Private ruling: Employee Share Scheme
Date of advice: 3 October 2016
Published: November 2016
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | This ruling applies for questions 4 and 5 for the following periods: | Year ending 31 March 2015 | Year ending 31 March 2016 | Year ending 31 March 2017 | Year ending 31 March 2018 | Year ending 31 March 2019

Ruling: Q1: Will Company X Limited (Company X) obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by Company X or a subsidiary member of the Company X income tax consolidated group to the Trustee of the Company X Employee Share Trust (the EST) to fund the subscription for, or acquisition on-market of, ordinary Company X shares to satisfy Employee Share Scheme (ESS) interests issued pursuant to the Company X Equity Incentive Plan (EIP)? | A3: Yes. | Q2: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in full or in part, any deduction claimed by Company X as the head entity of the Company X tax consolidated group in respect of irretrievable cash contributions made by Company X to the EST to fund the subscription for, or acquisition on-market, of ordinary Company X shares? | A4: No. | Q3: Is the provision of ESS interests and shares by Company X to employees of Company X (or subsidiary member employees) pursuant to the EIP, a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)? | A5: No. | Q4: Will the irretrievable contributions made by Company X or any other member of Company X income tax consolidated group to the Trustee of the EST to fund the subscription for, or acquisition on-market of, ordinary Company X shares pursuant to the EIP, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBAA? | A6: No.

Relevant facts and circumstances: Company X is an Australian company. As part of its remuneration strategy, Company X has established a long term incentive plan, under which Participants are granted rights to acquire Company X ordinary shares (Performance Rights) or an equivalent cash payment in lieu. Performance Rights are granted for nil consideration. Company X also operates a Deferred Short Term Incentive (STI) scheme, under which participants are entitled to receive cash and rights to acquire Company X ordinary shares (Deferred STI Rights). Equity Incentive Plan Company X Equity Incentive Plan (EIP) operates as follows: • At the discretion of the Board, eligible employees are invited to participate in the EIP. • Performance Rights or Deferred STI Rights (collectively Awards) are issued in accordance with the guidelines established by Company X's Board. • Performance Rights may vest subject to a specific performance period, with both employee service requirements and performance conditions attached to the vesting of Performance Rights. • Deferred STI Rights may vest subject to a specified vesting period, with employee service requirements attaching to the vesting of Deferred STI Rights. • Upon vesting, Participants will acquire one ordinary Company X share for each vested Performance Right and Deferred STI Right, with no amount being payable to acquire the shares. Employee Share Trust Establishment of the Employee Share Trust An Employee Share Trust (EST) was established as a separate vehicle for the sole purpose of acquiring or subscribing for, delivering, allocating and holding shares in Company X for employees participating in the EIP. Reasons for establishing the EST The reasons for using a trust include: • A company is unable to hold its own shares. The EST is a vehicle which will enable Company X to effectively acquire and hold its own shares for the purposes of fulfilling is obligations resulting from existing grants under the EIP. • The EST will facilitate the acquisition of shares either on-market or by a new issue of shares by Company X. • The EST provides an arm's length vehicle for acquiring and holding shares in Company X, either by way of new issue or acquiring on-market, i.e., providing flexibility relating to capital management. • The EST will be an efficient structure for giving effect to disposal restrictions and vesting conditions. As the Trustee of the EST is the legal owner, employees have no ability to deal in the shares whilst they are held in the Trust subject to restrictions/conditions. • Contribution to the EST to acquire shares before Awards vest may enable Company X to hedge against a potential increase in costs to satisfy Awards due to share price growth. • The EST provides the flexibility to acquire and hold shares that will be allocated to employees under the EIP. When vesting conditions are not met, Awards are forfeited and the EST enables shares held for such forfeited Awards to be 'recycled' to satisfy other grants of Awards. • The EST establishes independent records and accounts for participating employees. Obligations of the Trustee The sole activities of the Trustee will be acquiring shares for the purpose of providing them to participants on vesting of their Awards under the EIP and the administration of the EST. The Trustee will acquire shares at market value and will have the discretion to acquire them on-market or by subscribing for new shares. The EST is managed and administered so that it satisfies the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997. Allocating shares to the EST Under the terms of the EST Deed, Company X will instruct the Trustee to subscribe for, purchase or allocate a number of shares specified in the notice. This instruction may occur at the time Awards are granted or at a later time depending on Company X's capital management strategy. The Trustee will, in accordance with instructions received and pursuant to the EIP rules, acquire deliver and allocate shares to participants provided that the Trustee receives sufficient payment to subscribe for or purchase shares and/or has sufficient unallocated shares available in the EST. Shares will not be allocated to employees under the EST and no interest in the shares will arise until the relevant vesting conditions are met and a Performance Right has vested. Company X may make irretrievable contributions to the EST as required, noting that contributions to the EST will only be made if the Awards are settled in shares via the EST (i.e. not by a cash payment in lieu). Company X contribution to the EST All funds received by the Trustee from Company X will constitute accretions to the corpus of the EST and no participant will be entitled to receive a distribution of or from such funds. The funds will not be returned or repayable to Company X except where they are used for subscribing for shares in Company X. The Trustee will not be permitted to acquire any share or deliver any share to any participant, if to do so would contravene any applicable law. It will not be permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the EST in accordance with the EIP rules. It will not be permitted to carry out activities which result in the participants being provided with additional benefits other than the benefits that arise under the relevant plan rules. Company X is not a beneficiary under the EST Deed and any funds it contributes to the EST, other than specifically in the form of a loan, cannot be refunded, repaid or returned to Company X other than by way of the Trustee paying the issue price where it subscribes for shares in Company X. Company X will have no interest in the shares held by the EST.

Relevant legislative provisions: Fringe Benefit Tax Assessment Act 1986 section 66 | Fringe Benefit Tax Assessment Act 1986 subsection 136(1) | Fringe Benefit Tax Assessment Act 1986 paragraph 136(1)(h) | Fringe Benefit Tax Assessment Act 1986 paragraph 136(1)(ha) | Income Tax Assessment Act 1936 section 177A | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 subsection 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 section 83A-210 | Income Tax Assessment Act 1997 subparagraph 83A-210(a)(i) | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2)) | 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 subsection 995-1(1)

Reasons for decision: Summary: The irretrievable cash contributions made by Company X Limited (Company X) or a subsidiary member of the Company X income tax consolidated group to the Trustee of the Company X Limited Employee Share Trust (the EST), to fund the subscription for, or acquisition of on-market of, ordinary Company X Shares to satisfy Employee Share Scheme (ESS) interests issued under Company X Equity Incentive Plan (EIP), will be a deduction under section 8-1. | Detailed Reasoning - Detailed reasoning: Section 8-1 states: (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. Loss or outgoing incurred To qualify for a deduction under section 8-1 a contribution to the trustee of an employee share trust (EST) 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. This must be read subject to the propositions developed by the courts, which are discussed in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance . A contribution made to the trustee of an EST is incurred only when the ownership of that contribution passes from an employer to the trustee of the EST and there is no circumstance in which the employer can retrieve any of the contribution - Pridecraft Pty Ltd v. Federal Commissioner of Taxation FCAFC 339; 2005 ATC 4001 (Pridecraft); Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650 2004 ATC 4674; 55 ATR 745 (Spotlight) . Application to the facts To claim a deduction under subsection 8-1(1) contributions made to the Trustee of the EST by Company X must be irretrievable and non-refundable. Company X has stated that all funds received by the Trustee of the EST from Company X in the form of irretrievable contributions will constitute accretions to the corpus of the Trust and the funds will not be returned or repayable to Company X except where they are used for subscribing for Shares in Company X. Therefore, Company X will incur an outgoing on the day the irretrievable contributions are made to the EST. Company X has a legal obligation to provide Shares to participants at vesting of Awards, (in accordance with EIP Rules). Company X has a legal obligation to fund the EST for the purpose of enabling the EST to satisfy those Shares. Accordingly, contributions made to the Trustee of the EST by Company X will be irretrievable and will therefore be considered a loss or outgoing incurred by Company X for the purpose of subsection 8-1(1). Necessarily incurred in carrying on a business 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] ; 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). Draft Taxation Ruling TR 2014/D1 Income tax: employee remuneration trust arrangements (TR 2014/D1 draft) provides the Commissioner's current view on a broad scope of taxation consequences for employers, trustees and employees who participate in an employee remuneration trust (ERT) arrangement. The way in which the EST has been established and operates is in line with the elements of an ERT to which TR 2014/D1 applies. Paragraph 14 of TR 2014/D1 provides that where an employer: • carries on a business for the purpose of gaining or producing assessable income and engages employees in the ordinary course of carrying on that business • makes a contribution to the trustee of an EST, and • at the time the contribution is made, the primary purpose of the contribution is for it to be applied, within a relatively short period of time, to the direct provision of remuneration of employees (who are employed in that business). then, such a contribution would ordinarily satisfy the nexus of being necessarily incurred in carrying on that business. Paragraph 178 of TR 2014/D1 provides that the Commissioner will generally accept a relatively short period of time for the trustee of an ERT to diminish a contribution for the direct provision of remuneration to employees to be up to five years from the date the contribution was made by an employer to the trustee of an ERT. However, where the contribution has been made to facilitate an employee having an interest in the ERT corresponding to a particular number of shares (or rights to acquire shares) in the employer or in its subsidiaries to which Subdivision 83A-C applies, the statutory scheme is such that a relatively short period of time for these arrangements will generally be accepted as being up to seven years from the date the contribution is made. Application to the facts It is considered that Company X is carrying on a business and when Company X or a member of the Group makes a contribution to the Trustee of the EST, its primary purpose is to enable Company X to meet its obligations arising from the grant of Awards under the EIP. Therefore, the contributions made by Company X or a member of the Group to the Trustee of the EST are part of the overall employee remuneration costs of Company X. The benefits provided to employees under the EIP are designed to reward, retain and motivate employees and to provide them with the opportunity to share in any future growth in value of the Company. Accordingly, we consider that contributions made to the Trustee of the EST by Company X or a member of the Company X Group for the purpose of remunerating its employees in the form of Shares under the EIP is an outgoing incurred in carrying on the business for the purpose of gaining or producing assessable income. Capital or revenue 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 contributions will not be deductible under section 8-1 to the extent to which it is capital or of a capital nature. In ATO Interpretive 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 the view is expressed that a company will be entitled to a deduction for irretrievable contributions made to the trustee of its employee share scheme under section 8-1. 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: 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... More recently in GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 21 ATR 1; 90 ATC 4413 the High Court pointed out that the character of expenditure is ordinarily determined by reference to the nature of the asset acquired and that the character of the advantage sought by the making of the expenditure is a critical factor in determining the character of what is paid. In Spotlight Stores Pty Ltd v Federal Commissioner of Taxation (2004) 55 ATR 745 and Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 58 ATR 210 it was determined that payments by an employer company to an employee share trust established for the purpose of providing incentive payments to employees were on revenue account and were not capital or 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 to 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 a capital nature, but the advantages of a capital nature are only expected by very small or trifling comparison, apportionment may not be required. In this regard, the draft taxation ruling TR 2014/D1 at paragraph 202 states: Where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period (as discussed in paragraph 178 of this draft Ruling) 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 the employer: • intends that any direct interest in the employer acquired by the trustee of the ERT (for example shares) will be transferred to employees within that relatively short period, and • does not anticipate that such shares will be on-sold to third parties at that time or shortly thereafter. For these purposes, the Commissioner considers that a relatively short period of time is up to 5 years, increased to 7 years where the benefit in question relates to an ESS (paragraph 178 of TR 2014/D1). Where the primary purpose of the employer in making the contribution is to remunerate employees with 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 examples shares) will be transferred to employees within that relatively short period, and • such shares will not be on-sold or third parties at that time or shortly thereafter. Application to the facts On weighing up the facts in this case we consider the capital structure advantage will only be small or trifling as: • the operation of the EST and the EIP Rules are such that Shares allocated to each employee will generally be transferred into the name of the relevant employee subject to any sale restriction that applies to such Shares • contributions to the Trustee of the EST will generally be made after the relevant Awards have been granted the implication being contributions will relate to Shares allocated to employees within a maximum period of three years • Shares are subject to Vesting Conditions, and • the EIP provides employee equity incentive plans to further align the interests of staff and shareholders, by employees earning significant award from the acquisition of equity in the company. Therefore, apportionment for the capital structure advantage will not be required. Conclusion Accordingly, where irretrievable cash contributions are made by Company X or by a subsidiary member of the Company X Group to the Trustee of the EST to acquire Shares, whether by on-market purchase or subscription, are allowable deductions under section 8-1. | Summary: A deduction for the irretrievable contribution under section 8-1 will generally be allowable in the income year in which Company X incurred the outgoing, the timing of which is pursuant to section 83A-210. | Detailed Reasoning - Detailed reasoning: The provision of money to the trustee of an EST by the employer for the purpose of remunerating its employees under an employee share scheme is an outgoing in carrying on the employer's business and is deductible under section 8-1. 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 contribution (the money) provided to the trustee for the purpose of enabling an employee to acquire (directly or indirectly) an ESS interest under an ESS and the contributions are made before the income year in which the employee acquires the ESS interest. Arrangement The implementation of the EIP, the establishment of the EST under the Trust Deed and the provisions of money by Company X or the Company X 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 EIP, when the participant is granted Awards, an ESS interest will be acquired by the participant at the time of grant. ESS An ESS 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 or action of course to conduct, whether unilateral or otherwise. The EIP is an ESS for the purposes of subsection 83A-10(2) as it 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 the EST Deed. Relevant connection The granting of Awards, 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 Participants are all interrelated components of the EIP. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed. Accordingly, the provision of money to the Trustee by Company X is considered to be for the purpose of enabling Participants, indirectly as part of the EIP, to acquire ESS interests. A deduction for the purchase of Shares to satisfy the obligations arising from the grant of ESS interests is therefore allowable to Company X in the year in which the money was paid to the Trustee (and the ESS interests were satisfied), under section 8-1. However, in circumstances where an amount of money is used by the Trustee to purchase excess shares, or where the money is held in the Trust, and intended to meet obligations arising from a future grant of ESS interests, the payment occurs before the employees acquire the relevant ESS interests. In such circumstances, section 83A-210 will apply and the excess payment will only be deductible in the year of income when the relevant ESS interests are subsequently granted and the expenditure incurred. | Summary: As discussed in Question 2a, section 83A-210 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an ESS, in relation to the employee's employment and the contributions are made before the acquisition of the ESS interests. Accordingly, section 83A-210 will not apply where Company X makes irretrievable contributions to the Trustee to fund the acquisition of Shares to satisfy the ESS interests, where the contribution is made after the acquisition of the relevant ESS interests. In such a situation, the irretrievable contributions by Company X to the Trustee will be deductible under section 8-1 in the income year in which the irretrievable contributions are made and where ESS interests are ultimately satisfied. | Summary: The Commissioner will not seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part of full, any deduction claimed by Company X as head entity of the income tax consolidated group in respect of the irretrievable cash contribution made by Company X or any subsidiary member of the Company X income tax consolidated group to the Trustee to fund the subscription for or acquisition on-market of Company X shares by the EST. | Detailed Reasoning - Detailed reasoning: Law Administration Practice Statement (draft) PS LA 2005/24 (draft) Application of General Anti-Avoidance Rules (PS LA 2005/24) deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise his discretion to make a determination in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met: • there must be a scheme within the meaning of section 177A of the ITAA 1936 • a tax benefit must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out, 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 (dominant purpose). On the basis of an analysis of these three 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 Company X for the irretrievable contributions made by Company X or any subsidiary member of the Company X income tax consolidated group to the Trustee to fund the subscription for, or acquisition on-market of, Company X shares by the EST. | Summary: The provision of ESS interests and shares by Company X to employees of Company X (or a subsidiary member of the Company X income tax consolidated group) under the EIP will not be treated as a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). | Detailed Reasoning - Detailed reasoning: An employer's liability to fringe benefit tax (FBT) arises under section 66 of the FBTAA which provides that tax is imposed in respect of the fringe benefit 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. The provision of Awards Paragraph (h) of the definition of 'fringe benefit' 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 83AB or 83AC of that Act applies. Subsection 83A-10(1) defines an ESS interest as: (a) a share in the company (b) a right to acquire a beneficial interest in a share in the company Subsection 83A -10(2) defines an ESS as: An employee share scheme is 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. Company X has stated that it will grant ESS interests to participants under the EIP. These ESS interests offered to participants are offered at discount (as there is no consideration paid for them) and in connection with the participants employment. It is therefore accepted that the EIP described in this private ruling comprise ESS and incorporates the use of trust that is employee share trust within the meaning of subsection 130-85(4). Accordingly, the acquisition of ESS interests pursuant to the EIP will not be subject to FBT on the basis that they are part of an ESS (to which Subdivision 83A-B or 83A-C will apply) and thereby excluded from the definition of 'fringe benefit' by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA. The provision of shares upon vesting of Awards As stated above, 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 '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. The court at page 410 said: Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, casual connection or relationship between the benefit and the employment. The situation is similar to that which existed in Federal Commissioner of Taxation v McArdle (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The full Federal Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years. When an employee is granted an Award under the EIP, they obtain a right to acquire a beneficial interest in a share in Company. It is this right that constitutes an ESS interest. When this right is subsequently exercised, any benefit received, that is, the beneficial interest is shares, would be in respect of the exercise of the right, and not in respect of employment. Therefore, the benefit that arises to an employee after the vesting of Awards, being the beneficial interest in a share, does not give rise to a fringe benefit as no benefit has been provided in respect of the employment of the employee. | Summary: The irretrievable cash contributions made by Company X (or any other member of the Company X income tax consolidated group) to the Trustee of the EST to fund the subscription for or acquisition on-market of Company X shares will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include: 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); EST An EST is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4). Subsection 130-85(4) states: 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). An ESS is defined in subsection 83A-10(2) as a scheme to 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 Awards granted under the EIP are ESS interests, within the meaning of subsection 83A-10(1), acquired under an ESS, as defined in subsection 83A-10(2). Thus the EIP is an ESS within the meaning of subsection 83A-10(2) because it is a scheme under which Awards and ultimately shares are provided to eligible employees in relation to the employee's employment. Under the EIP, Company X has established the EST for the sole purpose of the Trustee acquiring shares in Company X and allocating those shares to employees. Therefore, paragraphs 130-85(4)(a) and (b) are satisfied because: • the EST acquires shares in Company X, and • the EST ensures that the ESS interest, being beneficial interest in Company X shares is provided under an ESS by allocating those shares to the employees in accordance with the EST Deed and the EIP Rules. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) will also require that the Trustee undertake incidental activities that are a function of managing the employee share plan and administering the Trust. 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 explains that the activities which are considered to be merely incidental (in accordance with paragraph 130-85(4)(c)) include: • the opening and operating of a bank account to facilitate the receipt and payment of money • the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to an employee • the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme • dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purpose of the employee share scheme • the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiaries 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. The provision of the EIP Rules and EST Trust Deed collectively make it clear that the Trustee can only use the contributions for the acquisition of shares for eligible employees in accordance with the EIP Rules. In addition, the EST Deed states that the EST will be managed and administered so that it satisfies the definition of "employee share trust' for the purposes of subsection 130-85(4). Therefore, the EST is an employee share trust as the activities of the trust involve acquiring shares and allocating beneficial interest in those shares to employees. 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 to fund the acquisition of Company X shares from being a fringe benefit.

Are irretrievable contributions made by Company X or a subsidiary member of the Company X income tax consolidated group to the Trustee of the EST, to fund the subscription for, or acquisition on-market of, ordinary Company X shares by the EST to satisfy ESS interests issued pursuant to the EIP, deduction to Company X at a time determined by section 83A-210 of the ITAA 1997, where contributions are made before the acquisition of the relevant ESS interests? | Question 2b: Are irretrievable contributions made by Company X or a subsidiary member of the Company X income tax consolidated group to the Trustee of the EST to fund the subscription for, or acquisition on-market of, ordinary Company X shares by the EST to satisfy ESS interest issued pursuant to the EIP, deductible to Company X under section 8-1 of the ITAA 1997 in the income year when the contributions are made, where the contribution is made after the acquisition of the relevant ESS interest? | Reasons for decision: All references are to the Income Tax Assessment Act 1997 unless otherwise stated.