Private ruling: Employee Share Scheme
Date of advice: 23 August 2016
Published: October 2016
Ruling period: Year ending 30 June 2016 | Question 6 | Will the provision of Options and Shares by Company A (or its employer entities) to employees of Company A under the Option Plan be a fringe benefit within the meaning subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)? | Answer | No | Question 7 | Will the irretrievable cash contributions made by Company A or any subsidiary of Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A Shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA 1986? | Answer | No | Question 8 | Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to Company A or any subsidiary of Company A, by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A Shares? | Answer | No | This ruling applies for the following period: | Year ending 31 March 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will Company A, as head entity of the Company A income tax consolidated group, obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act (ITAA 1997) in respect of the irretrievable cash contributions made by Company A, or a subsidiary member of the Company A tax consolidated group, to the Trustee to fund the subscription for or acquisition of Company A Shares by the Trust? | A1: Yes | Q2: Will Company A, as head entity of the Company A income tax consolidated group, obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by Company A or any subsidiary member of the Company A income tax consolidated group in relation to the implementation and on-going administration of the Trust? | A2: Yes | Q3: Will irretrievable cash contributions made by Company A, or any subsidiary member of the Company A income tax consolidated group, to the Trustee, to fund the subscription for or acquisition on-market of Company A Shares by the Trust, be deductible to Company A at a time determined by section 83A-210 of the ITAA 1997? | A3: No | Q4: If the Trust satisfies its obligation under the Option Plan by subscribing for new Shares in Company A, will the subscription proceeds be included in the assessable income of Company A under section 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997? | A4: No | Q5: Will the Commissioner 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 Company A as head entity of the Company A group in respect of the irretrievable cash contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to the Trustee to fund the subscription for or acquisition on-market of Company A Shares by the Trust? | A5: No

Relevant facts and circumstances: Background 1. Company A and its subsidiaries are private companies for income tax purposes. 2. Company A is an Australian resident for tax purposes. 3. The Trustee, is an independent third party. The Trustee is an Australian resident for taxation purposes. The Option Plan/Scheme 4. Company A’s remuneration strategy is designed to attract, retain and motivate appropriately qualified and experienced employees whilst balancing the expectations of shareholders. As part of its remuneration strategy, Company A operates the Option Plan and may operate other long term equity incentive plans from time to time. 5. Company A has established the Option Plan in accordance with the Scheme Rules. 6. Company A’s Option Plan operates in the manner in that as soon as reasonably practicable following the end of the financial year, the Board may select the Eligible persons that will be invited to participate in the Option Plan and issue an offer letter which outlines the maximum number of Options to be granted under the Invitation. 7. The eligibility criteria to be used by the Board of Company A is outlined in the Scheme Rules. 8. Following receipt by Company A of an Application, Company A will grant to the relevant Participant, for nil consideration, a number of Options as determined by the Board, up to a maximum number of Options specified in the Invitation. 9. Options granted to a Participant will vest in favour of that Participant as determined by the Scheme Rules. There is no exercise price payable. 10. An Option does not confer on a Participant: a) Any voting rights in respect of Shares or in respect of any other equity securities of the Company; b) The right to participate in new issues of Shares or other equity securities of the Company; c) The right to attend or vote at any general meeting or other meeting of holders of any Shares or other equity securities of the Company; d) The right to receive any dividends or other distributions or to receive or otherwise participate in any returns of capital from the Company; or e) The right to participate in a liquidation or winding up of the Company. 11. Subject to the Options vesting in favour of a Participant the Board in its sole and absolute discretion, will issue the relevant number of Options Shares directly to the Participant, or Procure that the Trustee allocates the relevant number of Options Shares to the Participant to be held by the Trustee on trust for that Participant in accordance with the Trust Deed. 12. All Option Shares will be issued as fully paid, be free of encumbrances; and rank equally in all respects with the other Ordinary A shares of Company A as at the date of issue and be subject to the Terms of Offer. 13. An Option Share may be forfeited in the circumstances as set out in the Scheme Rules regarding cessation. 14. Subject to the Scheme Rules, if the Participant ceases to be an employee or consultant of Company A under special circumstances (such as being a good leaver or a bad leaver), then Company A has the right to buy-back some or all of the Option Shares. This is deemed to include the right of Company A to purchase, cancel or otherwise require the transfer or forfeiture of the Option Shares. 15. If an Initial Public Offering (IPO) of Company A Shares occurs before all Options capable of vesting in favour of a Participant have vested in favour of that Participant, any unvested Options granted to a Participant will not be accelerated and will continue to vest in favour of a participant in accordance with the requirements of the Scheme Rules, except that – a) the unvested Options will be in respect of unissued ordinary shares in the relevant Company A Group Member that is to be listed on a Recognised Stock Exchange in connection with the IPO (IPO Entity), and b) if applicable, the number of unvested Options held by a Participant will be adjusted (by such amounts as determined by the Board in its sole discretion) to take into account any reorganisation that occurs immediately prior to and in connection with the IPO. Company A will procure that the Scheme Rules are varied in a such a way as determined by the Board in its sole discretion which unless such variation is required by or necessitated by law, neither disadvantages nor advantages the Participant nor adversely effects the rights of the other holders of Shares, to account for the effect of the IPO. If the IPO entity is not Company A it will procure including by way of assignment or novation that the IPO entity replaces Company A as a party to the Scheme provided that the IPO entity agrees to assume all rights and obligations of Company A under the Scheme Rules. 16. Subject to Company A’s constitution, a Participant must not dispose of Options granted to a participant without the prior written approval of the Board. Following the issue by Company A of Option Shares to a Participant or the allocation by the Trustee of Option Shares to a participant, a Participant must not dispose of its legal or beneficial interest in, and must not direct the Trustee to dispose of its legal interest in such Option Shares without the prior written approval of the Board. 17. A participant must not direct the Trustee to transfer its legal interest in any Option Shares to the Participant without the prior written approval of the Board. 18. All Participants are Australian residents for taxation purposes. Employee Share Trust (the Trust) 19. The Trust operates as follows: ● The Trust will be funded by contributions from Company A or a subsidiary member of the Company A tax consolidated group (e.g. for the purchase of Shares in accordance with the Option Plan). ● Contributions are made by Company A to the Trustee once the Board resolves to provide a particular Participant a Share as a result of Options having vested and automatically exercised. At the time of each contribution, the Board will provide the Trustee a notice listing Company A’s employees, for whom the contribution is being made, i.e. the portion of the contribution and the applicable number of Shares to be acquired in respect of each Participant. ● These funds will be used by the Trustee to acquire Shares in Company A either from an existing shareholder, on-market to the extent Company A becomes listed or via a subscription for new Shares in Company A. ● Shares acquired by the Trustee will be allocated to the relevant Participants following instructions from Company A. ● The Trustee can sell shares on behalf of a Participant where permitted to do so by the Participant, subject to any disposal restrictions set out in the Option Plan. 20. The Trustee will hold the legal title to relevant Option Shares on trust for a Participant in accordance with the Trust Deed. 21. The Trustee is required to act independently. 22. The costs and expenses of establishing, managing and administering the Scheme will be borne by Company A. 23. The Trustee has all the powers in respect of the Trust and Trust Fund that is legally possible for a trustee as a body corporate to have but only for the sole purpose of exercising its powers and discharging its obligations under the Trust Deed and relevant Scheme Rules. 24. The Trust will be operated such that it satisfies the definition of an employee share trust’ for the purposes of subsection 130-85(4) of the ITAA 1997. Contributions made by Company A to the Trust 25. Company A will only make irretrievable cash contributions to the Trust in the income year that the Options vest. 26. Company A will not make irretrievable cash contributions to the Trust before the grant of the Options to Participants. 27. Company A will not make irretrievable cash contributions to the Trust at or around the time of the grant of Options to the Participants. 28. Company A will not make large up-front payments that provide for the Trust operations for several years in the future. 29. No contributions have been made to the Trust in respect of the Option Plan to date. 30. The Trustee of the Trust holds all Company A Shares pursuant to the Option Plan on capital account.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 section 66 | Fringe Benefits Tax Assessment Act 1986 section 67 | Fringe Benefits Tax Assessment Act 1986 subsection 67(1) | Fringe Benefits Tax Assessment Act 1986 subsection 67(2) | Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(h) | 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 177A(5) | Income Tax Assessment Act 1936 section 177C | Income Tax Assessment Act 1936 subsection 177C(1) | 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 6-5 | 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 20 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 subsection 20-20(2) | Income Tax Assessment Act 1997 section 20-30 | 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 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 section 83A-205 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 83A-340 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 paragraph 104-35(5)(c) | Income Tax Assessment Act 1997 paragraph 104-155(5)(c) | Income Tax Assessment Act 1997 paragraph130-85(4) | Income Tax Assessment Act 1997 paragraph130-85(4)(a) | Income Tax Assessment Act 1997 paragraph 130-85(4)(c) | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 section 974-75 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Company A as head entity of the tax consolidated group will obtain an income tax deduction, pursuant to section 8-1 in respect of the irretrievable cash contributions made by Company A or any subsidiary member of the Company A tax consolidated group to the Trustee to fund the subscription for or on-market acquisition of Shares by the Trust. | Detailed Reasoning - Detailed reasoning: 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 it does 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. Irretrievable cash contributions It must be determined as a conclusion of fact whether the contributions made by Company A to the Trustee are irretrievable cash contributions. The Trust Deed outlines that the Trustee holds the Trust Fund on trust for all beneficiaries, in the manner required by the Scheme Rules and that it may apply any part of the general trust property for the benefit of the beneficiaries. The Trustee must comply with any direction of the Board to acquire Shares on behalf of a Participant in accordance with the relevant Rules and must apply any amount paid to it by a Group Company or a Participant pursuant to the relevant Rules in accordance with any such direction of the Board. The Trust Deed enables the Trustee to discharge its obligations under the Trust Deed and Scheme Rules and for no other purpose. Accordingly a refund of any contributions by the Trustee would be in breach of the powers of the Trustee under the Trust Deed. The Trust Deed states that Company A and each of its group companies are not beneficiaries of the Trust and has no entitlement to any Shares forming part of the Trust Fund at any time. Accordingly, a contribution made to the Trust will not be refundable or retrievable by Company A. In conclusion, the above clauses support the conclusion that the cash contributions made by Company A to the Trustee are irretrievable cash contributions. Positive Limb Company A provides cash contributions to the Trustee to be used in accordance with the Trust Deed and Scheme Rules for the sole purpose of subscribing for and/or acquiring Shares for the benefit of Participants. Such contributions are irretrievable or non-refundable to Company A and therefore a loss or outgoing is incurred. The trust is established for the sole purpose of obtaining Shares for the benefit of Participants. The purpose of the contributions is to provide an incentive to employees linked to the operating performance of the Company A business. Accordingly, there is a sufficient nexus between Company A’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) . Consistent with this, the Commissioner's view is 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 its employees as part of the overall remuneration of the employees, a company will be entitled to a deduction under section 8-1 for its irretrievable cash contributions made to the trustee of its employees share scheme. Accordingly, the irretrievable cash contributions made by Company A to the Trustee will be entitled to an income tax deduction under the positive limb of section 8-1. Negative Limb In Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210; FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745, payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and neither capital nor of a capital nature. Company A’s cash contributions are revenue in nature as the amount and timing of the contributions are designed to correspond to meeting employee obligations over a relatively short period of time and those obligations are accepted as being components of employee remuneration. As Company A’s cash contributions to the Trustee are part of the overall remuneration of its employees it is concluded 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. 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. 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 Company A 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 would not seek to apportion the deduction. | Summary: Company A as head entity of the Company A Group will obtain an income tax deduction, pursuant to section 8-1 in respect of costs incurred by Company A or any Company A Group entity in relation to the implementation and on-going administration of the Trust. | Detailed Reasoning - Detailed reasoning: Company A will incur costs associated with the services provided by the Trustee of the Trust, including but not limited to: ● employee share plan record keeping; ● production and dispatch of holding statements to employees; ● provision of annual income tax return information for employees; ● costs incurred in the acquisition of Shares on-market (e.g. brokerage costs and the allocation of Shares to Participants; ● management of employee termination; and ● other Trustee expenses such as the annual audit of the financial statements and annual income tax return of the Trust. In addition to the services to be provided by the Trustee, Company A has incurred and will incur various costs, including the services provided by Company A’s accounting and legal advisors and also contribute to the costs incurred by the Trust as outlined in the Trust Deed. The costs incurred by Company A in relation to the implementation and on-going administration of the Trust are deductible under section 8-1 as either: ● costs incurred in gaining or producing the assessable income of Company A; or ● costs necessarily incurred in carrying on Company A’s business for the purpose of gaining or producing the assessable income of Company A. The view that the costs incurred by Company A are deductible under section 8-1 is consistent with ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer. Accordingly, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses and therefore, are not excluded from being deductible under paragraph 8-1(2)(a). | Summary: The irretrievable cash contributions made by Company A or any subsidiary member of the Company A group to the Trustee, to fund the subscription for or acquisition on-market of Shares by the Trust, will be deductible in the income year in which they are incurred as the contributions are made after the Board resolves to convert existing Options to Shares. | 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 Company A incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210. Section 83A-210 of the ITAA 1997 applies if there is a relevant connection between the money provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by the employee under and employee share scheme in relation to the employee’s employment. Section 83A-210 will operate in circumstances where the contribution occurs before the time the beneficiary acquires the ESS interest. In such circumstances section 83A-210 will operate to delay the deduction under section 8-1 until such time as the relevant ESS interest is acquired by the employee. 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. 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 Option 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 can operate as intended. Once the Board resolves to convert the Options to Shares, section 83A-340 of the ITAA 1997 applies and the Options are treated as having always been rights to acquire the beneficial interest in the Shares. Therefore, the Options would be deemed to have been ESS interests from the time the Options were granted to the Participant. However, as the contributions by Company A to the Trustee are made after the Board resolves for the Participants’ existing Options to be converted to Shares, section 83A-210 will not apply. The contributions will be deductible under section 8-1 of the ITAA 1997 income year they are incurred. | Summary: If the Trust satisfies its obligation under the Option Plan by subscribing for new Shares, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or 20-20 or trigger a CGT event under Division 104. | Detailed Reasoning - Detailed reasoning: Ordinary Income Section 6-5 provides that a taxpayer’s assessable income includes income according to ordinary concepts, which is called ordinary income. The definition of ‘income’ was observed by Jordan CJ in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219; 3 ATD 142 at 144-145 where his Honour said: The word “income” is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts… A leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that: The fundamental relation of “capital” to “income” has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being “derived” that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description. In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient’s purpose in engaging in the transaction, venture or business. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In accordance with an employee share scheme, the Trustee subscribes to the Company for an issue of Shares, it pays the full subscription price for the Shares and the Company receives a contribution of share capital from the Trustee. The character of the contribution of share capital received by Company A from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Where Company A issues the Trustee with a new share in itself, the character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature. This view is supported by the reasoning in ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee. As Company A receives subscription proceeds from the Trustee where the Trust has subscribed for new Shares to satisfy obligations to Participants, that subscription price received by Company A is a capital receipt, is not on revenue account, and not ordinary income under section 6-5. Section 20-20 Division 20 deals with amounts included to reverse the effect of past deductions and section 20-20 deals with assessable recoupments, which are described at subsection 20-20(2) as ‘an amount you receive by way of insurance, indemnity or other recoupment’. The subscription proceeds received by Company A from the Trust are for Shares and are integral to the arrangement, whereby the acquisition and holding of the Shares by the Trustee and the allocation of Shares to the Participants are all interrelated components of the Option Plan. The character of the subscription proceeds paid to Company A for the Shares is not one of ‘insurance, indemnity or other recoupment’. Also, the table at section 20-30 which shows the deductions for which recoupments are assessable does not include provision for funding a trust to acquire shares for employees. For the above reasons, the subscription proceeds received by Company A do not constitute assessable recoupments under section 20-20. Capital Gains Tax (CGT) Section 102-20 states that a taxpayer can only make a capital gain or loss if a CGT event happens. It is not possible to make a capital gain or loss if there is no CGT event. No CGT events occur when the Trust satisfies its obligations under the Option Plan by subscribing for new Shares. The relevant CGT events that may be applicable when the subscription proceeds are received by Company A are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset). Paragraph 104-35(5)(c) states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, Company A is issuing Shares, being equity interests as defined in section 974-75, to the Trustee and therefore CGT event D1 does not happen. In relation to CGT event H2, paragraph 104-155(5)(c) states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity Shares in the company. Therefore, CGT event H2 does not occur. As no CGT event occurs, there is no amount that will be assessable as a capital gain to Company A. Therefore, when the Trust satisfies its obligations under the Option Plan by subscribing for new Shares, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20-20, nor trigger a CGT event under Division 104. | 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 Company A as head entity of the tax consolidated group in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for or acquisition on-market of Shares by the Trust. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA of the ITAA 1936 applies to a scheme, the Commissioner can make a determination under section 177F of the ITAA 1936 to cancel the tax benefit obtained under the scheme. 1. 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 It is considered that this definition is sufficiently wide to cover the Option Plan, which utilises payments made by Company A to the Trustee (in accordance with the Trust Deed) to fund the acquisition of Shares on behalf of Participants by the Trustee. 2. The 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, Company A 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 Company A, if the scheme was not entered into (i.e. the Trust was not used) Company A may not receive a tax deduction for this amount. Accordingly, Company A may obtain a tax benefit in the form of a deduction for contributions to the Trust, which Company A otherwise may not be entitled to. However, Company A also noted that if it chose to simply buy Shares for employees on market via a broker (subject to company law requirements) or alternatively remunerate the employees via an entirely different method (such as cash bonuses), Company A would be entitled to an income tax deduction, in which case there is no tax benefit. If Company A issued new Shares directly to Eligible Employees it would not receive a deduction for the same amount as under section 8-1 in respect of issuing the Shares as 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 Company A will receive under section 8-1 for the irretrievable cash contributions it makes to the Trustee. 3. The 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 has concluded that the scheme is not being entered into or carried out for the dominant purpose of obtaining a tax benefit. | Summary: The provision of Options by Company A (and its employer subsidiaries) to employees of Company A under the Option Plan will not be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA). | Detailed Reasoning - Detailed reasoning: Company A’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 Option 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 Company A and that Subdivision 83A-B or 83A-C applies to those ESS interests. The Shares acquired by the Trustee under the Option Plan to satisfy Options are also provided to employees under that same employee share scheme. When an employee of Company A accepts an Offer to participate in the Option 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 right 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 Company A employees who participate under the Option 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 Company A or any subsidiary of Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A Shares will not be treated as a fringe benefit 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). The right to acquire a beneficial interest in a share is an ESS interest within the meaning of subsection 83A-10(1) and the Option Plan is an employee share scheme within the meaning of subsection 83A-10(2). Accordingly, paragraphs 130-85(4)(a) and (b) are satisfied because: ● the Trust acquires Shares or rights in Company A; 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 Option Plan. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) will require the Trustee to undertake incidental activities that are a function of managing the Option 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 Trust Deed also indicates that the Trust has been established for the purpose of administering current and future employee incentive plans established by Company A for the benefit of Participants in those employee incentive plans. 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 from being a fringe benefit. Accordingly, the irretrievable cash contributions made by Company A or any subsidiary of Company A to the Trustee of the Trust, to fund the subscription for or acquisition on-market of Shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Summary: The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company A or any subsidiary of Company A, by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Shares. | Detailed Reasoning - Detailed reasoning: PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145 – 148 provide as follows: 145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA. 146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit. 147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose. 148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement: (i) a benefit is provided to a person; (ii) an amount is not included in the aggregate fringe benefits amount of the employer; and (iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into. Therefore, the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 Fringe Benefits Tax-Response to questions by major rural organisation under the heading “Appendix, Question 18” where, on the application of section 67, the Commissioner states: …As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement... Further, paragraph 151 of Practice Statement 2005/24 provides: 151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA. In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the Trust, and to employees by way of the provision of Options under the Option Plan are excluded from the definition of a fringe benefit for the reasons given in questions 7 and 8 above. Therefore, as these benefits have been excluded from the definition of a fringe benefit and as there is also no fringe benefits tax currently payable under the Option Plan, the fringe benefits tax liability is not any less than it would have been but for the arrangement. Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of the company in relation to a tax benefit obtained under the Option Plan.