Private ruling: Employee share trust
Date of advice: 17 May 2016
Published: July 2016
Ruling period: For the income years ending | 30 April 2016 | 30 April 2017 | 30 April 2018 | 30 April 2019 | 30 April 2020

Ruling: Q1: Will the Company obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 ( ITAA 1997) for irretrievable cash contributions made by the Company or a subsidiary member of the Company income tax consolidated group (the Group) to the Trustee of the Employee Share Trust (the EST) where such funding is in accordance with the purpose, terms and conditions of the Employee Equity Plans? | A1: Yes | Q2: Will the Company obtain a deduction under section 8-1 of the ITAA 1997 for costs incurred by the Group in relation to ongoing administration of the EST? | A2: Yes | Q3: Are the irretrievable cash contributions made by the Group to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company shares by the EST to satisfy ESS interests issued under the Employee Equity Plans, deductible to the Company at a time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests? | A3: Yes | Q4: Do the subscription proceeds paid by the Trustee of the EST to the Company for the subscription of new shares constitute assessable income of the Company 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? | A4: No | Q5: Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to any aspect of the arrangement(s) described in the Facts to deny, in part or in full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company or the Group to the Trustee of the EST to fund the subscription for or acquisition on-market of Company shares by the EST? | A5: No | Q6: Will the provision of Performance Rights, deferred rights or shares under the Employee Equity Plans to executive employees of the Group constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | A6: No | Q7: Will the irretrievable cash contributions made by the Company or any other subsidiary member of the Group to the Trustee of the EST to fund the subscription for or acquisition of Company shares on-market constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | A7: No | Q8: Will the Commissioner make a determination under section 67 of the FBTAA in respect of any aspect of the Employee Equity Plans or EST arrangement? | A8: No

Relevant facts and circumstances: Background The Company is an Australian company listed on the Australian Securities Exchange the head company of an income tax consolidated group (the Group). The Company considers its employees important to its success as a business. The remuneration policy of The Company is designed to be competitive and equitable with the aim of aligning the economic interests of key company executives with those of the shareholders by providing an opportunity for key executive employees to potentially earn significant rewards by participating in the Short Term Incentive Scheme (STI) and the Executive Performance Rights Plan (EPR), together referred to as the Employee Equity Plans. The Company has established the Employee Share Trust (EST) to obtain Shares for the benefit of participants in the Employee Equity Plans operated by the Company. The EST is operated by an unrelated corporate trustee (the Trustee). Short Term Incentive Scheme (STI) The Short Term Incentive Scheme 20ZZ Rules (20ZZ Rules) provide the rules for remunerating eligible employees for the service period from 1 July 20VV to 30 June 20ZZ. Where the Company offers a STI in future years, the STI will operate in accordance with the terms and conditions provided in the 20ZZ Rules. 20ZZ Rules The objective of the STI is to drive a high performance culture and retain key talent with a tangible incentive scheme as part of a total rewards package. Participation in the scheme is by invitation only. The STI rewards are calculated as a number of months of an employee's total employment cost (TEC) multiplied by the achieved performance measure up to a maximum of 100% of pro-rata TEC. The STI can consist of a cash component and a deferred rights component. Where an employee is eligible to participate in the Company's deferred STI arrangements, the Board determines the portion of the reward to be deferred and the employee will be provided with deferred STI documentation at that time. Under 20ZZ Rules the reward amount comprised of two components - a cash component and a deferred rights component. The cash component comprises X% of the overall reward amount whereas the deferred rights component represents the remaining Y% of the reward amount. The cash component was paid to employees after the ASX release of the Company's annual financial results in August 20ZZ. The deferred rights component was delivered in the form of rights to acquire ordinary shares in the Company. The number of rights issued equated to Y% of the overall reward amount divided by the Company volume weighted average share price for the five business days up to October 20ZZ (following the performance period ending June 20ZZ). The rights vested on June 20AA. The rights would have lapsed if the employee resigned or was summarily dismissed before this date, unless the Board determines otherwise. Once the deferred rights vested, the Company either allocated a Share for each right that vested, or instructed the Trustee of the EST to subscribe for, acquire or allocate one share in the Company for each right which vested. Any Shares issued/allocated on vesting may be held via the EST. In the event that the Shares are held on trust in the EST on behalf of the employees, the employees are the beneficial owner of the Shares, with full voting and dividend rights. The Shares the employee received following the vesting are subject to trading restrictions. When the employee leaves the Company the Unrestricted Shares are transferred from the EST to the employee as Fully Paid Ordinary shares. However, the employee may request the withdrawal the Unrestricted Shares from the EST at any time prior to ceasing employment. No amount was payable by the employee to the Company or the Trustee on the vesting of the rights. Executive Performance Rights Plan (EPR) The purpose of the EPR is to encourage key executives to focus on long term Company performance and the achievement of sustainable growth. It provides key executives with the opportunity to receive equity-based reward and thereby aligns their interests with shareholders' interests and encourages them to take a shareholder's perspective. The EPR is administered by the Board of The Company in accordance with the Executive Performance Rights Plan Rules which commenced in November 20VV (the Plan or Plan Rules). There are currently three programs operating as part of the EPR plan. It is at the Board's absolute discretion to issue an invitation to certain employees (Eligible Executives) to apply for the grant of specified number of Performance Rights on the terms set out in the Plan and on such additional terms and Performance Conditions as the Board determines (Clause 2.1). Unless the Board otherwise determines, no amount is payable in relation to the grant or vesting of a Performance Right (Clause 2.1). The Eligible Executive may apply for up to the number of Performance Rights specified in their invitation (clause 3.2). A Performance Right may be a) a right to acquire a Share or a right to subscribe for a Share: or b) a right for the Trustee to subscribe for, acquire and/or allocate a Share and to hold the Share on behalf of the relevant Participant (Clause 4.1). Each Performance Right granted under the Plan will vest on the date specified in the invitation and is conditional on the satisfaction of the Performance Conditions attaching to the Performance Right or as determined by the Board (Clause 5.1). A Participant is a person who has been granted a Performance Right under the Plan (Clause 1.1). Clause 5.2 provides the circumstances when an unvested Performance Right will lapse. Where a Participant ceases to be an employee of the Company or one of its subsidiaries, the Board in its discretion may determine some or all Performance Rights held will lapse, vest (immediately or subject to conditions), or will no longer be subject to some conditions or restrictions previously applied (Clause 5.3). Unvested Performance rights may be cancelled if a Participant and the Board have agreed to the cancelation in writing (Clause 5.7). Upon the vesting of Performance Rights, the Participant becomes entitled to be issued, transferred or allocated the relevant Shares as soon as practicable after the date of vesting (Clause 5.8(b)). Once the Performance Rights vest, the Board must determine to either: a) Issue or transfer the Share in respect of each Performance Right to the Participant, or b) Instruct the Trustee of the EST to subscribe for, acquire and/or allocate one Share in respect of each Performance Right of the Participant, such Shares are to be held by the Trustee in the Trust on trust for the Participant subject to the terms of the Trust Deed (Clause 5.8(c). Performance Rights do not carry voting or dividend rights, however Shares allocated upon vesting of Performance Rights will rank equally in all respects with Shares of the same class (Clause 5.8(d)). The Board may determine that a restriction period will apply to the Shares following the vesting of the Performance Rights (Restricted Shares) up to a maximum of 7 years from the Grant Date (Clause 6.1). Any Shares held in the Trust for the benefit of the Participant will remain in the Trust until the Participant submits a Withdrawal Notice to the Company which is approved by the Board and the Shares have ceased to be Restricted Shares (Clause 8). A Participant is entitled upon vesting of a Performance Right, to receive in addition to the Share, the number of Securities issued by way of a 'bonus issue' which the Participant would have received if the Performance Right had vested before the record date for the bonus issue (Clause10.1). The Employee Share Trust The EST is operated by the Trustee in accordance with the Trust Deed. The EST has been established for the sole purpose of obtaining shares for the benefit of Participants, including subscribing for or acquiring, allocating, holding and delivering Shares in the Company under the EPR, and any other employee equity plans for the benefit of Participants (Recitals B). The Trust Deed defines Participant as 'a former, current or future employee or director of the Group who is participating, or who may participate in the future, under the terms of a Plan or Plans and who receives Shares to be held by the Trustee under the terms of this Deed' (Clause 1.1). The Group is defined as 'the Company and any Related Body Corporate of the Company, but not including the Trustee (Clause 1.1). The Shares acquired or subscribed for by the EST are held by the Trustee on trust for the Participant on the terms of the Trust Deed and subject to the Plan Rules and Terms of Participation (Clause 3.1). The Company does not have any charge, lien or any other proprietary right or interest in the Shares acquired by the Trustee (Clause 3.4). At no time will any member of the Group or the Trustee be entitled to obtain any beneficial interest in the Trust Assets, other than the Trustee's right of indemnity (Clause 3.5). Subject to the Trust Deed, the Trustee has the full power to do all things a trustee is permitted to do by law in respect of the Trust, the Trust Shares and the Trust Assets, including the activities listed in Clause 4.1. Without limiting the generality of clause 4.1, the Company and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of section 130-85(4) ( Clause 4.2). If the Trustee holds Shares otherwise than for a specified Participant, the Trustee may, on instructions from the Board, sell the Shares to a third party or accept the offer to buy back the Shares by the Company (Clause 4.3) Clause 4.5 of the Trust Deed deals with remuneration of the Trustee and provides: The Trustee is not entitled to receive from the Trust any fees, commission or remuneration in respect of its performance of its obligations as trustee of the Trust. The Company may pay to the Trustee from the Company's own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as the Company and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement. If the Trustee receives a notice from the company(as specified in clause 6.1), subject to the Trustee receiving sufficient payment or having must sufficient capital as required by that notice, the Trustee must within seven days after the receipt of that notice, a) purchase the requisite number of Shares on behalf of the Participants either on market or off market b) subscribe for Shares of the Company on behalf of the Participants c) allocate Shares that are trust assets (not being held on behalf of any other Participant) to be held on behalf of the Participants, or d) effect a combination of the above acts (Clause 6.2). The subscription price of the Shares must be the market value of the Shares as determined by the Board on the date the shares are issued to the Trustee unless the Board determines otherwise (Clause 6.3). Clause 6.4 of the Trust Deed deals with the funding of the EST: (a) The Company must provide the Trustee, or cause the provision to the Trustee of, any funds required by the Trustee in order to comply with its obligations under clause 6.2 (after application by the Trustee of any capital as provided by clause 6.1(d)(ii). (b) Subject to clause 6.4(c), all funds received by the Trustee from the Company will constitute Accretions to the corpus of the Trust and will not be repaid to the Company and no Participant shall be entitled to receive such funds. (c) Funds received by the Trustee from the Company may be paid to the Company where the Trustee subscribes for Shares in accordance with this Deed, the relevant Plan Rules or relevant Terms of Participation. (d) 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 subscribe for, acquire, allocate, or deliver those Shares, the Board may require the Trustee to: (i) apply such amount to subscribe for, acquire, and/or allocate and deliver Shares in accordance with this Deed, the relevant Plan Rules or the relevant Terms of Participation; or (ii) deposit the funds into any account opened and operated by the Trustee in accordance with clause 4.1(k) to be used for the purposes set out in clause 6.4(d)(i) above. The Trustee may not exercise any voting rights, participate in rights issues or hold any bonus shares in relation to unallocated trust shares. The Trustee may, however, apply any capital receipts, dividends or other distributions received in relation to the unallocated shares to purchase further shares to be held on trust (Clause 8.1). The structure of the EST and rules of the Employee Equity Plans, are such that shares allocated to each Participant will generally be transferred into the name of the relevant Participant (or their nominee) on receipt of a Withdrawal Notice, subject to any Restrictive Period (Clause 11.2). The Trustee will also, after any relevant restrictions lift, be permitted to sell shares on behalf of a Participant where permitted by the relevant Plan rules (Clause 12.1). If the EST is terminated, the Trustee must not pay any balance remaining after the distribution of trust assets to any member of the Group (Clause 17.3).

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 section 66 | Fringe Benefits Tax Assessment Act 1986 section 67 | Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 Division 20 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 paragraph 130-85(4) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: An employer is entitled to a deduction under section 8-1 for a contribution paid to the trustee of an employee share trust that is either: • incurred in gaining or producing assessable income ('first limb') or • necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income ('second limb'), to the extent the contribution is not of capital or of a capital nature. To qualify for a deduction under section 8-1 a contribution to the trustee of an employee share trust must be incurred. As a broad guide, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape. A contribution made to the trustee of an employee share trust is incurred only when the ownership of that contribution passes from an employer to the trustee of the employee share trust and there is no circumstance in which the employer can retrieve any of the contribution - Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001 ; Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650 2004 ATC 4674; 55 ATR 745. The Company established the EST under the terms of the Trust Deed. The Trust's sole purpose is of obtaining Shares for the benefit of Participants, including subscribing for or acquiring, allocating, holding, and delivering Shares under the EPR and the STI (and other employee equity plans) for the benefit of Participants. The EST is funded by cash contributions from the Company or a subsidiary member of the Group for the purchase of Shares under the Employer Equity Plans. All funds received by the Trustee from the Company or the Group will constitute accretions to the corpus of the Trust and will not be repaid to the Company or the Group and no Participant will be entitled to receive the funds. The Deed does not confer on the Company any charge, lien or any other proprietary right or interest in the Shares acquired by the Trustee in accordance with the Deed. At no time, including the termination of the EST, will any member of the Group be entitled to obtain any beneficial interest in the Trust Assets. Given these facts, it is considered that the contributions made to the Trustee of the EST by the Company or the Group are irretrievable and will be losses or outgoings incurred at the time the contributions are made. Further, to be deductible under section 8-1, a contribution must have been incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. In order to satisfy the second limb of section 8-1 there must be a relevant connection between the outgoing and the business. An expense will have the relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' ( Ronpibon Tin NL and Tongkah Compound NL v. FC of T ( 1949) 78 CLR 47 at 55-58; [1949] HCA 15 at [9]-[15] (Ronpibon) ; Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation [1980] FCA 150; 80 ATC 4542 at 4559-4561; (1980) 11 ATR 276 at 294-297 (Magna Alloys)). It is considered that the Company is carrying on a business and when the Company or a member of the Group makes a contribution to the Trustee of the EST, its primary purpose is for the contribution to be applied to the direct provision of remuneration of its employees in the form of Shares in the Company in accordance with the EPR and the deferred rights component of STI Rules. Where the Trustee has a received a notice from the Board and the Trustee must, subject to the Company or the Group providing funds or having sufficient capital of the Trust, purchase or subscribe for the requisite number of Shares within seven days (Clause 6.2 of the Deed). Consequently, we consider that contributions made to the Trustee of the EST by the Company or a member of the Group for the purpose of remunerating its employees in the form of Shares under the Employee Equity Plans is an outgoing in carrying on the Company's business for the purpose of gaining or producing assessable income. Where a contribution satisfies either limb of subsection 8-1 (1), it may still be capital or of a capital nature. Pursuant to subsection 8-1(2), the contribution will not be deductible under section 8-1 to the extent to which it is capital or of a capital nature. Whether an outgoing is capital or revenue in nature can generally be determined by reference to the test articulated by Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337; 5 ATD 23; (1938) 1 AITR 403 : There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay... A contribution to the trustee of an employee share trust is of capital or of a capital nature where the contribution secures for an employer an asset or advantage of an enduring or lasting nature that is independent of year to year benefits that the employer derives from a loyal and contented workforce. Where a contribution is, ultimately and in substance, applied by the trustee of an employee share trust to subscribe for equity interests in the employer (for example shares), the employer has also acquired an asset or advantage of an enduring nature. The combined operation of subsections 8-1(1) and 8-1(2) may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a differing nature. Where a contribution is made for the purpose of securing for the employer advantages of both a revenue and capital nature, but the advantages of a capital nature are only expected to be very small or trifling by comparison, apportionment may not be required. Where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period of the contribution being made, it is considered that any amount of the contribution attributable to securing a capital structure advantage will only be very small or trifling where it is intended that: • any direct interest in the employer acquired by the trustee of the employee share trust (for example shares) will be transferred to employees within that relatively short period, and • such shares will not be on-sold to third parties at that time or shortly thereafter. Where the Company or a member of the Group makes contributions of funds to the EST, Trustee is required to purchase or subscribe for Shares on behalf of the Participants within seven days of receiving the notice from the Board. Under the EPR there is a three year performance period and where the performance conditions are satisfied the Performance Rights will vest and the Participant becomes entitled to be issued, transferred or allocated the relevant Shares. Under the STI, the performance period is for one year and the deferred rights will vest at the end of the financial year following the service period. On weighing up the facts in this case we consider the capital structure advantage will only be very small or trifling and apportionment for the capital structure advantage will not be required. Accordingly, where irretrievable cash contributions are made by the Company or by a subsidiary member of the Group to the Trustee of the EST in accordance with the purpose, terms and conditions of the Employee Equity Plans, the amount will be deductible to the Company under section 8-1. As discussed in question 1 above, section 8-1 provides that 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. The Company and the Group will incur ongoing costs associated with the administration of the EST. These administration costs are part of the ordinary recurring cost to the Company of implementing the Employee Equity Plans and remunerating its employees and are therefore deductible under section 8-1. The deduction under section 8-1 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. Section 83A-210 provides 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. Section 83A-210 will only apply if there is a relevant connection between the irretrievable cash contributions (the money) provided to the trustee for the purpose of enabling an employee in acquire (directly or indirectly) an ESS interest under an employee share scheme and the contributions are made before the income year in which the employee acquires the ESS interest. Arrangement The implementation of Employee Equity Plans, the establishment of the EST under the Trust Deed and the provision of money by the Company or the Group to the Trustee of the EST to acquire and hold Shares on behalf of Participants, are considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i). ESS interest An ESS interest in a company is defined in subsection 83A-10(1) 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. Under the Employee Equity Plans, a deferred right provided under the STI or the Performance Right granted under the EPR is an ESS interest as it is a beneficial interest in a right to acquire a beneficial interest in share in the Company. ESS scheme An employee share scheme is a scheme under which ESS interests in a company (or subsidiaries of the company) are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2)). Subsection 995-1(1) defines the term 'scheme' to include any arrangement, or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The Employee Equity Plans are employee share schemes for the purposes of Division 83A as each is an arrangement under which an ESS interest (a right to acquire a beneficial interest in a share), is provided to a Participant in relation to their employment in the Group, in accordance with Trust Deed. Relevant connection The granting of Performance Rights and deferred rights, the provision of the irretrievable contributions to the Trustee under an arrangement for the purpose of acquiring and holding Shares and the allocation of Shares to the Participants are all interrelated components of the Employee Equity Plans. All the components of the scheme must be carried out so that the scheme can operate as intended. The provision of irretrievable contributions to the Trustee is necessary to allow the Plans to proceed. Accordingly, the provision of money by the Group to the Trustee to acquire Shares is considered to be for the purpose of enabling the Participants, indirectly as part of the Employee Equity Plans, to acquire the relevant ESS interests (the Performance Rights and deferred rights). If the irretrievable contributions are provided by the Group to the Trustee before the income year in which the relevant ESS interests are acquired by a Participant, then section 83A-210 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1. In this instance, the irretrievable contributions will only be deductible in the income year in which the relevant ESS interests are acquired by the Participants. If the irretrievable contributions are provided in or after the income year in which the ESS interest is acquired by the Participant, section 83A-210 will not apply and the irretrievable contributions will be deductible under section 8-1 in the income year in which the expenses are incurred. Ordinary income Section 6-5 provides that assessable income includes income according to ordinary concepts which is called ordinary income. The classic definition in Australian law was given by Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215. Chief Justice Jordan considered that: The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts. The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that: The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description. In GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. They further stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. Periodicity, recurrence and regularity are regarded the most visible indicators of ordinary income. As a more general rule, amounts received as a result of carrying on a business should also represent ordinary income. Importantly, however, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. The decision in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337 (Sun Newspapers) is a leading authority on the distinction between revenue and capital expenditure, where his Honour said at 363: There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment. In accordance with the Trust Deed, if the Trustee subscribes for an issue of Shares, it pays the market value of the Shares as determined by the Board on the date the Shares are issued to the Trustee and the Company receives a contribution of share capital for the Shares from the Trustee. The character of the contribution for share subscription from the Trustee of the EST can be determined by the character of the right or thing disposed of in exchange for the receipt. Here the Company is issuing the Trustee with new Shares in itself. The character of the newly issued Share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature. Accordingly, when the Company receives subscription proceeds from the Trustee of the EST for new Shares in the Company to satisfy obligations to the Participants under the Employee Equity Plans, the subscription proceeds received are a capital receipt and therefore not ordinary income under section 6-5. Section 20-20 Assessable recoupments Under Subdivision 20-A, certain amounts received by way of insurance, indemnity or other recoupment are assessable income if the amounts are not income under ordinary concepts or otherwise assessable. Specifically, under subsection 20-20(2), an amount you have received as recoupment of a loss or outgoing is an assessable recoupment if: (a) you received the amount by way of insurance or indemnity; and (b) you can deduct an amount for the loss or outgoing for the *current year, or you have deducted or can deduct an amount for the loss or outgoing for an earlier income year under any provision of this Act. The subscription proceeds received by the Company from the Trustee of the EST are for the issuing of new Shares in accordance with the Employee Equity Plans. The character of the subscriptions paid to the Company for Shares is not one of insurance, indemnity or other recoupment of a previously deducted loss or outgoing. Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20. Capital gains tax Section 102-20 states that you make a capital gain or loss, if and only if a CGT event happens. The relevant CGT events that may be applicable when the subscription proceeds are received by The Company are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset). However, paragraph 104-35(5)(c) states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, the Company will issue Shares, being equity interests as defined in section 974-75, to the Trustee of the EST, therefore CGT event D1 does not happen. In relation to CGT event H2, paragraph 104-155(5)(c) states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Therefore, CGT event H2 will also not occur. Since no CGT event occurs, there will be no amount that will be assessable as a capital gain to the Company. Therefore, when the Trustee of the EST satisfies the obligations under the Employee Equity Plans by subscribing for new Shares in the Company, the subscription proceeds will not constitute the assessable income of the Company under section 6-5 or section 20-20, nor trigger a CGT event under Division 104. 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 of the ITAA 1936, and • 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. On the basis of an analysis of these requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by the Company in respect to the irretrievable cash contributions made by the Company or any subsidiary member of the Group to the Trustee of the EST to fund the subscription for or acquisition on-market of the Company Shares by the EST. An employer's liability to Fringe Benefits Tax (FBT) arises under section 66 of the FBTAA which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a fringe benefit is provided. 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 by the employer or an associate of the employer in respect of the employment of the employee. However, certain benefits are excluded from being a fringe benefit by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. Paragraph (h) of the definition of 'fringe benefit' states that a fringe benefit does not include: (h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83AB or 83AC of that Act applies. The Commissioner accepts that the Employee Equity Plans are employee share schemes, that the rights provided under the EPR and STI are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests. Accordingly, the provision of rights pursuant to the Employee Equity Plans will not be subject to FBT on the basis that they are acquired by Participants under an employee share scheme (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA. Shares As stated above, a fringe benefit is a benefit provided to an employee or an associate of an employee 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. Heerey, Merkel and Finkelstein JJ at page 410 stated: 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, causal connection or relationship between the benefit and the employment. The situation is similar to that which existed in Federal Commissioner of Taxation 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 Court ruled 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 rights granted under an employee share scheme are exercised, and shares are allocated by the employer, it is considered that the benefit that arises comes as a consequence of the employee exercising the rights previously obtained under the scheme, and not in respect of employment. Therefore, the benefit that arises to an employee upon the vesting of a Performance Right or a deferred right under the Employee Equity Plans (being the provision of a Share) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee. Paragraph (ha) of the definition of a fringe benefit in subsection 136(1) of the FBTAA states that a fringe benefit does not include: 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) as having the meaning given by subsection 130-85(4). Subsection 130-85(4) provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2) 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). The terms 'ESS interest' and 'employee share scheme' as defined in section 83A-10 were considered in question 3 and it is accepted the Employee Equity Plans will be employee share schemes under which the ESS interests (Performance Rights or deferred rights) are provided to employees of the Company. The Company has established the EST under the Trust Deed and the EST's sole purpose of obtaining and allocating Shares to satisfy the ESS interests of Participants acquired under the Employee Equity Plans. There are some incidental activities undertaken by the Trustee to manage and administer the EST, as provided in clause 4.1 of the Trust Deed. Therefore, the EST is an employee share trust, as defined in subsection 995-1(1), as the activities of the Trust meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). As such, 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. Accordingly, the irretrievable cash contributions the Company or any other subsidiary member of the Group makes to the Trustee of the EST to fund the subscription for or acquisition on-market of the Company Shares, in accordance with the Trust Deed, will not constitute a fringe benefit under subsection 136(1) of the FBTAA. Section 67 of the FBTAA is the general anti-avoidance provision in the FBTAA. PSLA 2005/24 provides guidance on the application of section 67 of the FBTAA 1986. Paragraphs 145-148 state: 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 any other 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 and or could reasonably be expected to be included in the aggregate fringe benefits amount, if the arrangement had not been entered into. The Commissioner will only make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. In Miscellaneous Taxation Ruling MT 2021, at Appendix 1 Question 18, 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… Under the arrangement, the benefits provided to the Trustee by way of irretrievable cash contributions to the EST and to Participants by way of the provision of Performance Rights and deferred rights are excluded from the definition of a fringe benefit for the reasons given in questions 6 and 7 above. Consequently, no amount could reasonably be expected to be included in the aggregate fringe benefits amount if the arrangement had not been entered into. Therefore, the fringe benefits tax liability is not any less than it would have been but for the arrangement. The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of the Company, or any subsidiary member of the Group, in respect of the Employee Equity Plans and the EST arrangement.

Reasons for decision: All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. | ATO view documents: ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust | ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities | ATO ID 2010/219 Fringe Benefits Tax - Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme. | ATO ID 2010/142 Fringe Benefits Tax - Employee share scheme: indeterminate rights not fringe benefits | ATO ID 2014/42 Income tax - Employer costs for the purpose of administering its employee share scheme are deductible | Miscellaneous Taxation Ruling MT 2021 Fringe Benefits Tax-Response to questions by major rural organisation | Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules | Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions | Draft Taxation Ruling TR 2014/D1 Income tax - employee remuneration trust arrangements | Ronpibon Tin NL and Tongkah Compound NL v. FC of T (1949) 78 CLR 47; [1949] HCA 15 | Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation [1980] FCA 150; 80 ATC 4542; (1980) 11 ATR 276 | Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337; 5 ATD 87; (1938) 1 AITR 403