of acquiring ordinary shares in the Company for the benefit of eligible Participants under the Company's employee equity plans. | The trustee of the Trust is XYZ Pty Ltd ("Trustee"). | The Trustee is an unrelated entity to the Company. | Contributions made to the Trust by The Company: Shares are acquired by the Trustee through contributions made by the Company to the Trustee. | Shares acquired are held by the Trustee absolutely on behalf of the Participants. This arrangement is referred to as the Company Employee Performance Rights Plan ('PRP') or simply 'the Plan' in the application. | The Company has set up the EST to allow employees to participate in the equity of the Company as follows: The EST has been established for the sole purpose of subscribing for or acquiring, delivering, allocating and holding shares in the company under the Company's PRP, including outstanding awards and future awards. | The sole activities of the Trustee will be acquiring shares for the purpose of providing them to Participants at a discount and the administration of the trust, | The Trustee will acquire shares at market value and will have the discretion to acquire them on- or off-market or by subscribing for new shares. | The Trustee will, in accordance with instructions received pursuant to the Plan Rules, acquire, deliver and allocate Shares for the benefit of a Participant provided that the Trustee receives sufficient payment to subscribe for or purchase Shares and/or has sufficient unallocated Trust Shares available. | Shares will not be allocated to employees under the EST and no interest in the Shares will arise until the relevant performance/vesting hurdles are met and the equity interest has been exercised. | Participants are absolutely entitled to the Shares as against the Trustee from when vesting occurs and the Shares are allocated to them. While such Shares are held in trust, the Participant may be entitled to dividend and voting rights. | All funds received by the Trustee from the company will constitute accretions to the corpus of the Trust and no Participant will be entitled to receive such funds. | The funds will not be repaid to the company (i.e. the contributions will be irretrievable). However the Trustee may apply part of the funds received to subscribe for Shares in the Company, which would require a payment to the Company. | Where an amount paid by the Company to the Trustee in respect of the acquisition of Shares for the benefit of a Participant is in excess of the amount required by the Trustee to acquire those Shares, the Company may require the Trustee to apply such amount to acquire, deliver or allocate Shares in accordance with the Trust Deed, the relevant Plan Rules or the relevant terms of participation, or deposit the funds into any account opened and operated by the Trustee. | To the extent that vesting or performance conditions are not met, or the equity interests are otherwise forfeited in accordance with the PRP, the Shares are forfeited to the Trustee who acquires the Shares. | The Trustee will not be permitted to offer, issue or acquire any Share or any Rights to any Share if to do so would contravene any 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. 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 from the relevant Plan Rules. | The Company will have no interest in the Shares held by the Trust. | Assumptions: The Plan and the Trust are administered in accordance with their terms. | All entities referred to are residents of Australia for income tax purposes.