Private ruling: Fringe Benefits Tax
Date of advice: 22 April 2016
Published: June 2016
Ruling period: 1 July 20XX to 30 June 20YY

Ruling: Q1: Will the irretrievable cash contributions made by Company A to Company B (Trustee), as trustee of the Company A Employee Share Trust (Company A EST), to fund the subscription for, or acquisition on-market or off-market of, Company A shares, constitute a fringe benefit within the meaning of section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: No. | Q2: Will Company A be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions it makes to the Trustee, to fund the subscription for, or acquisition on-market or off-market of, Company A shares by the Trustee to satisfy ESS interests issued pursuant to the Company A Executive Incentive Plan (EIP)? | A2: Yes. | Q3: Will irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for, or acquisition on-market or off-market of, Company A shares by the Trustee, be deductible to Company A under section 8-1 of the ITAA 1997 at a time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests? | A3: Yes. | Q4: Will 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 full, a deduction claimed by Company A for the irretrievable cash contributions made by it to the Trustee to fund the subscription for, or acquisition on-market or off-market of, Company A shares by the Trustee? | A4: No.

Relevant facts and circumstances: Company A has established an employee share plan, the Company A Equity Incentive Plan (EIP), under which senior executives may be provided with performance rights (Rights and Options), with each Right and Option representing a right to acquire a fully paid ordinary share in Company A (Company A share) in the future at no cost, subject to vesting conditions. Senior executives were granted Rights and/or Options under the EIP on listing and subsequent grants of Rights and/or Options are made to them on an annual basis as part of their remuneration. In addition, Company A established the Company A Limited Recourse Loan Plan (LRLP) under which one senior executive has been provided with a loan to acquire shares in Company A for market value. The shares are subject to vesting conditions and are forfeited where performance conditions and/or service conditions are not met. The LRLP is not the subject of this private ruling and is mentioned only by virtue of the fact that shares acquired by an executive under the LRLP which have been forfeited due to the executive not meeting vesting conditions may be purchased by Company A off-market. The implementation of the EIP and LRLP form part of Company A's long-term strategy of creating shareholder wealth by: • rewarding the hard work of senior executives in Company A in a way that is competitive, market related and cost-effective for the business; • motivating and promoting the long-term retention of senior executives in Company A; • reflecting the importance of senior executives to the future success of Company A; • enabling the executives to benefit in the long term growth and ownership of Company A by participating in these plans; and • attracting new executive talent to achieve Company A's strategy. EIP Overview The EIP is governed by the Company A Equity Incentive Plan Rules (Plan Rules). Pursuant to the Plan Rules the Board of Directors of Company A (Board) or any committee of the Board or a duly authorised person or body to which the Board has delegated its powers under the EIP may, from time to time, in its absolute discretion, invite Eligible Employees (as defined in the Plan Rules) to participate in a grant of Rights or Options. An offer to participate in the EIP (Offer) will be made on the terms set out in the Plan Rules and/or on any additional or alternative terms as the Board may determine from time to time. An Eligible Employee to whom Rights or Options have been granted becomes a Participant under the EIP. Pursuant to the Plan Rules, the Board will, amongst other things, set out in the Offer: • the number of Rights or Options being offered, or the method by which the number will be calculated; • the amount (if any) that will be payable for the grant of Rights or Options; • any vesting conditions or other conditions that apply, including any vesting period; • when Rights or Options may vest; • the procedure for exercising an Option (including any exercise price that will be payable) following vesting and the period(s) during which it may be exercised; and • whether the vesting of Rights and/or vesting and exercise of Options will be satisfied through an allocation of Company A shares or by making a cash payment. Pursuant to the Plan Rules, acceptance of an Offer must be made by the Eligible Employee in accordance with the instructions that accompany the Offer, or in any other way the Board determines. The Board may, at its discretion, refuse to allow the participation of an Eligible Employee where that Eligible Employee ceases to be an Eligible Employee, or ceases to satisfy any other conditions imposed by the Board, before the grant of Rights or Options is made. Rights A Right is defined in the Plan Rules as an automatic entitlement to a Company A share (or, in certain circumstances, to a cash payment in lieu of a Company A share) once applicable conditions (including any vesting conditions) are satisfied. Pursuant to the Plan Rules, where an Eligible Employee has accepted an Offer to participate in a grant of Rights in accordance with the Plan Rules, the Board will, subject to its discretion, grant Rights to the Eligible Employee. Unless the Board determines otherwise: • no payment is required for the grant of a Right • Rights may not be registered in any name other than that of the Eligible Employee The Plan Rules detail how Rights will vest: • subject to any express rule to the contrary, a Right will only vest where each vesting condition, and all other relevant conditions advised to the Participant by the Board have been satisfied • subject to the Plan Rules, the vesting of a Right will be satisfied by Company A allocating Company A shares to the Participant pursuant to the Plan Rules • the Board may determine that the vesting of a Right will be satisfied by Company A making a cash payment in lieu of an allocation of Company A shares pursuant to the Plan Rules • the Board may determine, prior to making a grant of Rights, that the vesting of those Rights will only be satisfied through an allocation of Company A shares to the Participant in accordance with the Plan Rules, and not by making a cash payment under the Plan Rules • vesting occurs upon notification from Company A to the Participant that Rights have vested pursuant to the Plan Rules Subject to the Plan Rules as soon as practicable following vesting of a Right, the Board must issue to, procure the transfer to, or procure the setting aside for the Participant of the number of Company A shares in respect of which Rights have vested. No further action is required on the part of the Participant. Pursuant to the Plan Rules, where the Board exercises its discretion under the Plan Rules to make a cash payment to a Participant in lieu of an allocation of Company A shares, it will do so on the following terms: • Company A must pay to the Participant an amount in Australian dollars (or any other currency determined by the Board in its absolute discretion) equivalent to the value of Rights that have vested • the amount of the cash payment referred to in the Plan Rules will be calculated by multiplying the number of Company A shares in respect of which Rights have vested by the Current Market Price (as defined in the Plan Rules) • where the Board determines that the payment under the Plan Rules is to be made in a currency other than Australian dollars, unless the Board determines otherwise, the foreign exchange rate applied will be the average closing exchange rate of the relevant currency for the 5 days prior to the date of vesting A Right will lapse upon the earliest to occur of: • the Right lapsing in accordance with a provision of the Plan Rules (including in accordance with a term of an Offer); • failure to meet a vesting condition or any other condition applicable to the Right within the vesting period; or • the receipt by Company A of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Right. Options An Option is defined in the Plan Rules as an entitlement to receive a Company A share (or, in certain circumstances, to a cash payment in lieu of a Company A share) that may only be exercised on satisfaction of applicable conditions (including any vesting condition) and compliance with the applicable exercise procedure (including payment of any applicable Exercise Price (as defined in the Plan Rules)). Pursuant to the Plan Rules, where an Eligible Employee has accepted an Offer to participate in a grant of Options in accordance with the Plan Rules, the Board will grant Options to the Eligible Employee. Unless the Board determines otherwise: • no payment is required for the grant of an Option • Options may not be registered in any name other than that of the Eligible Employee The Plan Rules detail how Options vest: • subject to any express rule to the contrary, an Option granted under the EIP will only vest and become exercisable where each vesting condition, and all other relevant conditions advised to the Participant by the Board pursuant to the Plan Rules, have been satisfied • the exercise of any Option granted under the EIP will be effected in the form and manner determined by the Board and, subject to the Plan Rules, must be accompanied by payment of the relevant Exercise Price (if any) • subject to the Plan Rules, the exercise of an Option will be satisfied by Company A allocating Company A shares to the Participant pursuant to the Plan Rules • the Board may determine that the exercise of those Options will be satisfied by Company A making a cash payment in lieu of an allocation of Company A shares pursuant to the Plan Rules • the Board may determine, prior to making a grant of Options, that the exercise of those Options will only be satisfied through an allocation of Company A shares to the Participant in accordance with the Plan Rules and not by making a cash payment under the Plan Rules • vesting occurs upon notification from Company A to the Participant that Options have vested pursuant to the Plan Rules Subject to the Plan Rules, as soon as practicable following the exercise of an Option, the Board must issue to, procure the transfer to, or procure the setting aside for the Participant of the number of Company A shares in respect of which Options have been exercised. No further action is required on the part of the Participant. Pursuant to the Plan Rules, where the Board exercises its discretion under the Plan Rules to make a cash payment to a Participant in lieu of an allocation of Company A shares, Company A must: • notify the Participant that no Exercise Price is payable in respect of the Options exercised and/or refund any amount paid by the Participant in respect of those Options • as soon as reasonably practicable, pay to the Participant an amount in Australian dollars (or any other currency determined by the Board in its absolute discretion) equivalent to the value of Options that have been exercised by the Participant • the amount of the cash payment referred to in the Plan Rules will be calculated by multiplying the number of Company A shares in respect of which Options have been exercised by the Current Market Price, less any Exercise Price that would otherwise have been payable in respect of the Options exercised • where the Board determines that the payment under the Plan Rules is to be made in a currency other than Australian dollars, unless the Board determines otherwise, the foreign exchange rate applied will be the average closing exchange rate of the relevant currency for the 5 days prior to the date of exercise An Option will lapse upon the earliest to occur of: • 5 years after vesting or any other date nominated as the expiry date in the Offer; • the Option lapsing in accordance with a provision of the Plan Rules (including in accordance with a term of an Offer); • failure to meet a vesting condition or any other condition applicable to the Option within the vesting period; or • the receipt by Company A of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Option. The Company A EST Company A has established the Company A EST pursuant to the Employee Share Trust Deed (Trust Deed) between Company A and Company B (Trustee) for the purpose of obtaining Company A shares for the benefit of participating senior executives of the EIP. This includes subscribing for Company A shares at market value or otherwise acquiring Company A shares on-market or by way of off-market transfers, and allocating, holding and delivering shares in Company A pursuant to the Plan Rules of the EIP. It is also intended that the Company A EST will be available for the following: • to facilitate the off-market purchase of Company A shares acquired by an executive under the LRLP which have been forfeited due to the executive not meeting vesting conditions. These shares will be used to settle existing Rights and Options granted under the EIP when they vest • to facilitate the requirements of any future equity plans Company A may implement pursuant to the Trust Deed which includes, within the purpose of the Company A EST, '…administering the current and future employee incentive plans adopted by the Company or the Group". Operation of the Company A EST The Trust Deed sets out the manner in which contributions can be made to the Company A EST and Company A shares acquired. Pursuant to the Trust Deed, contributions to the Company A EST are made on the following basis: • the Company A EST may acquire Company A shares determined appropriate and necessary by Company A; funds must be transferred to the Company A EST by Company A to enable the Trustee to acquire Company A shares; • where the Trustee receives a request or direction from the Board specifying how the Trustee should acquire the Company A shares (whether by way of purchase on-market or pursuant to an off-market transfer or subscription (refer to the Plan Rules and the Trust Deed)), the Trustee must, so far as is reasonable within the terms of the Trust Deed and subject to the Plan Rules and the Trust Deed, comply with any such request or direction. (The Plan Rules and the Trust Deed provides that a request or direction from the Board to the Trustee to acquire shares is only effective if the Trustee has been provided with sufficient funds to acquire the relevant Company A shares); and • the Trustee will then consider the Board's instructions and having regard to its broader obligations under the Trust Deed and under trust law will then act accordingly to acquire and allocate the Company A shares to a Participant, with such actions, however, being subject at all times to the requirement under the Plan Rules and the Trust Deed that the Trustee manage and administer the Company A EST so that the Company A EST satisfies the definition of an 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997. The Trustee's action to acquire shares on-market, by way of an off-market transfer, or to subscribe for new shares in Company A will take into consideration any Corporations Act 2001 (Corporations Act) requirements. The purpose and sole activities of the Company A EST are limited to obtaining shares for the benefit of Participants in the EIP and other incidental activities (such as distributing dividends to employees in accordance with the Trust Deed and Plan Rules and meeting the administrative costs of the EST). At all times, the decision by the Trustee will be made in accordance with the Trust Deed and in fulfilment of the Trustee's fiduciary duty to beneficiaries. Company A is not a beneficiary under the Trust Deed, and any funds, both the initial contributions and any additional contributions required to fund the Company A EST, cannot be refunded, repaid or returned to Company A (other than by way of the Trustee paying the issue price where it subscribes for shares in Company A). Further, Company A will have no interest in the shares held by the Company A EST. To the extent that the Company A EST derives interest or dividend income from the holding of Company A shares that is in excess of the costs of the Company A EST, such income may be used to acquire more Company A shares to deliver to employees or may be distributed to employees who have become beneficially entitled to the income (because, for example, their rights have vested but the shares not yet delivered). To the extent that there is no one presently entitled to the income of the Company A EST, the Trustee will pay tax on this income. The Company A shares acquired by the Trustee at any time will be registered in the name of the Trustee as legal owner of the Company A shares. No employee will have beneficial entitlement to the Company A shares in the Company A EST or the income of the Company A EST at any time, unless the Trustee exercises its discretion otherwise. This discretion will be exercised under the terms of the Trust Deed, in fulfilment of the Trustee's fiduciary duty to beneficiaries and in accordance with Plan Rules. All of the Company A shares acquired by the Company AEST will be ordinary shares in Company A. The EIP, operated by Company A with the participation of the Trustee, will at all times be operated in accordance with the requirements of Division 83A of ITAA 1997. Reason for establishing and using the Company A EST Company A's reasons for administering the EIP via the Company A EST are that: • the Company A EST provides employees with the knowledge that the Company A shares and any incidental dividend income or associated rights, are held independently of Company A and the Trustee has a fiduciary obligation to act in the interests of its beneficiaries, i.e. Company A employees • the Company AEST can enable the Company A shares to be acquired progressively over time either on-market or by subscription • Company A can manage its costs and share capital position by having the Company AEST acquire Company A shares to hold on executives' behalf for a period of time, before the executives meet the vesting criteria and become entitled to the Company A shares under the Plan Rules of the EIP. If the executives do not meet the vesting criteria, the Company A EST can reallocate the Company A shares to fulfil future grants • the Company A EST provides the opportunity to improve cash flow planning as Company A can make contributions to the Company A EST periodically throughout the vesting period, thus giving Company A the flexibility to determine the most appropriate time to make contributions • the Company A EST is the most appropriate vehicle to be used to acquire shares and accumulate dividend income during the vesting period for the purpose of acquiring further Company A shares, meeting the costs of the EIP or distributing dividends to employees • the Company A EST enables easier administration of the EIP

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 subsection 177D(2) | 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 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 subsection 83A-10(2) (a) | Income Tax Assessment Act 1997 subsection 83A-10(2) (b) | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 83A-210(a)(i) | Income Tax Assessment Act 1997 section 83A-210(b) | Income Tax Assessment Act 1997 section 83A-340 | Income Tax Assessment Act 1997 paragraph 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: An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA, which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a 'fringe benefit' is provided. In general terms 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include: (ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997); Subsection 995-1(1) states that the expression an 'employee share trust' has the same 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 interest 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 (1) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). Paragraphs 130-85(4)(a) and (b) The beneficial interest in a share received by a Participant when an ordinary share in Company A is provided to them under the terms of the Trust Deed is an ESS interest within the meaning of subsection 83A-10(1). Subsection 83A-10(2) 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 EIP is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which rights (Rights and Options) to acquire ordinary shares in Company A (being ESS interests) are provided to employees in relation to the employee's employment. Company A has established the Company A EST to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests acquired by those employees under the EIP. A beneficial interest in a Company A share is itself provided under an employee share scheme because it is provided under the same scheme under which the Rights and Options are provided to employees in relation to their employment. Paragraphs 130-85(4)(a) and (b) are therefore satisfied because: • the Company A EST acquires shares in a company, namely Company A; and • the Company A EST ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust Deed and EIP. Paragraph 130-85(4)(c) Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the EIP. 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 sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c): • 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 Company A shares) are not considered to be merely incidental. The Trust Deed states: …the Company and the Plan Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purpose of section 130-85(4) of the Income Tax Assessment Act 1997 (Cth) (as amended or replaced from time to time). Paragraph 130-85(4)(c) is satisfied as all other activities undertaken by the Trustee are merely incidental to managing the EIP. | Detailed Reasoning - Conclusion: The Company A EST satisfies the definition of an employee share trust in subsection 130-85(4) as: • the Company A EST acquires shares in a company (being Company A); • the Company A EST ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Trust Deed and EIP; and • the 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 Company A EST. 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 Company A to the Trustee to fund the subscription for, or acquisition on-market or off-market of, Company A shares, will not constitute a fringe benefit within the meaning of section 136(1) of the FBTAA. | Detailed Reasoning - Question 2: The general deduction provision in 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. Losses or outgoings To claim a deduction under subsection 8-1(1) contributions made to the Trustee by Company A must be irretrievable and non-refundable. Pursuant to the Trust Deed, Company A must provide the Trustee with all the funds (contributions) required to enable it to subscribe for, or acquire shares in Company A (either on market or pursuant to an off-market transfer). The Trustee will, in accordance with instructions received pursuant to the Plan Rules, acquire, deliver and allocate Company A shares for the benefit of participants provided that the Trustee receives sufficient payment to subscribe for or purchase Company A shares. The Trustee cannot repay funds received by the Trustee from Company A. The Trustee must apply the funds received in the acquisition or subscription of Company A shares under the Trust Deed and the EIP. No Participant is entitled to receive such funds from the Trustee. These contributions made to the Trustee by Company A will therefore be irretrievable and non-refundable. On this basis, the irretrievable contributions made by Company A are considered to be a loss or outgoing for the purpose of subsection 8-1(1). Sufficient nexus In order for a loss or outgoing to be deductible under subsection 8-1(1) it must be either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. A line of authorities has established that there will be a link between a loss or outgoing and the derivation of income where there is a sufficient nexus. ( The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169, Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288, W. Nevill And Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin No Liability v The Federal Commissioner of Taxation (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147). The contributions made by Company A to the Trustee of the Company A EST are part of the overall employee remuneration costs of Company A. The benefits provided to employees under the EIP intend to reward, retain and motivate employees and to encourage participation by employees of Company A through share ownership. A sufficient nexus exists between the outgoings (being the irretrievable contributions made by Company A to the Trustee of the Company A EST) and the derivation of assessable income for the purposes of subsection 8-1(1). Capital or revenue? Company A will make periodic contributions to the Trustee of the Company AEST for the purpose of acquiring and subscribing for ordinary shares in Company A pursuant to the EIP. In 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. 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 payments by an employer company to an employee share trust, established to provide incentive payments to employees, were held to be on revenue account and were not capital or of a capital nature. | Detailed Reasoning - 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 different nature. This would be relevant in the circumstances where the Trustee of the Company AEST uses contributions made by Company A to the Trustee for the administration of the EIP to subscribe for shares in Company A. 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 the year to year benefits that the employer derives from a loyal and contented workforce. Where the trustee of an employee share trust, ultimately and in substance, uses a contribution from the employer to subscribe for equity interests in the employer (for example shares), the employer has also acquired an asset or advantage of an enduring nature. Where a contribution secures for the employer advantages of both a revenue and capital nature, but the expected advantages of a capital nature are very small or trifling by comparison, apportionment may not be required. In this case, the outgoings incurred by Company A by way of the irretrievable contributions it makes to the Trustee of the Company AEST in order to carry on its business are either not capital in nature or any capital component is considered to be sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. Private or domestic in nature Nothing in the facts suggest that the irretrievable contributions made by Company A to the Trustee of the Company AEST are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1936 or the ITAA 1997. | Detailed Reasoning - Conclusion: The irretrievable contributions Company A makes to the Trustee of the Company AEST to fund the acquisition of ordinary Company A shares in accordance with the Trust Deed and the EIP will be an allowable deduction to Company A under section 8-1. | Detailed Reasoning - Question 3: The deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which Company A incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210. Section 83A-210 states 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 applies under an arrangement where 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 employee share scheme, in relation to the employee's employment and the contributions are made before the acquisition of the ESS interests. Arrangement The implementation of the EIP, establishment of the Company A EST and provision of money by Company A to the Trustee, 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, each Right and Option provided to a Participant when an offer is made under the EIP is an ESS interest as it is (or may later become) a right to acquire a beneficial interest in a share in a company (Company A). Employee share scheme Subsection 83A-10(2) defines 'employee share scheme' 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 EIP is an employee share scheme for the purposes of Division 83A as it is an arrangement, which provides an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a share), to a Participant in relation to their employment in Company A in accordance with the Trust Deed. A Company A share acquired by the Trustee to satisfy a right provided under an employee share scheme, to an employee in relation to the employee's employment, is itself acquired under the same employee share scheme. Relevant connection The making of an offer under the EIP, the providing of Rights or Options under the EIP, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the Company A shares by the Trustee and the allocation of Company A 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 to acquire Company A shares is for the purpose of enabling Participants, indirectly as part of the EIP, to acquire relevant rights (that is ESS interests). If Company A provides irretrievable contributions before a Participant acquires the relevant ESS interests, then section 83A-210 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1. In this instance, the contribution will only be deductible to Company Ain the income year when the relevant Rights or Options (ESS interests) are provided to Participants. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust . Indeterminate rights Rights and Options provided under the EIP are indeterminate rights for the purposes of section 83A-340. That is because the option exists to either deliver a Company A share or make a payment of a cash equivalent to satisfy the Right or Option, at the discretion of the Board. In this circumstance the Right or Option is not a right to acquire a beneficial interest in a share unless and until the time when the Board determines the Rights or Options will be satisfied by the provision of Company A shares. Once determined, section 83A-340 operates to treat these Rights or Options as though they had always been rights to acquire beneficial interests in shares. If irretrievable contributions are provided to the Trustee before these Rights or Options are acquired (and the Rights and Options do subsequently become ESS interests), then section 83A-340 operates to deem the Rights and Options to always have been ESS interests. Where this occurs, section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1. In such a case, a deduction to fund the exercise of the Rights and Options would be available to Company A in the income year in which Participants acquire the Rights or Options. | Detailed Reasoning - Note: Where the Rights and Options do not become ESS interests because they are ultimately satisfied in cash, the outgoing should not flow through the Company A EST. This is because the Company A EST would not be satisfying the sole activities test for the purposes of subsection 130-85(4) in those circumstances. As discussed in the analysis above, 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 employee share scheme in relation to the employees employment and the contributions are made before the acquisition of the ESS interests. Accordingly, section 83A-210 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Company A shares where the contribution is made after the acquisition of the relevant Rights or Options. In such a situation, the irretrievable contributions by Company A to the Trustee will be deductible under section 8-1 in the income year in which the irretrievable contributions are made where relevant Rights or Options are ultimately satisfied with Company A shares. | Detailed Reasoning - Question 4: Law Administration Practice Statement PS LA 2005/24 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: 1. there must be a scheme within the meaning of section 177A of the ITAA 1936 2. 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 3. having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies. On the basis of an analysis of these three requirements, 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 Company A for the irretrievable cash contributions made by Company A to the Trustee of the Company AEST to fund the subscription for, or acquisition on-market or off-market of, shares in Company A.

Reasons for decision: All references are to the Income Tax Assessment Act 1997 unless otherwise stated.