Private ruling: Employee Share Scheme
Date of advice: 16 September 2016
Published: November 2016
Ruling period: Question 4 | Will the provision of Employer options to employees of Employer (or any subsidiary member of the Employer income tax consolidated group) under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)? | Answer | No | Question 5 | Will the irretrievable cash contributions made by the Employer or made by another entity that is a member of the Employer group of companies to the Trustee to enable the Trust to subscribe for, or acquire off-market, Employer shares, be treated as a fringe benefit provided by the Employer or by the relevant entity within the meaning of subsection 136(1) of the FBTAA? | Answer | No | This ruling applies for questions 4 to 5 inclusive applies for the following periods

Ruling: Q1: Will Employer, as the head entity of the Employer income tax consolidated 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 the Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee of the Trust to fund the subscription for, or acquisition off-market of, ordinary shares in the Employer by the Trust? | A1: Yes | Q2: Will the irretrievable cash contributions made by Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee, to fund the subscription for or acquisition off- market of Employer shares by the Trust, be deductible to the Employer at the time worked out in accordance with section 83A-210 of the ITAA 1997? | A2: Yes | Q3: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act (ITAA 1936) applies to deny, in part or full, any deduction claimed by the Employer in respect of the irretrievable cash contributions made by the Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee to fund the subscription for, or acquisition off-market of, Employer shares by the Trust? | A3: No

Relevant facts and circumstances: Background 1. The Employer is the parent entity of a number of wholly owned subsidiaries forming a tax consolidated group and is privately owned. 2. Employees of the Employer and of various subsidiary members of the Employer income tax consolidated group may benefit under the employee share plan (the Plan). The Plan 3. The Employer established and implemented the Plan as part of its remuneration and reward program. The Plan is governed by Plan rules. 4. Participants in the Plan are employees of the Employer and of various subsidiary members of the Employer. 5. The Plan will enable eligible employees to share in the growth of the Employer through a grant of options. The options will be capable of being exercised into fully paid ordinary shares following the satisfaction of certain vesting conditions (as specified in the offer letter) over a five year period. Under its offer, the options may be subject to either time based vesting conditions and/or performance based vesting conditions. 6. The Plan broadly operates as follows: • The Board may determine at its discretion the total number of options to be offered to each eligible employee and the issue price at which the options are offered • The Board may in its absolute discretion determine that an employee who otherwise would be eligible to acquire options under the plan is nonetheless not eligible • Such an offer shall be made in writing. The offer shall be accompanied by an acceptance form, the terms and conditions of the plan and the summary of the plan. An eligible employee may accept the offer by delivering to the company the completed acceptance form by the acceptance date • An employee shall not be eligible to acquire options under the plan at any time if he or she is has been given notice of dismissal for misconduct from the employment • Subject to the terms attaching to the options, each option entitles the eligible employee to one fully paid ordinary share in the Employer. Shares allotted under the Plan will rank pari passu in all respects with the shares of the same class for the time being on issue • An option granted under the ESOP Plan may not be exercised unless the vesting conditions attaching to the options have been met • The options are to be issued for no consideration. The exercise price to be paid by the Participant is as specified in the relevant offer letter. It is the price to be determined by the Board at its sole discretion • Options become exercisable upon vesting, and remain exercisable until options lapse. Options may be exercised by the Participant lodging with the company an Option Exercise Notice and receipt of payment, which must be made within thirty days of delivery of the Option Exercise • Within one month of receipt of the Options Exercise Notice and receipt of payment, the Board shall allot to the Participant the shares to which the Participant is entitled • Options lapse on the earliest of, the expiry of the option period where the option is unexercised; upon being exercised or upon the company being liquidated; including failure to meet the option vesting conditions in the prescribed period • An option period will end at the specified date, 30 days after cessation of employment, or cessation of employment due to fraud or dishonesty • Participants do not participate in dividends or in bonus issues unless the options are exercised • Options shall not be transferable, transmissible or assignable • The Board has the right to vary the entitlements of all participants to take account of the effective capital reconstructions, bonus issues or rights issues • The Plan rules do not specify any restrictions on shares after exercise; however, Participants have entered Deeds which place disposal restrictions on the vested shares for at least one year after exercise, and • The Board may vary the Plan. Employee Share Trust 7. The Employer established an employee share scheme trust (the Trust), as a sole purpose trust to acquire, subscribe, allocate, hold and transfer shares for participating employees pursuant to the Plan and the appointment of a trustee to operate the Trust as Trustee (the Trustee). The establishment of the Trust for such a purpose is allowed under the Plan rules. . 8. The Employer will pay all reasonable costs and expenses in administering the Trust, including all reasonable costs and expenses in maintaining the corporate existence of the Trustee or incurred in connection with the acquisition, registration, disposal of or other dealing with shares and otherwise incurred by the Trustee acting reasonably in carrying out its duties. 9. The Trust will be managed and administered in a manner that satisfies the definition of 'employee share trust' in subsection 130-85 (4) of the ITAA 1997. 10. The Trust will operate as follows: • The Trust will be funded by contributions from the Employer or its subsidiaries (e.g. for the subscription or purchase of shares in accordance with the Plan • These contributions will be used by the Trustee to purchase shares in the Employer either off-market or via a subscription for new shares in the Employer (or through a combination of both), based on written instructions from the Employer • Shares acquired by the Trustee will be allocated to the Participant following the exercise of the options. The Participant will become absolutely entitled to such shares • The Trustee can sell shares on behalf of a Participant where permitted to do so by the Participant • The Trustee will, in accordance with instructions received pursuant to the Plan rules, subscribe for or purchase the Employer shares for the benefit of Participants provided that the Trustee receives sufficient funds from the Employer to subscribe for or purchase such shares • The Trustee aims to purchase and complete the allocation of shares to relevant Participants as soon as practicable after vesting and exercise. According to the Plan rules allocation should occur within one month of exercise, and the Trustee is bound to comply with the Plan. • The Trustee will ensure that a separate trust share account or record in respect to each Participant is established and maintained • Unless the company and the Trustee agree otherwise, the company will, on behalf of the Trustee, prepare and keep all necessary and proper records and accounts, transfers and other documents in connection with the affairs of, and transactions involving, the Trust • While the Employer shares are held in trust, the Participant will be entitled to dividend and voting rights. Shares held by the minority shareholders are subject to disposal restrictions • All funds received by the Trustee from the Employer will constitute accretions to the corpus of the trust and will not be repaid to the Employer and no Participant shall be entitled to receive such funds. The contributions will not be repaid to The Employer unless they are used to acquire and warehouse future Employer shares. Contributions made by the Employer to the Trust 11. The Employer will make cash contributions equal to the market value of shares that have been and will be acquired for employees. The Trust have and will use the cash contributions exclusively to purchase shares in the Employer for employees under the Plan and, pending such an acquisition, form part of general trust property. 12. Shortly after vesting, the Trustee will then allocate shares to the relevant Participants, having subscribed for or acquired off-market sufficient shares to fulfil the obligation as necessary. 13. The Trustee of the Trust holds all the Employer shares pursuant to the Plan on capital account. Use of the Trust to facilitate the Plan 14. All dealings between the parties are conducted according to the rules set in the Plan and the Trust Deed. 15. The Employer chose to utilise an employee share trust for a range of reasons in addition to the Trust being a vehicle for the delivery of shares to employees. In the present case, the Trust: • assists in the management of dealing in the company's shares by minority shareholders and the administration of various agreements the minority shareholders are party to • assist with facilitating employee equity participation on an anticipated liquidity event (which could include an IPO, trade sale or partial sale of the company's shares) • provides additional flexibility as to the source of shares to satisfy options.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(ha) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 177A | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 paragraph 177A(1)(a) | Income Tax Assessment Act 1936 paragraph 177A(1)(b) | Income Tax Assessment Act 1936 subsection 177A(5) | Income Tax Assessment Act 1936 section 177C | Income Tax Assessment Act 1936 subsection 177C(1) | Income Tax Assessment Act 1936 paragraph 177C(1)(b) | Income Tax Assessment Act 1936 subsection 177CB(2) | Income Tax Assessment Act 1936 subsection 177CB(3) | Income Tax Assessment Act 1936 subsection 177CB(4) | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1936 s ubsection 177F(1) | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 paragraph 8-1(2)(a) | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 section 83A-205 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 paragraph 83A-210(a) | Income Tax Assessment Act 1997 paragraph 83A-210(b) | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 paragraph 130-85(4)(a) | Income Tax Assessment Act 1997 paragraph 130-85(4)(b) | Income Tax Assessment Act 1997 paragraph 130-85(4)(c) | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The Employer will obtain an income tax deduction pursuant to section 8-1 in respect of the irretrievable cash contributions made by the Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee to fund the subscription for or acquisition off-market of Employer shares by the Trust. | Detailed Reasoning - Detailed reasoning: The Commissioner accepts that the cash contributions that the Employer will make to the Trustee of the Trust in accordance with the Trust Deed and Plan rules, which will enable the Trust to subscribe for or acquire Employer shares off-market for the benefit of Participants, will constitute 'irretrievable cash contributions'. The irretrievable cash contributions will be deductible under section 8-1 if either of the positive limbs in subsection 8-1(1) are satisfied and the contributions do not fall within any of the negative limbs in subsection 8-1(2). The relevant negative limb is paragraph 8-1(2)(a), which denies a deduction to the extent that the expenditure is capital, or of a capital nature. Positive Limb The Employer provides or will provide cash contributions to the Trustee to be used in accordance with the Trust Deed and Plan rules for the sole purpose of subscribing for and/or acquiring Employer shares for the benefit of Participants. Such contributions are irretrievable or non-refundable to the Employer and therefore an outgoing is incurred. The Trust was established for the sole purpose of obtaining fully paid ordinary shares in the Employer for the benefit of Participants. The purpose of the contributions is to enable the Trust to acquire shares in order to provide an incentive to employees that is linked to the operating performance of the Employer business. Accordingly, there is a sufficient nexus between the Employer's contributions to the Trustee and the derivation of its assessable income ( Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113; (1932) 2 ATD 169 ), Amalgamated Zinc (De Bavay's) Ltd v FCT (1935) 54 CLR 295; (1935) 3 ATD 288 , W Nevill & Co Ltd v FC of T (1937) 56 CLR 290; 4 ATD 187; (1937); 1 AITR 67 , Ronpibon Tin NL v FCT (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431 , Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344; (1956) 6 AITR 379; (1956) 11 ATD 147) . This is consistent with the Commissioner's view set out in ATO Interpretative Decision ATO ID 2002/1074 Income Tax - deductibility - irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme that where the purpose of an employee share scheme is to provide a benefit to a company's employees as part of the overall remuneration of the employees, the company is entitled to a deduction under section 8-1 for its irretrievable cash contributions made to the trustee of its employees' share scheme trust. Accordingly, the irretrievable cash contributions that Employer will make to the Trustee will satisfy the positive limb for an income tax deduction under section 8-1. Negative Limb In Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210 and FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745, payments made by an employer company to a trust which was established for the purpose of providing incentive payments to employees were held to be on revenue account and neither capital nor of a capital nature. A contribution to the trustee of an employee share trust is capital or of a capital nature where the contribution secures for the employer an asset or advantage of an enduring or lasting nature that is independent of 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 which is capable of having an enduring nature. The Employer's cash contributions are revenue in nature as the amount and timing of the contributions are designed to correspond to meeting obligations within a relatively short period of time to deliver shares to employees and those obligations are accepted as being components of employee remuneration. As the Employer's cash contributions to the Trustee are part of the overall remuneration provided to the Employer's employees, the Commissioner accepts that the contributions are not capital or capital in nature. Apportionment 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. Advantages of a capital nature will be considered small or trifling if the capital advantage obtained is permanently diminished within a relatively short period of time. In this case, the outgoings incurred by the Employer by way of contributions to the Trust in order to carry on its business are either not capital in nature or any capital component is sufficiently small or trifling such that the Commissioner will not seek to apportion the deduction. | Summary: Irretrievable cash contributions made by the Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee, to fund the subscription for or acquisition off-market of Employer shares by the Trust, will be deductible to the Employer at a time worked out in accordance with section 83A-210. | Detailed Reasoning - Detailed reasoning: The deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which the Employer incurred the outgoing. However, 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 provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by the Employer under the Plan in relation to the Participant's employment. 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 Plan, an option granted to a Participant is or will be an ESS interest as it is or will be a right to acquire a beneficial interest in a share in the Employer. The term 'employee share scheme' is defined in subsection 83A-10(2) as: a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of: (a) the company; or (b) *subsidiaries of the company; in relation to the employees' employment. For the purposes of subsection 83A-10(2), subsection 995-1(1) defines the term 'scheme' as follows: (a) any *arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest (that is, a beneficial interest in a right to acquire a beneficial interest in a share of the Employer), is provided to Participants in relation to their employment in the Employer in accordance with the Trust Deed. Division 83A will apply, broadly, if an ESS interest is acquired at a discount under an employee share scheme. The ESS interests acquired by the Participants under the Plan will be acquired at a discount. The exercise price will be determined by the Board at its sole discretion and adjusted in accordance with the date of the offer letter. ESS interest acquired by the Trustee of the EST A share acquired by the Trustee to satisfy an option granted under the employee share scheme to an employee in relation to the employee's employment, is itself acquired under the same scheme. The granting of options, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the shares by the Trustee and the allocation of shares to the Participants are all interrelated components of the Plan. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme operates as intended. If the irretrievable cash contributions are provided before the options are granted to the Participants, then section 83A-210 will apply to determine the timing of deduction of the cash contributions under section 8-1. In this instance the contribution will only be deductible to the Employer in the income year when the relevant performance rights are granted to Participants. This is consistent with the ATO-view set out 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. However, section 83A-210 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from options that have already been granted. | Summary: The Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Employer in respect of the irretrievable cash contributions made by the Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee to fund the subscription for or acquisition off-market of Employer shares by the Trust. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision. Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' that was obtained, or would be obtained, but for section 177F of the ITAA 1936, by a taxpayer in connection with a scheme to which Part IVA applies. Law Administration Practice Statement PS LA 2005/24 provides instructions and practical guidance to Tax Officers on the application of Part IVA and other General Anti-Avoidance Rules. PS LA 2005/24 is publicly available on the ATO website. The following requirements must be present before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936 (paragraph 47 of PS LA 2005/24): (i) a 'tax benefit', as identified in section 177C, was or would but for subsection 177F(1), has been obtained; (ii) the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and (iii) having regard to section 177D, the scheme is one to which Part IVA applies. The Scheme Subsection 177A(1) of the ITAA 1936 provides that 'scheme' means: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct This definition is sufficiently wide to cover the Plan, which use payments made by the Employer to the Trustee (in accordance with the Trust Deed) to fund the Trustee to enable the acquisition of Employer shares for the benefit of Participants. Tax Benefit Broadly, subsection 177C(1) of the ITAA 1936 provides that a tax benefit exists for the purposes of Part IVA of the ITAA 1936 where it might reasonably be expected that an amount would be included in assessable income, a deduction would not be allowable, a capital loss would not be incurred, or a foreign tax credit would not be allowable to the taxpayer in a year of income, if the scheme had not been entered into or carried out. Determining whether this is the case depends on the facts and involves 'a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable'. This prediction is often referred to as the 'counterfactual'. Within the above statutory parameters, the Applicant examined predictions of events for the purpose of concluding upon a postulate that is a reasonable alternative to the entering into or carrying out of the scheme. According to the Applicant, if the Employer directly provided eligible employees with either an increase in salary, or the issue of new shares directly to the Participant; it would not receive a deduction for the same amount as under section 8-1 in respect of issuing the shares; any deduction received would be limited to that allowable under section 83A-205. Therefore by using a Trust, a tax benefit is created through the greater deduction the Employer will receive under section 8-1 for the irretrievable cash contributions it makes to the Trustee. The Employer is unable to acquire shares in itself or hold shares in itself under Australian Corporations legislation without cancelling the shares, whether or not for the benefit of employees. Where the irretrievable cash contributions made by the Employer are in turn used by the Trust to subscribe for Employer shares, it might be said that the Employer has not suffered a permanent loss or outgoing as such. In this sense, the tax benefit is an allowable deduction for an expense incurred which is largely reimbursed, albeit with additional shares on issue. Applicable purpose test In deciding whether Part IVA of the ITAA 1936 applies to a scheme, it is necessary to consider whether, having regard to each of the factors set out in subsection 177D(2) of the ITAA 1936, it would be concluded that the person, or one of the persons who entered into the scheme or any part of it, did so for the purpose of enabling a relevant taxpayer to obtain a tax benefit in connection with the scheme. Having regard to the Part IVA analysis set out in the ruling request and the Commissioner's consideration of the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner will not make a determination under section 177F of the ITAA 1936 in respect of the Employer to deny, in part or in full, any deduction claimed by the Employer in respect of the irretrievable cash contributions made by the Employer to the Trust to fund the subscription for, or acquisition on-market of, Employer shares by the Trust. | Summary: The provision of Employer options to employees of the Employer (or any subsidiary member of the Employer income tax consolidated group) under the Plan will not constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA). | Detailed Reasoning - Detailed reasoning: The Employer's liability to fringe benefits tax 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 fringe benefits tax unless a fringe benefit is provided. A fringe benefit will only arise under subsection 136(1) of the FBTAA where benefits are provided by employers to employees or associates of employees. Under the definition of fringe benefit, a benefit must also be provided 'in respect of the employment of the employee'. Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA, states that a fringe benefit does not include: a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997 ) to which Subdivision 83A-B or 83A-C of that Act applies; The Commissioner accepts that the Plan is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interests is provided to employees in relation to their employment in the Employer and that Subdivision 83A-B or 83A-C applies to those ESS interests. The shares acquired by the Trustee under the Plan to satisfy options are also provided to employees under that same employee share scheme. When an employee of the Employer accepts an offer to participate in the Plan they obtain a right to acquire a beneficial interest in a share and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received would be in respect of the exercise of the options 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 ). Therefore, the provision of options to Employer employees who participate under the Plan will not be subject to fringe benefits tax because they are specifically excluded under paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA. | Summary: The irretrievable cash contributions made by the Employer or made by another entity that is a member of the Employer group of companies to the Trustee to enable the Trust to subscribe for, or acquire off-market, Employer shares will not be treated as a fringe benefit provided by the Employer or by the relevant entity within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: Subsection 136(1) of the FBTAA defines a 'fringe benefit', in relation to an employee, as 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 ); …. 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). As stated in the Detailed reasoning for Question 2 and Question 4 above, the right to acquire a beneficial interest in a share is an ESS interest within the meaning of subsection 83A-10(1) and the Plan is an employee share scheme within the meaning of subsection 83A-10(2). Under the Plan, the employer established the Trust to acquire shares in Employer and to allocate those shares to employees of the Employer and its subsidiaries. Therefore, paragraphs 130-85(4)(a) and (b) are satisfied because: • the Trust acquires shares or rights in the Employer; and • the Trust ensures that the ESS interests being beneficial interests in those shares or rights, are provided under an employee share scheme, to the employees in accordance with the Trust Deed and relevant rules of the Plan. In undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b), the Trustee will be required to undertake incidental activities that are a function of managing the Plan and administering the Trust. For the purposes of paragraph 130-85(4)(c) and ATO Interpretative Decision 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 , activities which are merely incidental include: • the opening and operation of a bank account to facilitate the receipt and payment of money; • the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee; • the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; • dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme; • the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares; • the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and • receiving and immediately distributing shares under a demerger. Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental. The purposes of paragraph 130-85(4)(c) are also reflected under the Trust Deed: The Background of the Trust Deed reinforce this in stating that the Trustee has agreed to act as Trustee of the Trust for the purposes of holding certain property on trust for the benefit of employees of the Group and specified others in accordance with the Rules of the Plan and other equity plan operated by the company. The Trust is an employee share trust, as defined in subsection 995-1(1), as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and (b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). Consequently, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the Trust. Accordingly, the irretrievable cash contributions made by the Employer will make or any subsidiary of the Employer will make to the Trustee of the Trust, to fund the subscription for or acquisition off-market of Employer shares will not constitute a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA.

Reasons for decision: All legislative references are to provisions of the ITAA 1997 unless otherwise stated. | Questions 1 to 3 -application of the single entity rule in section 701-1 | The income tax consolidation provisions allow certain groups of entities to be treated as a single entity for Australian income tax purposes. Under the single entity rule (SER) in section 701-1, the subsidiary members of a consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period they are members of the consolidated group with the head company of the group being the only entity recognised for income tax purposes. | The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997. As a consequence, the actions and transactions of the Employer or a subsidiary member of the Employer tax consolidated group are treated as having been undertaken by the Employer as the head company of the Employer tax consolidated group for Australian income tax purposes.