Private ruling: Employee share scheme
Date of advice: 12 May 2023
Published: 26 June 2023
Ruling period: In relation to income tax: | 1 January 20XX to 31 December 20XX | 1 January 20XX to 31 December 20XX | 1 January 20XX to 31 December 20XX | 1 January 20XX to 31 December 20XX | 1 January 20XX to 31 December 20XX | In relation to fringe benefits tax: | 1 April 20XX to 31 March 20XX | 1 April 20XX to 31 March 20XX | 1 April 20XX to 31 March 20XX | 1 April 20XX to 31 March 20XX | 1 April 20XX to 31 March 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: Will the Taxpayer as the parent company of the Taxpayer consolidated group (Taxpayer Group) obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by Taxpayer to the Trustee of the Trust (Trustee) to fund the subscription for shares by the Trustee of the Trust under the employee share option plan (the Plan)? | A3: Yes. | Q2: Are irretrievable cash contributions made by the Taxpayer Group to the Trustee, to fund the subscription for the Taxpayer shares by the Trust, deductible to the Taxpayer Group under section 8-1 of the ITAA 1997 at a time determined by section 83A-210 of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests? | A4: Yes. | Q3: If the Trust satisfies its obligation under the Taxpayer's Plan by subscribing for new shares in the Taxpayer, are the subscription proceeds included in the assessable income of the Taxpayer Group under section 6-5 or 20-20 of the ITAA 1997 or will they trigger a capital gains tax (CGT) event for the Taxpayer Group under Division 104 of the ITAA 1997? | A5: No. | Q4: Would the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by the Taxpayer Group for the irretrievable cash contributions made by the Taxpayer Group to the Trustee to fund the subscription for the Taxpayer shares in respect of Participants, where a share is a fully paid ordinary share in the capital of the Taxpayer? | A6: No. | Q5: Would the provision of stock options or shares by the Taxpayer to its employees under the Plan be a fringe benefit provided by the Taxpayer within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A7: No. | Q6: Are the irretrievable cash contributions made by the Taxpayer (or any subsidiary) to the Trustee, to fund the subscription for the Taxpayer shares in respect of Participants, treated as fringe benefits provided by the Taxpayer within the meaning of subsection 136(1) of the FBTAA? | A8: No. | Q7: Would the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount to the Taxpayer by the amount of tax benefit gained from irretrievable cash contributions made by the Taxpayer (or any subsidiary) to the Trustee, to fund the subscription for the Taxpayer shares? | A9: No.

Relevant facts and circumstances: The Taxpayer is an Australian private company. The Taxpayer is the parent company of an income tax consolidated group. The Taxpayer conducts a business. The Taxpayer Group remunerates employees by evaluating comparable positions in similar companies and industries. The Taxpayer Group is seeking to implement the employee share scheme (ESS) to reward certain key employees for their contribution to the company's success and share in the growth of the company. Employees within the Taxpayer Group will be eligible to participate in the Plan and may be granted stock options that can be exercised to receive shares in the Taxpayer, subject to satisfying the vesting conditions. The Plan The Employee Share Option Plan (the Plan) is a plan to which Subdivision 83A-B of ITAA 1997 applies. The Plan rules broadly operate to provide eligible employees (Participants) with the opportunity to acquire stock options to receive shares in the Taxpayer. In order to receive shares, the Participant must satisfy all relevant vesting criteria in accordance with the Plan rules. Where the vesting criteria are satisfied, then following payment of any exercise price, the Participant will be entitled to shares in the Taxpayer (one ordinary share for every stock option). The exercise price will be at least equal to the fair market value of the underlying share on the date of grant, unless otherwise stated in the Offer Letter. The Board intends to nominate the Trust for the purposes of administering the Plan. Those shares will be held under the Trust on behalf of the Participant subject to conditions as specified in the Plan rules. Once those conditions are satisfied, the Participant can withdraw the shares from the Trust. The Plan must be operated in accordance with the terms of the EST Trust Deed and the Rules of this Plan. The Trustee must follow the directions given to it by the Board of the Taxpayer or the Group in relation to the rules of this Plan. The Plan rules bind each Group Taxpayer and each Participant. Unless the Board of the Taxpayer or the Group so decides, the following will apply: • Invitations to participants who, subject to approval from trustee and Board, are invited to apply for and participate in the Plan through the issue of an Offer Letter for eligible employees. • The Trustee will allocate shares to each Participant according to the rules in this Plan Rules and the EST Trust Deed. • The Board shall determine the terms and conditions of any Offer. • the Acquisition Price will, unless otherwise determined, be equal to the Fair Market Value of the Shares the subject of the Offer. • No payment is required for the grant of the Options. • Subject to these Rules and the EST Trust Deed, the Trustee appointed shall have the power to: o Grant the Plan offer to Eligible Employees. o The vesting of a Participant's Options is subject to the satisfaction of the vesting conditions being performance and time related. o Where the vesting criteria are satisfied, then following payment of any exercise price, the Participant would be entitled to one ordinary Share of the Taxpayer for every option. o The Trustee to subscribe for, acquire and allocate to the Participant one Share for each option exercised and hold those shares in the EST on behalf of the Participant. o Trustee upon receiving the funds from the Taxpayer will subscribe for, and/or acquire Shares to be held on behalf of the Participants under the Plan. o Those Shares will be held under the EST on behalf of Participants, subject to conditions which will be specified in the rules in this document and the EST Trust Deed. Once conditions are satisfied, the Trust would distribute the Taxpayer's Shares to the Participant. o All ordinary Shares that are issued on the exercise of a Stock Option should rank equally with other ordinary shares in the Taxpayer. o Participants will be entitled to dividends from the date vesting conditions are satisfied and ordinary Shares under the Plan are issued to the Participant. o The Trustee must transfer the legal title of the shares to the Participants. o The Trustee must not accept any Share rights entitlement in respect of the Plan which are not allocated to any Participants. o If the Trustee holds the Share on behalf of a Participant and an accretion arises other than by way of cash distributions, bonus shares or share rights, then, subject to the Law, the relevant Participant is absolutely entitled to that accretion and the Trustee must follow the decision of the Board to transfer, or provide the benefit of, all or any part of the accretion to the Participant. • immediately upon granting the shares to the Participant, no one Participant may hold a beneficial interest in more than 10% of the shares. • the share options must be held for at least 3 years 'minimum holding' period (unless termination of employment). • the EST must be administered in such a way to comply with the sole activities test. • the trustee is not to pass dividends to Participants if the shares owned by the Trust is not yet allocated to the Participants. Income derived by the Trust through dividends paid on the Taxpayer's shares held by the Trust can only be passed to the Participants who have been allocated the shares. • if the Participant decides not to exercise any Option(s), the unexercised Option(s) will lapse on the Expiry Date. • The Participant is not permitted to transfer, sell, assign or otherwise dispose of any Options (Vested or Unvested) or any Shares acquired as a result of exercising their Options, for the Minimum Holding Period of 3 years starting from the issue date or start date of the employee. • Unless otherwise determined by the Board, the Taxpayer must pay all costs, charges and expenses relating to the establishment and operation of the Plan. Employee share trust The Trust has been established as a sole-purpose trust to acquire and hold shares on behalf of employees of the Taxpayer and their associates (Participants) pursuant to the proposed and any future potential employee equity plans. The Trust provides an arm's length vehicle through which shares in the Taxpayer can be acquired and held on behalf of Participants. This allows the Taxpayer to satisfy Corporations Law requirements relating to companies dealing in their own shares. Broadly, the Trust will operate as follows: • The Trust is to be funded by irretrievable contributions from the Taxpayer (or one of its wholly owned Australian resident subsidiaries). All funds received by the Trustee from the Taxpayer will constitute Accretions to the corpus of the Trust and will not be repaid to the Taxpayer or any subsidiary and no Participant will be entitled to receive such funds. • The funds are to be used by the Trustee to acquire shares in the Taxpayer via the subscription for new shares in the Taxpayer, based upon written instructions from the Taxpayer. • Irretrievable cash contributions are to be made regularly and progressively to the Trust in accordance with the Plan Rules and the Trust Deed. • Shares acquired by the Trustee must be allocated to the relevant Participant and held on their behalf. Each Participant is the beneficial owner of the shares held by the Trustee on their behalf and is absolutely entitled to all other benefits and privileges attached to those shares. • After the vesting conditions are met (stock options vest and are exercised, or the holding period ends), the Trustee must transfer the relevant number of shares into the name of the Participant (i.e., legal title) upon direction from the Taxpayer to the Trustee. • the Taxpayer does not have any charge, lien, or other proprietary right or interest in the shares acquired by the Trustee according to the Trust Deed. • No member of the Taxpayer, its subsidiaries, or the Trustee is entitled to obtain any beneficial interest in the Trust Assets. • Upon termination of the Trust, the Trustee must not pay any Trust Assets to the Taxpayer or any of its subsidiaries. • Neither the Taxpayer nor any of its subsidiaries are a beneficiary of the Trust. • The Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997. The Trust may acquire shares that are not allocated to Participants (unallocated Shares) to satisfy future obligations under the Plan to the extent that there are stock options granted to Participants that have not yet vested or vested stock options that have not yet been exercised. Whilst the Taxpayer intends to wait until the stock options vest and to receive the exercise notice and exercise price (if applicable) from Participants before providing the Trust with the cash necessary to acquire shares to satisfy the acquisition of or subscription for shares related to those stock options, the Taxpayer may make cash contributions to the Trust prior to the stock options being exercised by the Participants. This will allow the Trustee to have enough shares in the Trust ahead of the time they need to be allocated to Participants and avoids delays in times such as blackout trading periods and take advantage of any reductions in the Taxpayer share price from time to time. The Taxpayer Group will incur administration expenses for operating the ESS. These will form part of the consolidated income tax return that will be lodged by the Taxpayer as the head company of the income tax consolidated group. The Trust Deed states that: • the trust property is to be held by the Trustee on trust for the Participants from time to time in accordance with the terms of this deed. • defines the sole activities test as the test under subsection 130-85(4) of the ITAA 1997. • the Trustee must follow directions given to it by the Board of the Taxpayer in relation to the rules and operation of the Trust. • the Trustee must not grant a Security Interest over any Plan Security. • The Taxpayer must pay all Trust Expenses. • the Trustee has the power to undertake activities to operate the Trust described in paragraphs 130-85(4)(a), (b) and (c) of the ITAA 1997; • unless and until Plan Securities are allocated to a Participant, no Participant has any interest in any particular Plan Security or any other part of the Trust Property. • nothing in the Trust Deed confers, or is intended to confer, on any Taxpayer Group any Security Interest, proprietary right, proprietary interest or beneficial interest in the Plan Securities or any other Trust Property acquired by the Trustee in accordance with this deed or the Trust. • the Trustee must transfer Plan Securities to Participants as directed by the Taxpayer. • on termination of the Trust, the Trustee must: o transfer to each Participant the number of Plan Securities held by the Trustee for that Participant; o if there is any Trust Property remaining following completion of the transfers deal with the remaining Trust Property in accordance with the written instructions of the Taxpayer which cannot direct any remaining Trust Property to be transferred to itself or the Taxpayer Group; and o wind the Trust up.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 8-10 | Income Tax Assessment Act 1997 Section 20-20 | Income Tax Assessment Act 1997 Section 25-5 | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Section 130-85 | Income Tax Assessment Act 1997 Section 83A-210 | Income Tax Assessment Act 1997 Section 83A-340 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-35 | Income Tax Assessment Act 1997 Section 104-155 | Income Tax Assessment Act 1936 Section 177D | Fringe Benefits Tax Assessment Act 1986 Section 67 | Fringe Benefits Tax Assessment Act 1986 Section 136

Reasons for decision: Summary: Yes, the Taxpayer will be entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by them to the Trustee of the Trust to fund the subscription for, or acquisition of ESS Shares, as the contributions are payments by the employer to the Trust incurred as part of its remuneration strategy and is connected to gaining or producing the Taxpayer's assessable income. | Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) of the ITAA 1997 allows you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, pursuant to subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature. The Taxpayer is an Australian incorporated entity involved in a business for the purposes of gain or producing assessable income. The Taxpayer proposes to operate employee share schemes (ESS's) as part of its remuneration strategy. Under the Plan, the Taxpayer may grant stock options to eligible employees and will make irretrievable cash contributions to the Trust (in accordance with the Trust Deed) which the Trustee uses to acquire shares or subscribe for new shares for allocation to Participants to satisfy their options. The Taxpayer must provide the Trustee with all the funds required to enable the Trustee to subscribe for, or acquire, the Taxpayer's shares. The cash contributions made by the Taxpayer to the Trust are irretrievable and non-refundable to the Taxpayer in accordance with the Trust Deed, as: Therefore, if the Taxpayer makes a cash contribution to the Trust to acquire or subscribe for Shares to satisfy the stock options granted to the participants pursuant to the Plan, the amount has been incurred for the purposes of subsection 8-1(1) of the ITAA 1997. The costs incurred by the Taxpayer for the acquisition of shares to satisfy its obligations under the Plan in respect of the grant of stock options arise as part of the Taxpayer's remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. As such, it is incurred in the process of carrying on a business for gaining or producing the Taxpayer's assessable income. The cash contributions will be an outgoing incurred for periodic (rather than once-off) funding of an ESS for employees of the Taxpayer. The cash contributions are made as part of an ongoing process of remunerating employees, with the Trust expected to acquire shares regularly. Nothing in the facts suggests any intention for any contribution to be retained in the Trust for an extended period of time. While the contributions may secure an enduring or lasting benefit for the employer that is independent of the year-to-year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be sufficiently small. Therefore, the payments are not capital, or of a capital nature. The Taxpayer will be entitled to a deduction under section 8-1 of the ITAA 1997 in respect of the irretrievable cash contributions made by the Taxpayer to the Trustee of the Trust to fund the subscription for, or acquisition of Shares. | Summary: Yes, the Taxpayer will obtain a deduction pursuant to section 8-1 of the ITAA 1997 in respect to the costs incurred by the Taxpayer in relation to the on-going administration of the Trust. | Detailed Reasoning - Detailed reasoning: As discussed at Question 1, subsection 8-1(1) of the ITAA 1997 allows you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, pursuant to subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature. The Taxpayer carries on a business which produces assessable income as well the Taxpayer intends to operate its ESS plans as part of its overall remuneration policy. Under the Trust Deed, the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration in respect of its office. The Taxpayer must pay such fees and reimburse such expenses incurred by the Trustee as agreed between the Taxpayer and the Trustee. Further, trust expenses must be paid by the Taxpayer, and the Taxpayer must indemnify the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in the execution of the Trust. The on-going administration costs outlined in the facts are regular and recurrent employment expenses necessarily incurred by entities in the Taxpayer group, including by the Taxpayer, in operating a remuneration framework while carrying on a business for the purposes of gaining or producing its assessable income. Relevantly, these costs are not capital or of a capital nature and the Taxpayer will obtain a deduction under section 8-1 of the ITAA 1997 in respect of those costs (Taxation Determination TD 2022/8 Income Tax: deductibility of expenses incurred in establishing and administering an 'employee share scheme' ) when it lodges the income tax return for the Taxpayer Group. | Summary: Yes, the Taxpayer will obtain a deduction under section 25-5 of the ITAA 1997 in respect of costs incurred by the Taxpayer in managing the tax affairs of the Trust. | Detailed Reasoning - Detailed reasoning: Section 8-10 of the ITAA 1997 states that if more than one income tax deduction provision applies to an amount, the most appropriate provision should be used (i.e. the specific provision should override the general provision). Division 12 of the ITAA 1997 sets out particular types of deductions that are dealt with by a specific provision of either the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997. Section 25-5 of the ITAA 1997 is one such provision listed in Division 12 dealing with tax-related expenses. Subsection 25-5(1) of the ITAA 1997 allows a deduction for tax-related expenses, such as managing your tax affairs (paragraph 25-5(1)(a)). Entities in the Taxpayer Group or the Taxpayer may incur tax related expenses in managing the tax affairs of the Trust. To the extent the costs incurred by entities in the Taxpayer Group, including by the Taxpayer, relate to managing its tax affairs, they are tax-related expenses deductible by the Taxpayer under subsection 25-5(1) of the ITAA 1997 when it lodges the income tax return for the Taxpayer Group. | Summary: Yes, pursuant to section 83A-210 of the ITAA 1997, where irretrievable cash contributions are made at a time before the ultimate beneficiaries acquire the relevant ESS interest, the irretrievable cash contribution can only be deducted from the assessable income of the Taxpayer in the income year when the ESS interest is acquired by the Participant under the Plan. | Detailed Reasoning - Detailed reasoning: It is often the case that an outgoing will be both incurred and paid in the same year of income, and as such, the amount is deductible in that income year for the purposes of section 8-1 of the ITAA 1997. However, section 83A-210 of the ITAA 1997 modifies this rule in certain circumstances in respect of contributions provided by an employer to a trust to purchase shares under an ESS. Section 83A-210 of the ITAA 1997 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. The effect of section 83A-210 of the ITAA 1997 is to deem the timing an employer incurred the outgoing to be the time when the ESS interest is acquired by a beneficiary under an arrangement, rather than the time when the employer makes the contribution to the trust, if the contribution was made before the ESS interests are acquired. Further information is available 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. An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Shares that are purchased by the Trustee to satisfy its obligation under the Taxpayer's ESS, and subsequently granted to the Taxpayer's Participants pursuant to the Plans, are ESS interests for the purposes of section 83A-210. The Taxpayer's ESS satisfies the definition of an 'employee share scheme' in subsection 83A-10(2) of the ITAA 1997 as they are a scheme under which ESS interests are provided to the Participants in relation to their employment with the Taxpayer. The granting of the ESS interest to the Participants, the provision of the cash contributions to the Trustee, the acquisition and holding of shares by the Trustee and the allocation of shares to Participants are all interrelated components of the Taxpayer 's ESS. All the components constitute an arrangement for the purposes of section 83A-210 of the ITAA 1997 that must be carried out so that the scheme can operate as intended. The Taxpayer intends to only make irretrievable contributions to the Trust to fund the acquisition of Shares once options have been granted to a Participant. An option provided under the Plan is an indeterminate right because that option entitles the employee to acquire a Share, to be determined at a future time at the discretion of the Taxpayer. Although the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997 at the time it is granted, where it is ultimately satisfied with Shares (or when the number of Shares the employee is entitled to receive is determined), the indeterminate right will, pursuant to section 83A-340, be treated as if it had always been an ESS interest. Section 83A-210 of the ITAA 1997 applies equally to contributions made in respect of ESS interests and indeterminate rights. Therefore, an irretrievable cash contribution in respect of an indeterminate right is taken to have been paid at the acquisition time of the ESS interest. If an indeterminate right becomes an ESS interest, deductible contributions made in respect of those rights can be claimed in the income year when the ESS interest is deemed to have been acquired under section 83A-340 (this will be the year in which the indeterminate right was granted to the employee). Once this has been established, such contributions can be matched to ESS interests issued to the employee and where necessary the relevant earlier income year assessments can be amended to allow the deduction (Item 28 of subsection 170(10AA) of the ITAA 1936). It is important to note that an indeterminate right which is satisfied by the provision of cash by the Taxpayer never becomes an ESS interest and the deduction in relation to the contribution to the Trust in respect of the provision of that right is permanently deferred. However, where that ESS interest is subsequently issued to another participating employee, this employee becomes the 'ultimate beneficiary' and the deduction is available in the income year that this participating employee acquired this ESS interest. Therefore, where irretrievable cash contributions are made at a time before the Participants acquire the relevant ESS interest, the irretrievable cash contribution can only be deducted from the assessable income of the Taxpayer in the income year when the ESS interest is acquired by the Participant under the Plan, as provided by section 83A-210 of the ITAA 1997. | Summary: No, if the Trust satisfies its obligation under the Taxpayer's Plan by subscribing for new shares in the Taxpayer, the subscription proceeds will not be included in the assessable income of the Taxpayer under either sections 6-5 or 20-20 of the ITAA 1997 nor will they trigger a capital gains tax (CGT) event under Division 104. | Detailed Reasoning - Ordinary Income: Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In GP International Pipecoaters v Federal Commissioner of Taxation [1990] HCA 25, the High Court of Australia found that: To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt 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. The character of the contribution of share capital received by the Taxpayer from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, the Taxpayer is issuing the Trustee with new shares in itself. The character of the newly issued share is one of capital. Therefore, the receipt of the subscription proceeds takes the character of share capital, and accordingly, is of a capital nature. This view is supported by the reasoning in ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee . In conclusion, when the Taxpayer receives subscription proceeds from the Trustee where the Trustee has subscribed for new Shares to satisfy obligations to Participants, the subscription proceeds received by the Taxpayer is a capital receipt, and will not be ordinary income in the hands of the Taxpayer under section 6-5 of the ITAA 1997. | Detailed Reasoning - Section 20-20: Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year. the Taxpayer will receive an amount for the subscription of Shares by the Trustee. There is no insurance contract in this case, so the amount is not received by way of insurance. Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. Subsection 20-20(3) of the ITAA 1997 establishes that an amount received by you as 'recoupment' of a loss or outgoing is an 'assessable recoupment' if you can deduct the loss or outgoing for an earlier income year under a provision listed in section 20-30. None of the provisions listed in section 20-30 are relevant to the current circumstances. Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20 of the ITAA 1997. | Detailed Reasoning - Division 104: Section 102-20 of the ITAA 1997 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 Taxpayer are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset). However, paragraphs 104-35(5)(c) and 104-155(5)(c) of the ITAA 1997 respectively states that CGT events D1 and H2 do not happen if a company issues or allots equity interests or non-equity shares in the company. In addition, paragraphs 104-35(5)(e) and 104-155(5)(e) of the ITAA 1997 respectively states that CGT events D1 and H2 do not happen if a company grants an option to acquire equity interests, non-equity shares or *debentures in the company. In this case, the Taxpayer is issuing shares, being equity interests as defined in section 974-75 of the ITAA 1997, to the Trustee. Therefore, neither CGT events D1 nor H2 will occur. Since no CGT event occurs, there is no amount that will be assessable as a capital gain to the Taxpayer under Division 104 of the ITAA 1997. | Summary: No, Part IVA of the ITAA 1936 will not apply to deny, in part or in full, any deduction claimed by the Taxpayer in respect of the irretrievable cash contributions made by the Taxpayer to the Trustee to fund the subscription for or acquisition off-market of Shares by the Trust. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. The Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust where the conditions of Division 83A of the ITAA 1997 are met. In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the employee share trust arrangement. The granting of the ESS interest to the Participants, the provision of the cash contributions to the Trustee, the acquisition and holding of shares by the Trustee and the allocation of shares to Participants are all interrelated components of the Taxpayer 's ESS. All the components constitute an arrangement for the purposes of section 83A-210 of the ITAA 1997 that must be carried out so that the scheme can operate as intended. Therefore, based on the current facts and having regard to the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling the Taxpayer to obtain a tax benefit. | Summary: No, the provision of stock options by the Taxpayer to employees under the Plan will not be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) as they are excluded by paragraph 136(1)(h) as ESS interests acquired under an 'employee share scheme'. | Detailed Reasoning - Detailed reasoning: 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. In general terms, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the definition. Paragraph (h) of subsection 136(1) of the FBTAA excludes the following from being a 'fringe benefit': 136(1) In this Act, unless the contrary intention appears: ..... Fringe benefit, in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit: ... In respect of the employment of the employee, but does not include: ... (h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83A-B or 83A-C of that Act applies; An 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employee's employment. An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Shares that are purchased by the Trustee to satisfy its obligation under the Plan, and subsequently granted to Participants pursuant to the Plan, are ESS interests for the purposes of section 83A-10(1). Therefore, the Taxpayer's Plan constitutes an 'employee share scheme' within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which ESS interests in the Taxpayer are provided to the employees of the Taxpayer in relation to their employment with the Taxpayer. As the stock options to acquire Shares or Shares granted under the Plan will be acquired by the employees at a discount, they are ESS interests to which Subdivision 83A-B or 83A-C of the ITAA 1997 applies. According to the Plan, the offer is intended to operate in accordance with Subdivision 83A-B. Accordingly, the provision of stock options to acquire Shares by the Taxpayer to Participants under the Plan 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 will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph 136(1)(h) of the FBTAA. In addition, when a right to acquire ordinary shares is later exercised, it will not give rise to a fringe benefit as defined in subsection 136(1) of the FBTAA as any benefit received by the employee (i.e. the beneficial interest in a Share) would be in respect of the exercise of the right to acquire shares and not in respect of employment (refer ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme ). | Summary: No, the irretrievable cash contributions made by the Taxpayer to the Trustee pursuant to the Trust Deed, to fund the subscription for or acquisition off-market of the Taxpayer's shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA by virtue of the exclusion in paragraph 136(1)(ha) on the basis that the Trust Deed satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Paragraph 136(1)(ha) of the FBTAA 1986 excludes from the definition of 'fringe benefit': 136(1) In this Act, unless the contrary intention appears: ..... Fringe benefit, in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit: ... In respect of the employment of the employee, but does not include: ... (ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997); Therefore, for the irretrievable cash contributions to be excluded from the definition of 'fringe benefit', the Trust must be an employee share trust as defined in subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust, for an employee share scheme, is a trust whose sole activities are: (a) obtaining shares or rights in a company; and (b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of: (i) the company; or (ii) a subsidiary of the company; and (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). | Detailed Reasoning - Paragraphs 130-85(4)(a) and (b) of the ITAA 1997: The beneficial interest in a share received by a Participant when a share in the Taxpayer is provided to them under the terms of the draft Trust Deed and the Plan is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997. Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. The Plan is an ESS within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which rights to acquire Shares in the Taxpayer (being ESS interests) are provided to employees in relation to the employees' employment. The Taxpayer has established the Trust to acquire shares in the Taxpayer and to allocate those Shares to employees in order to satisfy ESS interests acquired by those employees under the Plan. The beneficial interest in the Taxpayer's share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights are provided to employees in relation to their employment. Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are therefore satisfied because: • the Trust acquires Shares in the Taxpayer; and | Detailed Reasoning - Paragraph 130-85(4)(c) of the ITAA 1997: 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 Trust. Paragraph 130-85(4)(c) of the ITAA 1997 provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13: Income tax: what is an employee share trust ? (TD 2019/13). Paragraph 12 of TD 2019/13 list examples of activities which are merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997 that include (but not limited to): borrowing money for the purpose of acquiring shares or rights in the employer company, where no security is provided over the trust assets and the interest payable on such a loan is not more than arm's length commercial rates the payment is made at or around the time, and because, the shares vest or are transferred to the participating employee (as required by the ESS) Paragraph 13 of TD 2019/13 lists examples of activities that are not merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997 that include (but not limited to): Trust Deed defines the Sole Activities Test as that the Trust must be managed and administered so that it satisfies the Sole Activities Test under subsection 130-85(4) of the ITAA at all times. It is considered that the clauses require the trustee to manage and administer the trust consistent with the definition of an "employee share trust" for the purpose of subsection 130-85(4) of the ITAA 1997. Under the draft Trust Deed, it is intended that the activities of the Trustee are limited to the sole purpose of exercising its powers and discharging its obligations under the Trust Deed and the relevant Plan Rules (and for no other purpose). It is intended that all other activities of the Trust are incidental to the Trustee undertaking these sole activities. Therefore paragraph 130-85(4)(c) of the ITAA 1997 will be satisfied as all other activities to be undertaken by the Trustee are merely incidental to managing the Plan. | Detailed Reasoning - Conclusion: The Trust satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 as: • the Trust acquires Shares in the Taxpayer; • the Trust ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in the Shares of the Taxpayer), are provided under an ESS (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those Shares to the employees in accordance with the draft Trust Deed and the Plan; and • the draft Trust Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to a function of administering the Trust. Paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA therefore excludes the contributions to the Trustee from being a fringe benefit. Accordingly, the irretrievable cash contributions made by the Taxpayer or any group member of the Taxpayer's tax consolidated group to the Trustee to fund the subscription for, or acquisition off-market of, shares will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Summary: No, the Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount to the Taxpayer by the amount of tax benefit gained from irretrievable cash contributions made by the Taxpayer (or any subsidiary) to the Trustee, to fund the subscription for the Taxpayer shares. | Detailed Reasoning - Detailed reasoning: Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules explains the application of Part IVA of the ITAA 1936 and other general anti-avoidance rules to an arrangement, including the operation of section 67 of the FBTAA (refer to paragraphs 185-191 of PS LA 2005/24). 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. Paragraph 191 of PS LA 2005/24 states: 191. The approach outlined in this practice statement (refer to paragraphs 75 to 150) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant (except that amendments corresponding to the 2013 amendments of Part IVA have not been made to section 67) and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA. As discussed in Questions 6 and 7, the irretrievable cash contributions made by the Taxpayer to the Trust will not be a fringe benefit as defined in subsection 136(1) of the FBTAA, nor would the grant of ESS interest (or cash payments) to Participants under the Taxpayer Plans, if an EST was not used. As a result, the FBT liability of the Taxpayer is not any less than it would have been but for the existence of the arrangement (i.e. the EST). Therefore, 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 Taxpayer by the amount of the tax benefit gained from the irretrievable cash contributions made by the Taxpayer to the Trustee.

Question 2a: Will the Taxpayer Group obtain an income tax deduction pursuant to section 8-1 of the ITAA 1997 in respect of costs incurred by the Taxpayer Group in relation to the on-going administration of the Trust? | Question 2b: Will the Taxpayer Group obtain an income tax deduction pursuant to section 25-5 of the ITAA 1997 in respect of costs incurred by the Taxpayer Group in managing the tax affairs of the Trust? | All funds provided to the Trustee will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee; and | On termination, the Taxpayer (or any other member of the Group) will not be a beneficiary of the Trust and will have no interests in the Shares held by the Trust. | the opening and operation of a bank account to facilitate the receipt and payment of money | bookkeeping, preparing financial, tax and regulatory statements, and other record-keeping and administrative actions necessary to operate the trust and undertake the activities described in paragraphs 130-85(4)(a), (b) and (c) | the receipt of dividends in respect of shares held by the trustee on behalf of a participating employee and their distribution to the employee | acquire additional shares for the purposes of the ESS | pay necessary and incidental costs of administering the trust and undertaking the activities described in paragraphs 130-85(4)(a), (b) and (c), for example costs relating to the audit of the trust, fees for professional services provided to the trustee in relation to the trust | pay interest on loans provided for the acquisition of shares or rights in the employer company, where the interest payable does not exceed arm's length commercial rates | the amount paid is equal to or less than the amount of dividends paid to the trustee (net of tax paid by the trustee on the dividends), in relation to the number of shares being received by the participating employee, during the accumulation period, and | dealing with shares forfeited under an ESS including the sale of forfeited shares and using the proceeds of sale for activities permitted under subsection 130-85(4) | the transfer of shares to participating employees, or the sale of shares on behalf of such employees and the transfer to the employee of the net proceeds of the sale of those shares, when required under the rules of the ESS, and | receiving and immediately distributing shares under a demerger or actions in order to participate in a takeover or restructure covered by section 83A-130. | providing financial assistance, such as providing a loan to an employee to purchase shares or interests in the employer company | payment of income or accrued capital from unallocated shares to any beneficiaries (or to employees who do not hold a beneficial interest in the employer company under the trust) | waiving or relinquishing certain entitlements, such as waiving the right to be paid or credited dividends pursuant to a dividend waiver clause contained in the governing trust documents | exercising a general discretion to make distributions of income or capital to pay a class of participating employees or other beneficiaries of the trust amounts unrelated to their ESS interests or entitlements under the ESS rules | for a purpose other than purchasing shares or rights in the employer company, or | with security provided over any of the trust's assets for the loan, or | where the interest payable on the loan is more than arm's length commercial rates | investing in assets other than shares or rights to shares in the employer company | engaging in trading activities in relation to shares in the employer company, other than purchasing and selling shares to satisfy obligations under the ESS | distributing mainly cash payments to participating employees rather than shares or ESS interests under the ESS | providing additional benefits to participants and/or employees, over and above the delivery of the ESS interests or resulting shares and any dividend equivalent payment that accrues directly from the employee's ESS interest.